A little more than a year ago, in the July 2012 In Focus feature for Australian Edge, we identified a group of stocks based on what we called the “Graham Factor,” which is the price-to-earnings ratio (P/E) multiplied by the price-to-book ratio (P/B).

According to Benjamin Graham, known now as Warren Buffett’s mentor but a master investor in his own right during the middle of the 20th century, a P/E ratio at or below 15 and a P/B ratio at or below 1.5 are bright lines for value.

Hence, separating the cheap and the dear based on a “Graham Factor” of 22.5–15 times 1.5–should be a meaningful exercise in identifying candidates for investment at any given time.

As we have long noted, and as Mr. Graham too believed, the most important element of a sound investment decision is a quality underlying business. A key factor we’ve consistently identified as indicative of a quality underlying business is dividend growth.

For this reason we’ve compiled list of 10 stocks from the AE How They Rate coverage universe of 112–including five Portfolio Holdings–with a 22.5 or lower “Graham Factor,” indicating they represent “reasonable value” at current levels, but that also increased their dividends for fiscal 2013 versus fiscal 2012.

Finally, in our table “Value and Quality,” in addition to P/E and P/B ratios and 12-month dividend growth, we’ve included each stock’s AE Safety Rating System, which is based on six criteria:

• We award a Safety Rating point to companies whose businesses are generally shielded from the ups and downs of oil and other resources.
• We award a point to companies for not cutting their dividends at any time in the past five years, a period which encompassed the Great Financial Crisis and provided stern tests for operating businesses of all stripes.
• We award a point to companies that have increased their dividends during the preceding 12 months, as dividend growth is the surest sign of a safe payout.
• We award a point to companies with low debt-to-assets ratios, which measures total obligations against the assets that would make good on them during a bankruptcy. This criterion is based on a sliding scale; businesses that have steadier revenues, such as pipelines, can sustain higher levels of debt than others, such as energy producers.
• We award a point to companies with low two-year debt-to-market capitalization ratios, which measures the debt companies would have to come to market to refinance were a real credit event to strike between now and the end of 2015. Debt is only significant relative to the size of the enterprise doing the borrowing, i.e. a USD100 million bond rollover is critical to a USD100 million company but insignificant to a USD100 billion one. We’re also more likely to give a break to a company in a stable business.
• And we award a point to companies with low payout ratios, which are calculated by dividing the indicated annualized distribution rate by the last 12 months’ relevant measure of profits.
• That’s usually earnings per share, after taking out any one-time gains or losses. Some companies, however, pay dividends from cash flow, so this is one indicator we always tally individually when analyzing companies. This criterion too is based on a sliding scale sensitive to the type of industry in which the company operates.

The more criteria a company meets, the higher is its AE Safety Rating and the more secure we can infer its dividend to be. All but one score on at least four criteria.

What we’re after is, one, protection from losses and, two, “adequate,” as Mr. Graham put it, rather than spectacular long-term returns.

Inside the Portfolio

Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY) is the subject of one of this month’s Sector Spotlight features, meaning we consider it a “best buy” for new money right now.

As of Oct. 9, 2013, Mineral Resources was priced at 11.37 times fiscal 2013 adjusted earnings per share, well below Mr. Graham’s 15 benchmark. At 2.07 times book value well it’s outside the corresponding 1.5 bright line.

A “Graham Factor” of 23.53 still indicates reasonable value, however, and Mineral Resources also grew its fiscal 2013 dividend by 4.3 percent, at a time when most mining and mining services firms have cut or eliminated payouts.

As we detail in the Sector Spotlight, Mineral Resources has come off from recent highs due to the fact that Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUGY) has exercised its right to “step in” and assume management and supervision responsibility at two Christmas Creek iron ore processing facilities in the aftermath of an Aug. 15 fatality at the facility.

There is some concern about the hit to reputation Mineral Resources will absorb here. But the long-term fundamentals of the business remain in good condition.

Mineral Resources is a buy under USD11 on the Australian Securities Exchange (ASX) using the symbol MIN and on the US over-the-counter (OTC) market using the symbol MALRF.

