The Future Belongs to Book-Value Bargains

Investors used to price companies according to the stuff they own. Three decades ago, the stock market value of America’s 500 largest companies was only a smidgen higher than their "book value" -- what accountants figure those companies would get in an asset auction.

Price/book isn’t infallible, of course. In a long slump like the one we’re in now, plenty of companies must write down their asset values, since former assumptions as to what they would fetch in a sale no longer hold. I recently argued that dividend yields are now a far more reliable measure than price/earnings ratios for investors hunting for bargains. They’re not perfect, either. Dividend payments for S&P 500 companies are expected to drop 10% versus a year earlier. Among financials alone, 16 companies cut yearly payments in September and October by a total of $14.6 billion. Still, the combination of asset values and dividend payments, along with measures of financial strength, seems more reliable at a time when, for example, Intel (INTC) from one week to the next changes its mind on expected fourth-quarter sales by more than $1 billion.

I recently ran a search for companies with more book value than stock market value, dividend yields of at least 3% and ample free cash flow. Some of the names dredged up were in rough shape. There were car dealers seeing the worst sales slump in decades. Lower sales today leads to pent-up demand tomorrow, I suppose. But then, in Havana, 60-year-old Chevys make perfectly fine taxis. I can’t help but think Americans can make do with their eight year-old Hondas for a while. The list also included newspapers, most of which I want no part of because of their unfair ownership structures. Last December I concluded that investors should pass on shares of Milwaukee publisher Journal Communications (JRN) despite a tempting valuation, because of its special voting privileges for employee-owned stock and its chief executive's dual role as board chairman. It turned up on this screen, too -- with an 80% lower stock price. Also, chicken-, cow- and pig-wrangler Tyson Foods (TSN) looks remarkably cheap but for America’s anemic restaurant traffic and for a determination by Russia to reduce its chicken imports and for the sudden concern among analysts that Tyson will violate its debt covenants with lenders, as rival Pilgrim’s Pride did last month. I’ve long gobbled Whole Foods (WFMI) wares while pooh-poohing its stock for being too expensive. It suddenly looks reasonable, but management no longer feels confident about paying a dividend. I no longer feel confident recommending stocks without one.

But there are worthy names among the wreckage. I’ve listed a handful on the table below. J.C. Penney (JCP) cut its dividend by more than half in 2000, but has increased payments in recent years and now carries a meaty yield.  A week ago I noted that Eastman Kodak (EK) was approaching a suitably ugly price of 25 cents on the dollar for the assets it owns free and clear, plus 10 years' worth of dividends. It’s below that price now. Northrop Grumman (NOC) is still expected to grow earnings this year and next -- an outlook that seems suspiciously rosy. But at least it has an order backlog equal to double this year’s sales. To create your own list, have a look at SmartMoney’s stock screener.