Valuation. How can I judge if a stock is on sale by looking at its dividend? Dividend per share...
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Transcript of Valuation. How can I judge if a stock is on sale by looking at its dividend? Dividend per share...
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Valuation
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How can I judge if a stock is on sale by looking at it’s dividend?
Dividend Yield = Dividend per Dividend per shareshare
Share Price
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Nintendo made $114M in profit from the WII
alone in 2008
In 2008, Tesco made £3 billion in profit
In the last three months of 2009, McDonalds
made a profit of $1.22 billion
In the last three months of 2009, Disney made a
profit of $844 million
In the last three months of 2009, Coca-Cola
made profits attributable to shareholders for
$1.54 billion
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Put some back into the company
Pay off debt
Pay out dividends
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Profits are a major indicator of how well
a company is performing.
If the profits are high, the company is doing
well
If the profits are low, the company isn’t
doing well
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As a result, profits (earnings) are the main driver of share prices, so investors are very interested in them!
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Revenue
Less: Costs
Profit (Earnings)
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The P/E Ratio
How can I judge if the stock is on sale by looking at it’s earnings?
Price/Earnings Ratio = Share PriceEarnings per
share
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The earnings per share are calculated at regular intervals and published.
For the sake of argument, the EPS is fixed until the next announcement.
Earnings do not change on a daily basis, but the share price does
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With the EPS fixed, as the share price
decreases, so too does the P/E Ratio
The lower the P/E Ratio, the cheaper the
earnings
That’s the way to find the more valuable
stocks…
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Chelsea F.C. produced earnings per share of £0.54.
The share price is £10.54
What is the P/E Ratio?
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P/E Ratio: £11.54£0.54
= 21.37
This means that the Share Price is 21 times Earnings
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Pick ten stocks which offer the lowest Price/Earnings
Ratios.
Hold them for a year and sell them next year if they are
still not offering the lowest P/E Ratio.
(We choose a year so as to give the companies time to
develop – too much chopping and changing incurs
many transaction costs and doesn’t allow the stocks to
grow)
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Know what to buy Stocks with the lowest P/E ratio
Know why you’re buying it They are offering the earnings at the lowest
prices Know when you will sell
Sell in a year if they are not offering the lowest P/E Ratio
Buy a number of stocks Buying ten stocks to diversify
Time Tested It has been time tested by many financial
analysts
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Each company has a website where you
can find the Investor Information
Look for Basic EPS and compare it to the
price to find the P/E Ratio
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What is the company name?
What does the company do?
What is the Dividend Yield?
What is the P/E Ratio?
Anything else you feel is important?
Would you buy or not buy?