Forum Archive Index - November 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi redredwine,
> 
>
> Can someone please nutshell for me the inter-relationships between
> eps, pe, div/share and yield?
> 

'eps' is 'earnings per share', some of which will be retained by the 
company to develop their own business, and some of which will be paid 
out as 'div/share' (dps).    If you take the 'dps', usually an 
historical figure from last year, and divide it by today's share 
price this will give you the 'yield'.   The p/e ratio is today's 
share price divided by last years 'eps'.
>
>
>It all looks a little confusing, even after having read some books. 
>If I plan to hold long and go for income, yield is what I need along
>with div/share, right?  
>
>
Yield yes.   div/share, not really.   Perhaps more important is the 
gap between 'eps' and 'dps'.   Companies like to at least maintain 
dividends over time.  But if 'dps' is already close to , or above 
'eps' you may find your income payout will drop in the future.
>
>
>If I plan to trade I'll be looking for a
> high eps regardless of all the rest, right?  
>
>
No, trading is all to do with taking advantage of share price trends. 
'eps' doesn't come into it.   Liquidity is the most important thing 
in selecting a share to trade.
>
>
>'cause I dunno.  And I
> know that p/e is very important and it should be low to start with
> but gets re-rated by the market as the company [and its profits]
> improve, 
>
>
'Income' shares generally will have a relatively low P/E, and will 
continue to have a relatively low P/E.   If the earnings go up the 
share price will go up in proportion.   So the ratio of Price to 
Earnings will not change much with time.

Income shares tend to be cyclical, and are affected by rates 
paid on competing income investments such as government bonds.  If 
interest rates fall, the price of 'income' shares will go up and vica 
versa. 

There is one more bogey to watch out for with income shares.  
Future Capital expenditure requirements!   If a company needs new 
expensive equipment to keep up its earnings ( eg. Air NZ needing to 
re-equip Ansett with new planes ), then all that spare cash that was 
going to be your income can suddenly disappear!   None of those 
indicators that you listed above will be able to tell you if 
that is liable to happen.  HTH  SNOOPY



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