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High Dividend Yield   U.S. Dow 30 S&P500   TSX Composite   TSX 40 60 Mid Small Dividends at Risk   U.S. S&P500   TSX Composite Value Ratio Approach   S&P500 Mid Small   TSX All Graham's Approach   S&P500 Mid Small   TSX All The Value 60 Approach   S&P500 Mid Small Sign up now to receive our FREE eNewsletters   Your Email Address:	Graham's Defensive Approach Benjamin Graham's approach for the defensive investor is fully described in his book The Intelligent Investor. Graham's approach is value oriented and is best described as a weeding out process. If a company passes all of Graham's tests then it qualifies for possible investment by a defensive investor. It should be noted that Graham's test do not apply to Financial stocks and are somewhat different when analyzing Industrials and Utilities. Despite these caveats, I apply the test to Financials and treat all companies as Industrials. So, the results are not in strict accordance with graham's rules. Graham's Rules of Defensive Investors 1. Adequate Size: Not less than $100 million in annual sales for and industrial company and not less than $50 million in total assets for a public company. Here I assume that all members of the TSE 100 pass the size restrictions. 2. Sufficiently Strong Financial Condition: For industrials current assets should be at least twice current liabilities as well long term debt should not exceed net current assets. For utilities debt should not exceed twice the stock equity at book value. 3. Earnings Stability: Some earnings for the common stock in each of the past 10 years. 4. Dividend Record: Uninterrupted payment for at least the past 20 years. Note that in many if not all cases data for the last 20 years is unavailable and as such I've made this check for as long a period as I can. 5. Earnings Growth: A minimum increase of at least one-third in per-share earnings in the past 10 years as measured by three-year averages at both ends of the period. 6. Moderate Price/Earnings Ratio (P/E): Should be less than 15 times the average earnings of the past 3 years. 7. Moderate Ratio of Price to Assets (P/B): Current price should not be more than 1.5 the last reported book value. 8. Modification to Rules 6 & 7: The P/E multiplied by P/B < 22.5. This criteria gives rise to the maximum price one should pay for the stock to follow this criteria which is listed as price in the following table. The following pages provide a list of potential Graham candidates in the TSE 36 & TSE 60. The stocks listed pass criteria 1 (adaquate size), and 6 through 8 (moderate price). However, they may not pass the other tests.
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Disclaimers: Consult with a qualified investment advisor before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. If you need personalized financial advice then please consider our private client services. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. A Dan Hallett and Associates Inc. publication. Norm Rothery, Ph.D., CFA, is the Chief Investment Strategist at Dan Hallett and Associates Inc. (DH&A) and the founder of StingyInvestor.com. DH&A is registered as Investment Counsel in the province of Ontario. Norm, DH&A, or related-parties may have an interest in the securities mentioned. More...