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Stocks: PE Ratio and Current Yield-Math w/ Business Apps, Annuities, Stocks, Bonds Chapter - YouTube
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There is no certain way of
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choosing stocks that
will go up in price.
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However, two stock
ratios that people
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commonly look at
before buying shares
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of a company are:
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the current yield and the
price-earning ratios.
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Let's look at the current yield.
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It allows us to compare stocks
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that sell at different prices.
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It is expressed as
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a percent and sometimes
it's in a table,
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but we're going to take a
look at the formula so that
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if it isn't present then
we can calculate it.
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To find current yield,
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you divide the annual
dividends per share
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divided by the closing
price per share.
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Let's look at an example.
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We have two companies here;
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Best Buy with the closing and
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dividend information
from a stock table
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and Barnes & Noble,
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again, closing price and
a dividend rate given.
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So to calculate
the current yield,
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we will take the annual
dividend per share,
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and from the table,
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this was a quarterly amount.
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So we need to take
our quarterly times
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4 to get us our annual
dividend amount per share.
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Then divide that by the
closing price per share.
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So the yield is 1.4
percent giving us
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that ratio of dividend to
the cost of that stock.
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How does Barnes & Noble stock up?
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They're giving a quarterly
dividend of $0.25,
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but their stock is
substantially lower.
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So what does that do in
terms of the current yield?
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We'll calculate the
annual dividend by
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taking that dividend
value from the table,
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multiplying it by 4
because it's quarterly,
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dividing it by the
closing price to give us
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a yield or return on
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investment by buying the
shares of 5.4 percent.
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In terms of investment
standpoint,
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Barnes & Noble looks much better
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because of this ratio of
dividend to price per share.
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It should be noted that not
all companies pay dividends.
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Several reasons; it could be that
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the company does
not have the profit
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because of some difficulties
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to pay out to the shareholders,
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it could be that they're pouring
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their profit back into the
company for growth reasons,
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and that money is used for
research and development,
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or along those same lines,
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it may be growing so
rapidly and needs
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that money for expansion as well.
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The other number that
some people use to help
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decide which stock to buy
is the price-earning ratio,
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also called the PE ratio.
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It's found by taking the
closing price per share,
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which we get from
our stock table,
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divided by the annual
net income per share.
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Let's calculate a couple figures.
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Here we have General Motors;
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the current price
per share is $53.01,
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the net earnings
per share is 6.68.
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So when we calculate
our PE ratio,
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we will take the current price
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divided by the annual
net income per share,
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and typically for a PE ratio,
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it's rounded to the
nearest whole number.
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Let's do another calculation.
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Here we have General Electric;
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the current price
per share is $46.18,
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the net earnings
is given as $1.27.
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Here we have a much
higher PE ratio
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expressed as a
whole number of 36.
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One more example and then
we'll take a look at what
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these numbers are
telling an investor.
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We have Nike; current
price per share,
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$49, net earnings
per share, 2.19.
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When you take your closing price
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per annual net income per share,
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it ends up with a PE ratio of 22.
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The higher the PE ratio,
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the more the market
is willing to pay
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for each dollar of
annual earnings.
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For example, a PE ratio of 20
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means an investor is willing to
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pay $20 for one dollar
of current earnings.
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Investors are often
willing to pay
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more for rapidly
growing companies
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because these companies
have the potential to
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generate even higher
profits in the near future.
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They are on their way up.
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As a result, the PE ratios of
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rapidly growing
companies are often
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higher than those of
slow growing companies.
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A low PE ratio may indicate
that a company is growing
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slowly and perhaps a
more safer investment,
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but research is needed
because sometimes it could
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be indicative of a company
having financial problems.
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It is best to compare the PE
ratios of similar companies.
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Our examples, we were
all across the board.
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But here, if you're
investing in an oil company,
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look at a similar oil company
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or whatever company
you're looking at,
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look at a similar
company manufacturing
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the same goods or in
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the same type of business
to make a comparison.
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It is noted here that it's
usually not worthwhile to
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compare the PE ratios of
very different companies,
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Walmart and Exxon, for example,
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because of being such
different businesses,
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it wouldn't make sense to
compare their PE ratio.
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