Monday 26 July 2010
What is the correct company value? Value versus Price
What is the correct company value?
Nobel Prize winner in Economics, Milton Friedman, has said; “the only concept/theory which has gained universal acceptance by economists is that the value of an asset is determined by the expected benefits it will generate”.
Value is not the same as price. Price is what the market is willing to pay. Even if the value is high, most want to pay as little as possible. One basic relationship will be the investor’s demand for return on capital – investor’s expected return rate. There will always be alternative investments, and in a free market, investor will compare the investment alternatives attractiveness against his demand for return on invested capital. If the expected return on invested capital exceeds the investments future capital proceeds, the investment is considered less attractive.
http://www.strategy-at-risk.com/2009/02/15/what-is-the-correct-company-value/
Stocks with High Dividend Yields have outperformed in the U.S.
Why are Dividends so Important?
"Dividends have historically accounted for more than half a stock's total return." Jeremy Siegel, PhD.
Stocks with High Dividend Yields have Substantially Outperformed the S&P 500 for 10 and 20 Year Periods.
Dividends are evidence that a Company is profitable. Corporations find it difficult to pay out false earnings.
An S&P study shows that stocks that paid dividends outperformed non-payers by 1.9% per year from 1980-2003.
When Dividend is Cut or Omitted?
The Board of Directors proposes that no dividend be paid for the financial year 2009 (0).
http://www.swedbank.com/idc/financialreports/AnnualReports2009/en/Om_Swedbank/Ekonomiskt_sammandrag_2009/ekonomiskt_sammandrag_2009.html
A key to beating the market is to invest in companies with strong returns on capital when they trade at low P/E's.
You wouldn't know it from looking at Acme's stock price, however. The company trades with a P/E of just 11, despite excellent returns on equity. To see the company's valuation in perspective, consider the P/E ratios of the following companies with similar returns on equity over the last five years (see chart).
Acme is not as recognizable as the rest of the names, but this is precisely why investors are offered this company at a discount. Many would argue that because the company is small, its riskiness is higher than the companies above. While that may be true to some extent (for example, three customers each exceed 10% of Acme's sales), the upside is also higher as the company has room to grow. Acme has an on-going goal of generating 30% of its sales from products developed in the last 3 years. This is something that the large companies listed above would have great difficulty achieving.
In his book, The Little Book That Beats The Market, Joel Greenblatt discusses how the key to beating the market is to invest in companies with strong returns on capital when they trade at low P/E's. Acme fits this description well.
Of course, investors cannot buy simply on the basis of a company's P/E. Further investigation of a company's risks and opportunities is necessary, as well as a careful reading of the company's notes to its financial statements.
http://www.gurufocus.com/news.php?id=86069
Economic performance of a Bank (National Australia Bank 2005)
Year 2005
Full year dividend 166 centsOn 9 November 2005, a final dividend of 83 cents per full-paid ordinary share, 80% franked, was declared in respect of the year ended 30 September 2005. This brings the full year dividend to 166 cents (80% franked). Refer to Figure 22.
http://www.nabgroup.com/0,,76586,00.html
| Table 17: Gross value add in the community17 | |
| Year to 30 September 2005 | $m |
| Net interest income | 7,082 |
| Fee income | 4,157 |
| Trading income | 656 |
| Net life insurance income | 1,672 |
| Other income | 289 |
| Net operating income | 13,856 |
| Significant revenue | 2,493 |
| Total net income | 16,349 |
| Other costs18 | (3,811) |
| Movement in excess of net market value over net assets of life insurance controlled entities | 335 |
| Significant expense | (2,209) |
| Total | 10,664 |
| 17 Gross value add in the community for the Group includes Australia, Europe, New Zealand, the United States and Asia. 18 Excludes salary-related costs, income tax relating to ordinary activities, payroll tax, fringe benefits tax, depreciation and goodwill and includes outside equity interests. | |
| Table 18: 2005 distribution of community value | |||
| Distribution of community value | Australia $m | Europe $m | New Zealand $m |
| Shareholder19 | 2,125 | 1,525 | 424 |
| Government20 | 1,665 | 251 | 131 |
| Employees21 | 2,348 | 1,205 | 325 |
| Depreciation & goodwill | 268 | 175 | 73 |
| 19 Net profit attributable to ordinary shareholders. 20 Includes income tax relating to ordinary activities, payroll tax and fringe benefits tax. Excludes net GST and VAT payments. 21 Salary-related costs, excluding payroll tax and fringe benefits tax. | |||
| Interest expense | |
| Year to 30 September 2005 | $m |
| Deposits and other borrowings | 10,401 |
| Other financial institutions | 1,780 |
| Bonds, notes and subordinated debt | 1,494 |
| Other debt issues | 115 |
| Total interest expense | 13,790 |
Full year dividend 166 cents
Diluted earnings per share 248 cents (after significant items)
Diluted earnings per share (after significant items) increased 26.5% from 196 cents to 248 cents. Refer to Figure 22.http://www.nabgroup.com/0,,76586,00.html
Why Return on Equity Is Important
Historically, one of the best ways to grow wealthy has been to own businesses that generate high returns on equity with little or no debt, paying a fair or low price for your stock. It's been an easy way to shower your family with torrents of cash.
