The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [138]
For more comprehensive treatment let us review briefly the chief elements of performance as they appear from our figures.
1. Profitability. (a) All the companies show satisfactory earnings on their book value, but the figures for Emerson and Emery are much higher than for the other two. A high rate of return on invested capital often goes along with a high annual growth rate in earnings per share.* All the companies except Emery showed better earnings on book value in 1969 than in 1961; but the Emery figure was exceptionally large in both years. (b) For manufacturing companies, the profit figure per dollar of sales is usually an indication of comparative strength or weakness. We use here the “ratio of operating income to sales,” as given in Standard & Poor’s Listed Stock Reports. Here again the results are satisfactory for all four companies, with an especially impressive showing by Emerson. The changes between 1961 and 1969 vary considerably among the companies.
2. Stability. This we measure by the maximum decline in per-share earnings in any one of the past ten years, as against the average of the three preceding years. No decline translates into 100% stability, and this was registered by the two popular concerns. But the shrinkages of ELTRA and Emhart were quite moderate in the “poor year” 1970, amounting to only 8% each by our measurement, against 7% for the DJIA.
3. Growth. The two low-multiplier companies show quite satisfactory growth rates, in both cases doing better than the Dow Jones group. The ELTRA figures are especially impressive when set against its low price/earnings ratio. The growth is of course more impressive for the high-multiplier pair.
4. Financial Position. The three manufacturing companies are in sound financial condition, having better than the standard ratio of $2 of current assets for $1 of current liabilities. Emery Air Freight has a lower ratio; but it falls in a different category, and with its fine record it would have no problem raising needed cash. All the companies have relatively low long-term debt. “Dilution” note: Emerson Electric had $163 million of market value of low-dividend convertible preferred shares outstanding at the end of 1970. In our analysis we have made allowance for the dilution factor in the usual way by treating the preferred as if converted into common. This decreased recent earnings by about 10 cents per share, or some 4%.
5. Dividends. What really counts is the history of continuance without interruption. The best record here is Emhart’s, which has not suspended a payment since 1902. ELTRA’S record is very good, Emerson’s quite satisfactory, Emery Freight is a newcomer. The variations in payout percentage do not seem especially significant. The current dividend yield is twice as high on the “cheap pair” as on the “dear pair,” corresponding to the price/earnings ratios.
6. Price History. The reader should be impressed by the percentage advance shown in the price of all four of these issues, as measured from the lowest to the highest points during the past 34 years. (In all cases the low price has been adjusted for subsequent stock splits.) Note that for the DJIA the range from low to high was on the order of 11 to 1; for our companies the spread has varied from “only” 17 to 1 for Emhart to no less than 528 to 1 for Emery Air Freight.* These manifold price advances are characteristic of most of our older common-stock issues, and they proclaim