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?