Friday, October 11, 2019

Aegon Benjamin Graham Intrinsic Value and Stock Price

Around 2000 there was a bubble in (Dutch) stocks and dot.coms. You can see that in the graph above. What you don't see is dividends. Aegon is paying a 30 cent dividend, the share price is EUR 3,86 that results in a dividend yield of EUR 0,3/EUR 3,86 = 8%

This year I calculated a book value per share of EUR 5, Equity EUR 10,3b / 2,05b shares = EUR 5 per share. Last year I had EUR 11 per share and Aegon reports EUR 10 and/or EUR 7,7 so I seem to have made a mistake...

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 500 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  20 000 million, based on 2018 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 15% 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 €0,6 EPS x €5 Book Value) = €7

DIVIDEND: AEGON pays an increasing dividend of 0,3/3,8 = 8%.

Conclusion: Aegon seems cheap, pays a good dividend, but is outside my circle of competence. 

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