Monday, January 12, 2009

Yield and P/E In Different Directions

As the P/E (Price/Earning Ratio) has gone down, the yields on stocks have gone up. This is typical of market crashes. Companies are very reluctant to reduce dividends, and those on such lists as the Dividend Aristocrats and Dividend Achievers will even raise theirs to stay on these lists.

Also, the Earnings per Share (EPS) is not an indicator for determining if a stock can fund their dividends in a downturn. What you need to look at is cash flow and liquidity. The cash flow to look at is that from operations. Liquidity is the difference between Current Assets and Current Liability. If a company has positive cash flow, greater than the dividend and the liquidity is fine (that is current assets are greater than current liabilities), then your dividend is probably safe.

Generally speaking, dividend yield runs on the TSX at about 2%, but this would have climbed quite a bit higher recently. Dividends are usually maintained in down markets because if a stock cuts its dividend, the stock price will fall like a stone.

Take Saputo (TSX-SAP), a favorite stock of mine. The in 2008 the average yield was 1.7%, but the current yield is 2.8%. Last year, the average P/E was 20%, it is currently at 13%. This also stock raised their dividend 16% in September 2008. Another favorite stock of mine is Pembina Pipelines, which last year had an average yield of 7.8%, but now has a yield of 10.8%. The P/E last year was around 16.5% and is now 11%. This stock also raised their monthly distribution in September by 13%. These stocks are still doing just fine.

Now, let’s look at the banks that did not raise their dividends. Bank of Montreal (TSX-BMO) used to have yields of around 3.5% and P/E around 13%. Now the yield is 8.3% and the P/E is around 8%. Royal Bank used to have yields around 3.25% and P/E around 14%. Now the yield is 5.4% and the P/E is 10.5%. Both these banks had lower EPS in their latest financial years ending October 2008.

So, if you are dependent on dividend income to live on, this is not such a horrible time as may appear. Yes, I have capital loses, on paper at least. However, so far, I have not done badly. The same thing happened in the last bear market of 2000/2001. Although I had, capital loses on paper, my dividends increased. The thing that happened was that my dividends did not increase as quickly as they had prior to the bear market.

Later this week I am going to go the Financial Forum at the Metro Toronto Convention Center. I have gone there every year since it opened. I found it valuable to sit and listen to what their featured speakers have to say about the current investing and economic climate. Last year the theme was that the market could be wrong about a stock for longer than you can remain solvent. Therefore, you should never bet the house (or all your money) on any stock or stock sector. I would let you know if there is any theme this year.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at for a list of the stocks for which I have put up spreadsheets on my web site.

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