Unanswered quarterly ?
When looking at dividend stocks can you help me understand why PE outside of the 20's is considered back.
what do extremely low/high ratios symbolize is going on with the stock?
1. When the market is higher, PE ratios are higher.
This is true. But it's not as simple as that. Some companies are growing much faster than others. A PE of 20 might be justified for a company growing at 10% but not for one growing at 30%. And vice versa for a company with a PE of 10 and shrinking earnings.
2. The lower the PE, the more "value" priced in
But again, not so simple. Let's say a stock has a PE of 6 and growing earnings by 20%. Does that mean it's undervalued? It could be overvalued if growth is going to slow down or even shrink after this year.
3. What is "earnings"
Earnings can include things like one-time charges or gains from selling assets or holdings or stocks they own in other companies (like Amazon buying Whole Foods). So you have to look at what those one-time charges are and what they represent and how likely they are to happen again (and how much) before you can gauge whether the earnings are truly recurring or not.
4. What is "growth"
If a company has been stagnant for years but now has some growth but with no profits then that's not really growth but rather just an increase in losses (which means you will never see any dividends). This happened with Tesla for many years until recently when finally there were profits (but still no dividends).
5. Is this really "dividend" earnings?
A lot of companies pay out dividends from earnings generated by share buybacks (see next point). This reduces shares outstanding which increases earnings per share without having any real change in the business itself. Many times, these companies will say nothing about their share buyback activity on their earnings reports so it looks like there was real growth when there wasn't.
6. Share buybacks / EPS dilution - why do people care?
When shares outstanding go down, then each share represents a larger percentage of the profits earned by the company. So if you own 1% of Apple and they reduce their shares outstanding by 1 billion then your stake goes up to 11% of Apple's profits. So if Apple pays $100 billion in dividends then $11 billion goes to shareholders who own 1% because their stake went up 11%. If Apple doesn't do any share buybacks then your stake remains at 1% and you get none of those extra profits unless you sell your stake and re-buy later when shares have gone up due to increasing profits (or perhaps more likely, expectations for increasing future profits). Note that I am simplifying here but I think this gets at the idea why people care about share buybacks vs dividend payments without using cash flow to pay out dividends .
7. Why does anyone care about dividend payments vs buybacks?
There are two reasons why people care about this : A) Because shareholders want money NOW instead of later B) Because investors want to make sure management isn't doing stupid things with cash flow such as paying out too much in dividends when cash flow isn't enough , doing stupid acquisitions , etc . This is where value investors come into play since they study every aspect of every company they invest in . They don't mind waiting longer for returns because they know how cheap their stocks are compared to historical valuations , etc . Value investing isn't just looking at P/E ratios , although that is part of it . It involves studying all aspects of businesses , industries , macroeconomics , etc . And understanding what makes businesses grow faster than others (or slower) depending on industry dynamics , competition within industries , regulation , etc . There's also income investing which focuses on high dividend stocks regardless of