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6 S&P 500 Dividend Stocks Undervalued By The Graham Number

Tickers in this article: COP LLL NOC SWY TAP WPO

Looking for dividend stocks trading at attractive prices? Here are some ideas to get you started on your search.  [Related List:  4 Oil And Gas Stocks Undervalued To The Graham Number ]

To create the stock list below we began by screening the S&P 500 for dividend stocks: Those paying dividend yields above 2% and sustainable payout ratios below 50%.

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Then we screened that universe for those that appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing," Benjamin Graham.

It is based off of a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

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Do you think these stocks pay sustainable dividend yields? Use this list as a starting point for your own analysis.

1. ConocoPhillips ( COP): Operates as an integrated energy company worldwide. Market cap at $70.41B, most recent closing price at $58.0.  Diluted TTM earnings per share at 8.14, and a MRQ book value per share value at 39.05, implies a Graham Number fair value = sqrt(22.5*8.14*39.05) = $84.57. Based on the stock's price at $61.06, this implies a potential upside of 38.5% from current levels.  Dividend yield at 4.5%, and payout at 47%.

2. L-3 Communications Holdings Inc. ( LLL): Provides command, control, communications, intelligence, surveillance, and reconnaissance systems; aircraft modernization and maintenance; and government services in the United States and internationally. Market cap at $7.14B, most recent closing price at $75.92.  Diluted TTM earnings per share at 8.78, and a MRQ book value per share value at 60.82, implies a Graham Number fair value = sqrt(22.5*8.78*60.82) = $109.61. Based on the stock's price at $78.71, this implies a potential upside of 39.26% from current levels.  Dividend yield at 2.6%, and payout ratio at 23%.

3. Northrop Grumman Corporation ( NOC): Provides products, services, and solutions in aerospace, electronics, information systems, shipbuilding, and technical service sectors. Market cap at $15.96B, most recent closing price at $65.04.  Diluted TTM earnings per share at 7.76, and a MRQ book value per share value at 44.56, implies a Graham Number fair value = sqrt(22.5*7.76*44.56) = $88.21. Based on the stock's price at $67.74, this implies a potential upside of 30.21% from current levels.  Dividend yield at 3.4%, and payout ratio at 27%.