Thursday, November 27, 2008

How to compare companies from different sectors using the PEGividends Ratio!

When comparing among stocks of companies from different sectors, does a low P/E ratio mean the stock is a better investment? Financial literature such as CFA states that a high P/E ratio suggests a growth stock and a low P/E suggest a value stock. So what now? Growth sounds good. Value sounds good too? We are confused!

Actually, its simple. The answer lies in whether the company or sector is really growing when we deem it a growth stock that justifies a high P/E. Therefore a measure called PEG ratio emerges which takes into account the growth factor. ( [Price/earnings] divided by Estimated Growth per share). The lower the PEG ratio, the better.

Now, what if a company has a low PEG ratio and a low dividend yield, while another company has a high PEG ratio and a high dividend yield. Which is a better investment now? Confused? Enter the pegividend ratio which takes into account the dividend yield too.

PEGIVIDEND RATIO =
([Price/earnings] divided by [Estimated Growth per share + dividend yield]).

The beauty of the pegividend ratio is that it can be used to compare companies from different industries/sectors unlike when using the P/E ratio which is commonly used to only compare companies from the same sector such as TADA..the telecoms industry:
Let's put this into practice, shall we? Let us compare Singapore Airlines with Keppel Corp. Here we go!
Data For Singapore Airlines ( A Great Way to Fly!)Above

Data for Keppel Corp ( Remember Christopher Lee as the iceman in the channel 8 show!) above

PEGividends ratio for SIA = 6.86 divided by (29.05 + 14.91) = 0.156

PEGividends ratio for Keppel = 6.10 divided by (29.73+6.88) = 0.167

SIA wins! ( marginally though. Also the dividends yield we use here is for the recent year, according to reuters. It may be more prudent to take the average dividend yield among several years, such as {( year 1 dividends + year 2 dividends + year 3 dividends) divided by 3 years} divided by the current price of the share so as to smooth out the lumpiness of the dividends.)

The PEGividend ratio method is from Ryan Barnes who has worked with Merrill Lynch, Charles Schwab, Morgan Stanley and many others as an institutional trader. You can check out his site at http://epiphanyinvesting.com/.

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

12 comments:

  1. There's another component, and that is the volatility/cyclicality of that growth. A growth rate that fluctuates eg. NOL, warrants a lower PE compared to say, a utility.

    Danielxx

    ReplyDelete
  2. hi Danielxx,

    Regarding the cyclicity of the growth actually its accounted for with the average of the %annual growths year by year.

    To digress, we think Lian Beng is not ahot stock..=)

    Great site by the way. Added your site.

    ReplyDelete
  3. Hi,

    Can you show us how you get the % of annual growth per year? I was a little lost in that..
    Thanks

    ReplyDelete
  4. Hi Third Anonymous,

    You can go to the section on your right: Intrinsic Values of Shares Listed on SGX ( Updated on 28 Nov 08).

    Click there and open the PDF file. Go look for SIA or Keppel and you will know how we got the figure.

    Feel free to ask again if unclear =)

    ReplyDelete
  5. From the PDF file, eg Keppel Corp.
    0.5021 0.3486 0.1785 0.1602 from the respective years.. Multiple by 100% will get the will at the values as shown in your post.
    How you obtain these values from or how you calculate them?? Resource from Reuters.com too?

    This part i need to explain.. Thanks alot cause i wanna learn..

    ReplyDelete
  6. May we know your name Anonymous?

    We seem to know you from somewhere. Sorry, just felt your language structure seems like a close friend of ours.

    Yup go to www.reuters.com

    click on stocks.

    Type in company name ( you got to try 2 times or many times. Its quite laggy and slow at times)

    Then the company will come up.

    Bottom right got income, cash and balance statements. Choose income.

    Voila!

    ReplyDelete
  7. Thanks SGDividends, well i prefer to stay as Anonymous.. Just a passionate learner..

    Ok, i managed to view the income statement of Keppel Corp to get the "EPS" data of 5yrs.. But i dun seem to find the data of "0.5021 0.3486 0.1785 0.1602" of the annual growth per year..
    Do u derive the value or formula?

    Thanks again...

    ReplyDelete
  8. The data "0.5021 0.3486 0.1785 0.1602" of the annual growth per year.. is derived from the data given by reuters. Its just the percentage change from the previous year ( expressed in decimel).=)

    ReplyDelete
  9. Great.. I got it..
    Thanks!!

    ReplyDelete
  10. Hey,
    How'd you get the div yield 6.88 (Keppel Corp) & 14.91 (Sia)?

    ReplyDelete
  11. This comment has been removed by the author.

    ReplyDelete