The Value Investing framework of Warren Buffett's mentor can also be used to evaluate Banks, Insurance Companies and other stocks that don't report Current Assets and Current Liabilities.
What Graham Wrote
Graham gave the following instructions on the subject of analyzing Utilities and Financials, which are structurally different from other types of stocks.
"1. Adequate Size of the Enterprise... not less than $50 million of total assets for a public utility."
"2. A Sufficiently Strong Financial Condition.. For public utilities the debt should not exceed twice the stock equity (at book value)."
Total Assets ≥ $350 Million
Criterion #1 above works out to about $350 million of Total Assets as of 2022, when adjusted for inflation.
No Current Assets or Liabilities
"We exclude one criterion from our tests of public-utility stocks—namely, the ratio of current assets to current liabilities. The working-capital factor takes care of itself in this industry as part of the continuous financing of its growth by sales of bonds and shares. We do require an adequate proportion of stock capital to debt."
The [2 x Equity] ÷ Debt rating on GrahamValue is simply a variation of of the standard Debt-to-Equity (D/E) Ratio. This Graham Rating is based on Graham's recommendations for "stock equity" or "stock capital" (also a common accounting term).
The rating is simply calculated as:
"Investing in Stocks of Financial Enterprises... counsel that the same arithmetical standards for price in relation to earnings and book value be applied to the choice of companies in these groups as we have suggested for industrial and public-utility investments."
GrahamValue's free Classic Graham Screener follows Graham's standard 17-rule Value Investing framework. The Advanced Graham Screener has additional filters which — when used in combination with the standard Graham rules — allow for the screening of Utilities and Financials.
Graham Ratings on GrahamValue are defined such that they're better when higher, and that Graham's Defensive requirements default to 100%.
Considering Interest Rates as of 2022, a Graham Number(%) of 60% may be sufficient for a Defensive grade stock to clear Graham's criteria. Also, the Size in Assets filter may need to be set to 140% and the Earnings Growth filter to 75%.
The filter values on the Advanced Graham Screener for Utilities and Financials would therefore be:
Earnings Stability (100% ⇒ 10 Years) ≥ 100%
Dividend Record (100% ⇒ 20 Years) ≥ 100%
Earnings Growth (100% ⇒ 33% Growth) ≥ 75%
[2 x Equity] ÷ Debt ≥ 100%
Size in Assets (100% ⇒ 250 Million) ≥ 140%
Graham Number(%) ≥ 60%
Source (User) GrahamValue
Note-1: For Financial Enterprises, the filter Size in Assets (100% ⇒ 250 Million) ≥ 100% can be substituted with the usual Defensive grade filter of Size in Sales (100% ⇒ 500 Million) ≥ 100%.
Note-2: Many of the stocks listed by the above filters may be marked Ungraded because they do not clear the standard framework.
The filter for Sectors is not included here because certain stocks which would not necessarily be classified as Utilities or Financials — such as Real Estate Investment Trusts (REITs) — also need to be screened using the above criteria.
Utilities and Financials can also not be included in the default Defensive grading system precisely for this reason; because their specifications cannot be applied to automatically determinable sectors.
The rules for Utilities and Financials are thus an advanced customization of Graham's standard Defensive rules, and so only supported by the Advanced Graham Screener.
Graham himself wrote that Utilities were more likely to clear his Defensive criteria, than were Industrials and other types of stocks.
"Our application of specific criteria to this select group of industrial stocks indicates that the number meeting every one of our tests will be a relatively small percentage of all listed industrial issues... If we turn now to the field of public-utility stocks we find a much more comfortable and inviting situation for the investor. Here the vast majority of issues appear to be cut out, by their performance record and their price ratios, in accordance with the defensive investor’s needs as we judge them."
Utilities and Financials are thus evaluated using Total Assets and Debt-to-Equity (D/E), unlike regular Defensive grade stocks.
The lists below show how many stocks with Intrinsic Values exceeding 70% are available across countries and exchanges. As Graham predicted, more stocks clear the Defensive criteria for Utilities than the Defensive criteria for Industrials.
Please note that these lists have not been filtered for sectors, for the reasons mentioned above. These lists also only include analyses with Fiscal Years in the current or previous years. Older analyses are not counted.
Utilities and Financials
Industrials and Other
Buffett on Graham, Fisher and Munger
At the Berkshire Hathaway 1997 Annual Shareholders Meeting, Buffett said that while he owes Phil Fisher a lot — and Charlie Munger even more — it doesn't compare with what he owes Graham.