Why Return on Equity Is Important
A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better. This should be obvious to even the less-than-astute investor If you owned a business that had a net worth (shareholder's equity) of $100 million dollars and it made $5 million in profit, it would be earning 5% on your equity ($5 ÷ $100 = .05, or 5%). The higher you can get the "return" on your equity, in this case 5%, the better.
Return On Equity (ROE): Find Explosive Momentum Stocks With This Financial Ratio
Return On Equity (ROE): Find Explosive Momentum Stocks With This Financial Ratio
June 4th, 2009
Green Mountain Coffee Roasters produced a return of over 113% this year alone. When powerful momentum stocks are charging upwards, it can be difficult to know when to get on board.
But it’s not as difficult as you would believe.
If you want the inside track on the best momentum stocks with ultra-explosive gains, throw on your “x-ray glasses” and focus on one of the most useful financial ratios around.
It’s called return on equity (ROE), but in many ways it tells us so much more.
ROE is one of the best measures of a corporation’s profitability. It shows you how much profit the company generates with the money shareholders have invested. Let me show you how to easily pull this number out – and how profitable it can be.
How to Calculate Return On Equity (ROE)
You calculate return on equity (ROE) by dividing net income by a shareholder’s equity. The higher the number, the more effective a company is at turning its assets and employees into piles of money for investors.
For instance, between 1998 and 2003, Dell Computer’s highly efficient direct sales and high profit-margin strategy paid off in terms of strong earnings growth and a double-digit ROE of 46%. During that same period Dell shares soared 91.95% raining money on shareholders.
ROE explains why Green Mountain Coffee Roasters (Nasdaq: GMCR) posted a 92.86% return while the S&P500tanked, -34.37%, over the last year. It’s been a horrific time for most investors, but GMCR shareholders have had lots to smile about as management skillfully squeezed out a 27.85% return on equity.
It’s made Green Mountain one of the few really safe harbors for the investors to ride out the market’s “storm of the century.”
The ROE ratio looks like this:
The only way this ratio can stay high or increase is by maintaining or increasing the bottom line net income through good management. If executives try to hose investors by sucking profit away – issuing more shares through a seasoned equity offering – you’ll catch them by the drop in this ratio.
Other investors who solely focus on net income won’t know the jig is up, because it will stay the same. That’s why ROE is a much better indicator of management effectiveness at bringing home the bacon.
How to Track Return On Equity (ROE)
Return on equity (ROE) is easy to track through many free financial websites – I like to use Yahoo! Finance. First, type the stock symbol of the company you’re looking for into the “Get Quotes” form on the upper left part of the web page.
When the page for the company’s information comes up, click on the “Key Statistics” link. Then on the same page in the “Management Effectiveness” section you’ll see the value for “Return on Equity (ttm).” This tells you how well management is generating profits for shareholders.
Just look at how their shares have soared…
We can also pull up the amount of institutional shareholders of this company. One of the other interesting things we can access on Yahoo! is the amount of institutional ownership of GMCR. Today it’s almost 27.85% of the company shares.
Institutions are some of the biggest drivers of price movements on the markets and a low institutional ownership means that this stock could have much more to go. By comparison, Starbucks has an institutional ownership of 66% – and a ROE of 3.47%.
Return On Equity (ROE) – How Well Is Management Doing?
Quite simply, a higher return on equity (ROE) number tells us how well management is doing, and if a company is undervalued.
It’s imperative you watch closely how ROE changes over time – ideally you want it to increase. Print off and save the Yahoo Finance web page for “Key Statistics” each week and you’ll see for yourself how return on equity is changing. If return on equity is double-digit and increasing you might want to consider buying the stock.
If a momentum stock like Green Mountain keeps on increasing its ROE, the stock should continue rising as well. So watch for the new ROE numbers for GMCR on June 28.
It all starts with education,
Dr. Scott Brown
Investment U
Investment U
The last decade has been very kind to investors that bought emerging market stocks.
The last decade has been very kind to investors that bought emerging market stocks, returning a “modest” 100% in some cases and an incredible 1000% in others. The S&P, in contrast, declined slightly over the same period. In some ways, 2009 was a microcosm for this trend, as the MSCI emerging markets index gained 73%, compared to 25% in the S&P. While investors are cautious about bubbles forming in some of these markets (bubbles seem to form and burst with alarming regularity), they continue to pour money in. $75 Billion was added to emerging market equity funds in 2009, to be precise. They are buoyed by predictions that emerging markets will account for the lion’s share of global GDP growth going forward.
This has facilitated a twist on the carry trade, whereby investors are now commonly using Dollar-funded loans to buy stocks, rather than sit back and earn a modest return investing in comparatively low-risk interest-bearing securities. This “traditional” carry trade is perhaps less popular now because interest rates are at all-time lows in many countries. But this is already starting to change as a healthy recovery in emerging markets has paved the way for rate hikes. While this could put a damper on stocks, it would re-open the bread and butter for carry traders, which is to sit back and earn a simple interest rate spread. Moreover, these carry traders can rest assured that if/when the Fed eventually raises rates, Central Banks in Asia and Latin America will almost certainly be in the same position.
http://www.forexblog.org/category/investing-trading
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