Mineral Resources also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol MALRY. Mineral Resources’ ADR, which is worth one ordinary, ASX-listed share, is also a buy under USD11.

AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) trended sharply lower after hitting a six-year closing high of AUD16.60 on the Australian Securities Exchange (ASX) on March 15, 2013.

A combination of regulatory challenges, the impact of Australia’s tax on carbon emissions, retail competition, wholesale weakness and less than bullish updated fiscal 2013 earnings guidance provided in early May 2013 weighed on investor sentiment about AGL stock, dragging it to a close of AUD13.89 on June 13.

Solid earnings–including another dividend increase–as well as the prospect of the new Australian government reworking the carbon tax have buoyed the stock, and it now sits at AUD15.88 on the ASX.

At these levels its P/E ratio is 12.27, its P/B 1.18. Along with 12-month dividend growth of 4.9 percent and a “6” AE Safety Rating, this is a compelling picture of reasonable value and high quality.

AGL Energy is a buy under USD17.25 on the Australian Securities Exchange (ASX) using the symbol AGK and on the US over-the-counter (OTC) market, using the symbol AGLNF.

AGL also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol AGLNY. AGL’s ADR–which represents one ASX-listed ordinary share–is also a buy under USD17.25.

Amalgamated Holdings Ltd (ASX: AHD, OTC: None), the subject of a September 2013 Sector Spotlight and therefore one of our “best buys” for that issue, has posted a US dollar total return of 16.1 percent for 2013 versus 4.5 percent for the S&P/ASX 200 Index.

Yet it still represents solid value, trading at 15.73 times earnings and 1.44 times book, for a “Graham Factor” of 22.65.

Management of Australia’s largest cinema operator boosted the fiscal 2013 dividend by 7.7 percent, and Amalgamated, one of the most technically advanced theater operators in the world, earns five Safety Rating System points.

Making movies work as an investment is a matter of smoothing out box office revenue that can be as volatile as any Hollywood diva or director. Amalgamated has complemented its movie business with hotel operations and a ski resort, a mix that establishes it as a global leisure services provider.

Amalgamated has been paying a dividend since November 1986, with no cuts since 2001, and the interim and final cuts that year were the only ones in the company’s 26-year payout history. A net cash position and low overall debt provide plenty of safeguard for the dividend going forward.

Management has also proven itself capable by updating movie exhibition technology in a timely way, converting legacy properties into new revenue generators and closing other sites while selling them for others to develop.

There’s also solid potential for uplift in hotel and leisure results once the Australian economy rebounds from its current mild malaise. As it is the movie business has proven its ability to withstand softer economic conditions and to support Amalgamated’s other interests.

Amalgamated Holdings is a buy under USD8 on the Australian Securities Exchange (ASX) using the symbol AHD.

GPT Group (ASX: GPT, OTC: GPTGF) has underperformed since we added it to the Portfolio in the May 2013 issue, posting a US dollar total return of negative 17.4 percent through Oct. 10, 2013. Fellow Australian real estate investment trust (A-REIT) and Conservative Holding Australand Property Group (ASX: ALZ, OTC: AUAOF), by comparison, has posted a loss of just 4.3 percent.

Some of GPT’s travail can be explained by the broader turn against REITs due to the fear of rising interest rates triggered by talk of “tapering” by the US Federal Reserve. Most of it has to do with operating metrics in its retail and office portfolio that have shown up weaker than its Australian peers, even considering the tepid economy Down Under.

At the same time, management has stuck to guidance for full-year 2013 net operating income growth of 5 percent, though the outlook for 2014 is more cautious.

Management paid distributions of AUD0.101 during the first half, 79.5 percent of realized operating income and up 5.9 percent versus the prior corresponding period.

GPT has also made solid progress with a cost-cutting program that should help the bottom line, including significant debt-cost reduction.

Management is holding a strategy conference this month that could provide the impetus for a unit-price bounce.

As of now GPT is trading well below the value of its portfolio, with a P/B ratio of just 0.94. GPT Group remains a buy under USD4.

Spark Infrastructure Group (ASX: SKI, OTC: SFDPF) posted a 3.4 percent increase in first-half profit before interest and tax based on solid operational results from SA Power Networks and the Victoria Power Networks assets CitiPower and Powercor.

