Earnings and Dividends
Let’s start with the share price and some quick definitions:
When you look at a newspaper or stock page online, you will see a number of columns.
For the, there is an OPEN, HIGH, LOW and CLOSE (or previous close) value. There may also be a VOLUME value.
At any moment in time, there is a BID, ASK (OFFER) and LAST value.
The OPEN is the price traded first thing in the day, when the market opens.
The LOW is the lowest price traded during the day, so far.
The HIGH is the highest price traded during the day, so far.
The CLOSE or LAST is the last price traded in the day so far. The previous CLOSE is the last price traded during the previous trading day.
VOLUME is the number of shares traded during the day, so far – by willing buyers and sellers.
The BID price is the price buyers are willing to BUY the share for, nearest the close. In other words, the price you as an individual trader would be selling from the buyer at if you just wanted the “market” value” for an immediate transaction.
The ASK price is the price sellers are willing to SELL the share for, nearest the close. In other words, the price you as an individual trader would be buying from the seller at if you just wanted the “market” value” for an immediate transaction.
An example:
Let’s say you wanted to buy 100 shares of Apple (AAPL).
The share market is open, and AAPL is trading at $170.00
The BID is $169.90 and the ask is $170.10.
Based on this information…
The most recent trade was at $170.00. The closest priced seller is willing to sell at $170.10, and the closest priced buyer is willing to buy at $169.90.
So – you can buy from the seller at $170.10, or put an order in at a lower price, known as a “LIMIT ORDER” and wait for someone willing to sell at that price.
Very often, the markets are so liquid with so many millions of shares traded each day, that there is a good chance you will be have your order “filled” at the lower buying price, assuming it is in a reasonable range.
If the trade is filled, the CLOSE price changes to the price we concluded the transaction at, and the VOLUME goes up by 100 shares.
Note – the BID/ASK SPREAD, is the distance between the BAD and ASK PRICES and is an indication of the share’s liquidity… we like lots of liquidity. In this example, the B/A Spread is 170.10 – 169.90 = 0.20 = 20c
Given that thousands of transaction occur in a very short space of time, the share price may move in different directions quite ‘erratically’ during that time.
Earnings
Earnings per share
When assessing whether a share is cheap or expensive, the first thing that the potential investor might want to know is how profitable the company is – from a historical point of view. One of the ways of expressing this, is the earnings per share or EPS measure. Simply calculated, the ‘earnings per share’ is the annualised after-tax profits divided by the average number of ordinary shares in issue.
Earnings yield
The earnings yield can be compared to the interest rate that you receive on your bank deposits. It is a mistake to directly compare the two rates to see which is better, however, since the bank rate is a future rate, but the EY is a historical rate. It is a derivative of the EPS and is calculated by taking the earnings per share as a percentage of the current share price. Earnings yield = Earnings per share divided by the current market price of the share x 100 (to create a percentage)
Price:Earnings ratio
The P/E ratio is the reciprocal of the earnings yield. In other words, P/E Ratio is the current share price divided by the earnings per share. So – if the Earnings ratio is 5%, then the P/E ratio is 1 divided by 0.05 = 20
Dividends
Another question a potential investor may ask is how much dividend the shares pay? Often, companies pay dividends twice per year, an interim dividend and a final dividend. The total dividend paid is the sum of the two.
Dividends have a number of important dates you should be aware of
- Date of Declaration: when shareholders are told by the company’s directors how much the dividend will be.
- The Last Day to Register” or LDR: the day on which you must own the shares in order to be eligible to receive the dividend.
- Ex dividend: the first trading day after the LDR. On this day their price normally falls by the amount of the dividend because people buying on this day will have to wait for the next dividend.
- The date payable: the day on which the dividend amount is received.
Normally the dividend paid by the company is only a portion of the earnings, rather than the whole lot. Earnings kept back, not paid as a dividend, is known as “retained income”. This is normally ploughed back into the business to ensure future growth.
The company’s “dividend cover” is the number of times that the dividend could have been taken out of the earnings. In other words: dividend cover equals the total dividend divided by the total earnings.
Some investor will seek to invest in shares for their income or dividend over the long term, and some will seek to invest in shares for capital growth over time. The Dividend Cover will give an indication of the companies dividend policy and retain income.
Dividend per share and Dividend Yield
The dividend per share and dividend yield is similar to the EPS and earnings yield, except that it is calculated by expressing the dividends figures as opposed to the earnings figures.
In other words:
DPS = total annual dividend divided by number of ordinary shares in issue
Dividend Yield = DPS / share price x 100
Notes:
- These ratios are used to highlight the return on your investment in relation to what the share is currently trading for
- They are good for comparisons between shares to give in indication of value of particular shares relative to one another and relative to the industry.
- These ratios have their limitations – as they may give and incomplete or unfair picture of the company. So should only be ‘indicative’.
- These ratios are historical in nature and cannot tell the future.
- The calculations could be based on old data, since earnings are published irregularly.
- The way in which the market “thinks” about a share is by buying it or selling it. So, if buyers are in the majority, the price is pushed up and “favoured”.
- The sentiment (what the market thinks of an investment) is often more important than any of the measures and calculations above, although, these may affect the sentiment being experienced in the market.
