Business

Pick, choose and refuse

The Sterling Report

With Yanique Leiba-Ebanks

Sunday, December 16, 2018

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Every profession uses specific jargon that confuses everyone else not privy to their learning. However, many times, as lay people, we have to figure out what various people are really saying to us, ie, we have to break it down so that we can make the best decisions.

Likewise, when you are building up your stock portfolio you have to break down what these “experts” are saying so that you can get what you really want.

Very recently, I attended a Mayberry seminar and listened keenly to the presentation on the recommended stocks, their performance, and the outlooks expressed. Throughout the whole presentation, the word P/E was used more times than I can possibly count. However, the person beside me, leaned in to ask me what a P/E ratio was. Of course, I explained. But it struck me that the talk would have meant absolutely nothing to anyone who didn't understand the concept. So, let me try to break it down.

ARE YOU LOOKING FOR A DEAL?

A price to earnings ratio (P/E ratio) in a nutshell tells you how expensive or cheap a stock is. So, if one company is trading at a P/E of 20 and another is trading at a P/E of 10, the latter is considered cheap compared to the other one.

In the examples given, the former means that you are paying $20 for each dollar of earnings, and for the latter, you are paying $10 dollars for every dollar of earnings.

I will give you the calculation, but many times you can find the ratio by contacting your broker, or it may be mentioned through other channels. The number changes every time the price changes, so always ask what price was used to calculate the ratio, as it may have changed.

The calculation is the price per share divided by the earnings per share.

Most brokerage houses have sheets that they disseminate to investors free of charge with the P/E ratios of all the listed companies. This is important, because a P/E ratio makes more sense when you are comparing it to other companies.

If you give me one number and I have no idea what other companies in the market are trading at, or what that company's competitors are trading at, it will not add much value.

For my cheap friends, sorry, my friends seeking sales, a low P/E is not always a good thing, because it may mean that the market doesn't think highly of that company's growth prospects. Likewise, a high P/E may seem cause for concern, but it may signal that the market expects huge growth potential from that company.

DO YOU WANT LOTS OF INCOME?

If you buy a stock for the income, the number you should ask about is the dividend yield. This is calculated by dividing the annual dividend per share by the price per share.

In a nutshell, this tells you how attractive the dividend policy is.

In the case of dividend yields, a higher number is a good thing. The lower the price, the higher the dividend yield. Likewise, the higher the dividend per share, the higher the yield will be.

Even a good dividend paying stock will have a lower dividend yield if the price moves up too rapidly.

Typically, certain stocks are known to be good dividend payers in the market.

Remember there are stocks that pay dividends in US dollars in Jamaica; ask your brokers about these companies if you are interested.

Yanique Leiba-Ebanks, CFA, FRM is the AVP, pensions & portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm . Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm .


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