The regulated asset base of the asset companies grew by 3.1 percent during the six months ended June 30, 2013, bringing the estimated total RAB to AUD8.3 billion. Growth in the RAB coupled with the gradual reduction of net debt-to-RAB drives growth in Spark’s distribution. SA Power Networks, CitiPower and Powercor have also delivered solid operating results.

Despite flat volumes, management expects to see revenue growth based on already approved rate increases for the second half of the current regulatory period.

Management declared an interim distribution of AUD0.055 per security, consistent with full-year distribution guidance of AUD0.11. This represents a 4.8 percent increase over the dividend paid for 2012. Management also reaffirmed guidance for 2014 and 2015 dividend growth of 3 percent to 5 percent.

The stand-alone payout ratio for the period was 87.6 percent.

A 12.71 P/E ratio, a 1.41 P/B ratio and a “Graham Factor” of 17.92, on top of steady distribution growth and a “5” Safety Rating, suggest a solid buy for investors focused on the long term

Spark Infrastructure is a buy on the ASX using the symbol SKI and on the US OTC market using the symbol SFDPF under USD1.80.

Outside the Portfolio

Beach Energy Ltd (ASX: BPT, OTC: BEPTF, ADR: BCHEY) reported production growth of 7 percent to 8 million barrels of oil equivalent (Mmboe) for fiscal 2013, comprised of 53 percent gas and gas liquids and 47 percent oil, while revenue was up 13 percent to AUD700.5 million.

Net profit for the year was a company-record AUD141 million.

Operating cash flow surged 21 percent to AUD264 million, supporting a cash balance as of June 30, 2013, of AUD347.8 million.

All that and management boosted the full-year dividend by 22.7 percent.

Undrawn credit facilities of AUD320 million, in addition to the significant cash balance, support Beach’s efforts in Australia’s Cooper Basin. It is the biggest producer in that region and the sixth-largest oil and gas company overall in Australia.

Management has guided to fiscal 2014 output of 8.7 to 9.3 Mmboe, growth of 12.5 percent at the midpoint compared to fiscal 2013, on a forecast CAPEX budget of AUD420 million to AUD480 million.

Oil production for fiscal 2013 was up 34 percent due to Beach’s evelopment, appraisal and exploration success, while new flowlines were installed and became operational. Production growth in fiscal 2014 will be driven by oil exploration and development in the Cooper Basin.

The company is reasonably priced relative to its Australian oil and gas peers and well positioned for further output and dividend growth.

Beach Energy is a buy under USD1.40 on the Australian Securities Exchange (ASX) using the symbol BPT and on the US over-the-counter (OTC) market using the symbol BEPTF.

Beach Energy also trades on the US OTC market as an American Depositary Receipt (ADR). Beach Energy’s ADR, which is worth 20 ordinary, ASX-listed shares, is a buy under USD28.

Dexus Property Group (ASX: DXS, OTC: DXSPF) is poised to significantly expand its portfolio with the acquisition of fellow A-REIT Commonwealth Property Office Fund (ASX: CPA, OTC: CWHPF).

Dexus has partnered with the Canadian Pension Plan Investment Board (CPPIB) to offer AUD0.68 in cash and 0.45 Dexus shares for each Commonwealth Property Office share, for a total value of AUD2.7 billion.

The offer values Commonwealth Property at AUD1.15, in line with its Oct. 10 closing price.

If consummated the deal would give Dexus and CPPIB equal stakes in the office fund and boost the Australian REIT’s office assets under management to AUD11.5 billion from AUD7.8 billion. Its third-party funds under management would climb to AUD8 billion from AUD6.1 billion.

Dexus would be in strong position to benefit from a rebound in the Australian economy. Tenant demand for offices Down Under has weakened, but a lack of building during the global credit freeze has kept supply in check.

Office completions in Australian city centers will be 30 percent below the historical average over the next 10 years, according to property broker Jones Lang LaSalle Inc.

In July Dexus agreed to acquire a 14.9 percent interest in Commonwealth Property at AUD1.13 per unit. Its large position will probably deter rival bidders.

