FOR BEGINNERS: No. 11 Dividend yield, cover, earnings yield

Press, 20 June 1984, Page 33

FOR BEGINNERS: No. 11 Dividend yield, cover, earnings yield

By

ADRIAN BROKKING

NZ SHAREMARKET

Above is reprinted a small part of the sharemarket table which appears every Saturday, in this case last Saturday, June 16. This table is done by computer, although, of course, the correct figures have to be put in.

Most of the table is selfexplanatory. The two columns on the left of the company’s name are the highest price and the lowest touched by the share market during the year.

The par or nominal value of the share is shown immediately after the name.

The last sale column again is self-explanatory; the next column shows the share’s price change of the previous day, that is the Friday, and the change since the previous Friday, thus for the whole of the week.

For example, the shares of Abacus Holdings, Ltd, sold last Friday at 135 c, which was steady but 5c higher than the previous Friday. AIC Finance shares sold at 106 c — a low for the year — a fall of 2c on the day and 4c on the week.

The next column showed that there was a prospective buyer for Abacus at 135 c, whereas buyers were offering 100 c for AIC Finance, with prospective sellers asking 106 c, the price at which business was done during the day. The next column shows the percentage dividend

paid by the company, at the last balance date, and the next column shows the yield on that dividend.

People who have never owned shares sometimes comment on the high dividends generally paid by companies, as if this directly compared with interest rates. However, the dividend is a percentage of the nominal value of the share, which almost certainly trades at a multiple of that value.

The relationship between the dividend and the market price of the share is the dividend yield. If a share with a face value of 50c is trading at 200 c, and it pays a dividend of 24 per cent, the dividend yield will be 6 per cent.

The formula to work this out is to multiply the face value of the share by the dividend, and to divide the product by the market price: in our example 50 x 24: 200 equals 6. Another way of looking at it is to say — the 24 per cent is 12c a share which is 6 per cent of the market price of 200 c.

Dividend yields are invariably well below interest rates: the average yield for all listed companies — also shown in the table — last Friday was 3.7 per cent. The median yield was also 3.7 per cent; this is the yield of the share at the exact midpoint of an order ranking all yields from high to low. A median yield of 3.7 per cent means that as many

shares have a dividend yield higher than 3.7 per cent than have a lower yield. The earnings yield, shown in the next column, is the relationship between the earnings of the share and market price. As we have seen before, few companies pay out all profits, and earnings are therefore usually higher than dividends, and so is the earnings yield usually higher than the dividend yield. A higher earnings yield means — everything else being equal — a low share price. The arithmetical inverse of the earnings yield is the price-earnings ratio, which shows how much the market is paying for the company’s earnings a share.

The number of times the dividend yield is divided into the earnings yield gives the dividend cover.

To expand on our earlier hypothetical example, if the earnings for that share were 30c, the dividend cover would be 2.5 (a good one) and the earnings yield would be 15 per cent — 50 x 60 (per cent, not cents) divided by 200 equals 15. The price-earnings ratio would be 200:30 equals 6.7 (rounded off) which is the same as the inverse of 15 per cent. In this hypothetical example therefore the market would be paying 6.66 times earnings.

The last column shows the net tangible asset backing per share, which we discussed in our third article of this series.

1984 High Low Share, Par Last Sale Change Day Week Quotations Div. % Div. Yield Earn. Asset Buy Sell Yield Bkg 140 113 135 — +5 135 — 16.0 5.9 1.4 .68 115 106 AIC Finance 50 ... . 106 -2 -4 100 106 — — — 650 255 Ajax McPhersons 50 . 255 — +5 250 — 24.0 4.7 13.8 2.70 260 221 240 — — — 245 24.0 5.0 13.8 2.28 390 270 Alex Harvev 50 ... . 270 -10 -15 — — 22.0 4.0 10.6 1.78 135 90 90 -5 -8 90 100 — — — — 570 520 Allflex Holds 50 ... . 520 -5 -5 520 530 28.0 2.6 11.8 1.48 197 130 132 — +2 122 130 25.0 4.7 21.2 1.18 245 170 A M Bislev 50 180 — -10 — — 26.0 7.2 10.6 2.43 200 130 Andas Group 10 ... . 200 — — 199 10.0 .5 1.7 2.20 408 305 ANZ Bank NZ 50 (a) . 360 -10 -15 355 362 18.0 2.5 12.0 1.40