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...
Valuation
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
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
Put some back into the company
Pay off debt
Pay out dividends
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
As a result, profits (earnings) are the main driver of share prices, so investors are very interested in them!
Revenue
Less: Costs
Profit (Earnings)
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
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
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…
Chelsea F.C. produced earnings per share of £0.54.
The share price is £10.54
What is the P/E Ratio?
P/E Ratio: £11.54£0.54
= 21.37
This means that the Share Price is 21 times Earnings
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)
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
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
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?