Fiscal 2013 funds from operations were up 1.3 percent to AUD365.4 million, or AUD0.0775 per security, as net operating income grew by 1.6 percent. Dexus’ distribution was up 12.1 percent.

Management has guided to fiscal 2014 FFO per security growth of 5.2 percent and distribution growth of 2 percent.

Priced at a 5.5 percent discount to the value of its assets and yielding 5.8 percent, Dexus Property is a buy under USD1.05 on the Australian Securities Exchange (ASX) using the symbol DXS and on the US over-the-counter (OTC) market using the symbol DXSPF.

Like AE Portfolio Aggressive Holding Ausdrill Ltd (ASX: ASL, OTC: AUSDF), MACA Ltd (ASX: MLD, OTC: None) is a solid mining services company with long-term relationships with big-name resource producers around the world. Like Ausdrill, it too lacks a presence on a US equity exchange.

MACA offers contract mining, civil earthworks, crushing and screening and material haulage primarily for iron ore and gold mining companies. It’s leveraged to continuing production rather than the capital-expenditure-heavy exploration and development cycle of the mining process. The company continues to win orders for new work, building an impressive backlog that makes its future cash flow highly visible.

Fiscal 2013 revenue grew by 42 percent to AUD475.9 million, while earnings before interest, taxation, depreciation and amortization (EBITDA) surged by 35 percent to AUD116.3 million. Net profit was up 31 percent to AUD49.5 million.

Work in hand as of June 30, 2013, was AUD1.713 billion, as management is targeting fiscal 2014 revenue of AUD550 million, which would be 15 percent year over year growth.

Held back by general sentiment against mining and mining services companies, MACA is trading at just 8 times earnings. The P/B ratio is 2.16, the “Graham Factor” 17.28. Dividend growth from fiscal 2012 to fiscal 2013 was 25 percent.

MACA is a buy on the Australian Securities Exchange (ASX) using the symbol MLD.

It’s a sign of management’s confidence in an imminent turnaround for its underperforming business units that Toll Holdings Ltd (ASX: TOL, OTC: THKUF, ADR: THKUY) boosted its fiscal 2013 final dividend by 7.4 percent. The full-year payout boost was 8 percent.

Toll’s second-half result reflected the slowdown in the broader Australian economy, as the logistics specialist posted a 3.7 percent decline in underlying earnings per share (EPS) versus the prior corresponding period. First-half underlying EPS were up 7.1 percent.

Full-year fiscal 2013 sales revenue was in line with fiscal 2012 at AUD8.7 billion, as EBITDA was up 3.7 percent to AUD426 million and net profit ticked up by 3 percent to AUD282 million. Management is generally cautious about fiscal 2014 but particularly positive about its Resources business, outside of mining services. And cost reduction and efficiency efforts should shore up the bottom line for other units. Global Forwarding remains on track to deliver AUD15 million to AUD20 million in cost savings in fiscal 2014, while Global Express appears to be weathering the discretionary retail downturn quite well, with fiscal 2013 second-half sales and EBITDA both up on the prior corresponding period and margins expanding.

Toll’s dividend growth is compelling, as are the traditional valuation metrics that translate to a “Graham Factor” of 23.78.

Toll Holdings is a buy under USD6 on the Australian Securities Exchange (ASX) using the symbol TOL and on the US over-the-counter (OTC) market using the symbol THKUF.

Toll Holdings also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol THKUY. Toll Holdings’ ADR, which is worth two ordinary, ASX-listed shares, is a buy under USD12.

Westfield Retail Trust (ASX: WRT, OTC: WTSRF) is a virtual pure play on high-quality shopping malls, the Australian dollar and the Australian consumer.

Its principal investment is a joint venture with Westfield Group and other third parties in a shopping center portfolio that includes 54 shopping centers in Australia and New Zealand. It’s the largest domestic-focused A-REIT, with assets of about AUD12 billion.

For the six months ended June 30, 2013, the A-REIT generated funds from operations growth of 3.8 percent to AUD300.5 million, or AUD0.0993 per security.

The portfolio remains 99.5 percent leased despite challenging retail conditions. And management lifted the interim distribution by 7.3 percent to AUD0.09925 per security.