Wednesday, June 20, 2018

Aegon: intrinsic Value much higher than Price ?

AEGON has an annual report of 393 pages and a Market Cap of 11 billion Euros. Berkshire Hathaway (run by Warren Buffett) has a Market  Cap of 472 billion $ and an Annual Report of 124 pages....  Management at Aegon intends to return 2,1 billion Euros in a few years, that is 20% of the market cap...  Aegon seems cheap, but I don't understand it. I wonder why they don't buy back more shares (at this low price) rather than increasing dividends? 

SECTOR: FAIL AEGON is in the Financial sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published even decades ago. Several of Graham's criteria, like the Current Ratio and Debt to Current Assets, do not apply to financial companies. As a result, the company will not be able to pass this methodology, although we will include the remainder of the analysis for informational purposes.

SALES: PASS The investor must select companies of "adequate size". This includes companies with annual sales greater than 260 million Euros. AEGON's revenue of  32 973 million, based on 2017 sales, passes this test.

CURRENT RATIO: FAIL The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AEGON is a financial stock so the current ratio analysis cannot be applied and this criterion cannot be evaluated.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: FAIL Long-term debt must not exceed net current assets. Companies that meet this criterion display one of the attributes of a financially secure organization. AEGON is a financial stock so this variable is not applicable and this criterion cannot be evaluated.

LONG-TERM EPS GROWTH: FAIL Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for AEGON were negative in 2015 and thus fails this test.

EARNINGS YIELD: PASS The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. AEGON's E/P of 13% passes this test.

Graham Number value: PASS The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. AEGON has a Graham number of (15 x €0,8 EPS x €11,9 Book Value) = €14,7

DIVIDEND: AEGON pays an increasing dividend of 0,27/5,43 = 5%.

Conclusion: Aegon seems cheap, but is outside my circle of competence. 

Comments, questions or E-mails welcome:

No comments: