P/B is calculated as share price divided by book value per share. Book value is most often calculated as Assets less Liabilities. However, some people conservatively calculate book value as Assets less Intangibles less Liabilities. I prefer the latter since it excludes goodwill and other intangibles which would be difficult to recover in a liquidation, and that is what is used in the calculations below.
A low P/B ratio could indicate a stock is undervalued or distressed. Since GAAP accounting is mostly based on historical cost, a viable growing company will normally be worth more than its book value. However, there are times when good companies will be punished along with the bad. It is our job as investors to separate the good companies from those that have fundamental problems.
Below are a couple of companies with a low P/B that would fall in the distressed category:
Hudson City Bancorp Inc. (HCBK)
P/B: 0.62 | Yield: 5.8%
Hudson City Bancorp Inc. operates 135 branches in the New York metropolitan area. It caters to high median household income counties and focuses on jumbo mortgage loan funding, largely through time deposits. It's sales and earnings have been on a downward trend for the last 4 quarters. It cut is dividend in May of this year.
Courier Corporation (CRRC)
P/B: 0.62 | Yield: 12.5%
Courier Corporation is book a manufacturer and specialty publisher that operates in two segments: book manufacturing and specialty book publishing. CRRC's earnings have been on a downward trend since 2006 and were negative in two of the last three years. Its quarterly dividend has been flat since November 2008. Needless to say, with all the electronic options available, book manufacturing is a declining industry.
It is not unusual to see insurance companies with low P/B ratios since many of their investment assets are carried at values approximating market. Here are few representative insurance companies:
Erie Indemnity Co. (ERIE)
P/B: 0.54 | Yield: 2.9%
Erie Indemnity Co. provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States.
Stancorp Financial Group (SFG)
P/B: 0.67 | Yield: 3.1%
StanCorp Financial Group provides a variety of insurance products. Its asset management businesses offer 401(k) plans, 457 plans, defined benefit plans, and other plans.
Cincinnati Financial Corp. (CINF)
P/B: 0.86 | Yield: 6.0%
Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.
To round out the list, here are several non-financial stocks with a P/B less than 1.5:
Archer-Daniels-Midland Co. (ADM)
P/B: 1.07 | Yield: 2.4%
Archer-Daniels-Midland Co. is one of the world's leading agribusiness companies, with major market positions in agricultural processing and merchandising.
Avista Corporation (AVA)
P/B: 1.20 | Yield: 4.6%
Avista Corp. generates, transmits and distributes energy as well as engages in energy-related businesses. The company operates in two business segments.
ConocoPhillips Co. (COP)
P/B: 1.39 | Yield: 4.1%
ConocoPhillips Co. was formed in 2002 when Phillips Petroleum and Conoco merged and is now is the fourth largest integrated oil company in the world.
Lowe's Companies, Inc. (LOW)
P/B: 1.43 | Yield: 2.8%
Lowe's Companies, Inc. sells retail building materials and supplies, lumber, hardware and appliances through more than 1,700 stores in the U.S. and Canada.
P/B is like yield, when it is at an extreme you have to question why it is there. If you determine it is the result of an irrational market movement, a purchase could result in both a higher yield and significant future capital appreciation.
Full Disclosure: Long CINF, COP. See a list of all my dividend growth holdings here.
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(Photo: Steve Woods)
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