Buying stocks using PE ratios and Dividend Yields

The Money pages of the Straits Times provide prices of stocks traded the day before. Besides share prices, it provides information such as Dividend Yield (Gross Yield %) and Price Earning ratio (Net P/E). How can we make use of such data?

Price Earning ratio is Stock Price divided by Earnings Per Share. It indicates how investors and traders view about the value of a particular stock. The PE ratio gives an idea of how many years an investor can recover his initial investment from the company’s yearly profits. For an example, a PE of 10 times = 10 years to get back your capital. For PE to be meaningful, we make assumptions on company’s future earnings, and that is anybody’s guess. An investor who is willing to pay a stock with higher PE is expecting the company to perform at that kind of level, or he is speculating on the future price movement.

As a general rule with other things being equal (such as sustained good performance of company), a stock with low PE offers potential for price upward movement.

For long-term investor, he may want to consider acquiring stock with history of high dividend yield. Company is willing to pay higher dividend only when it is doing well for the year.

On using both indicators such as PE ratio and Dividend Yield, how are stocks like as at end 2014? I extracted some numbers for some select stocks using information provided by the Straits Times.

Stock as at 31.12.2014 Stock Price PE Div Yield
Keppel Land 3.42 6.00 3.80
UOL 6.96 6.80 2.90
Keppel Corp 8.85 8.70 5.60
SembCorp Industries 4.45 9.70 3.80
SembCorp Marine 3.26 12.30 4.00
UOB 24.53 13.30 3.10
DBS 20.60 13.70 2.80
OCBC 10.46 13.80 3.30
City Developments 10.27 13.90 0.80
CapitaLand 3.31 16.60 2.40
SPH 4.21 16.80 5.00
Sing Tel 3.90 17.00 4.30
SATS 3.05 18.90 4.30
StarHub 4.15 19.30 4.80
M1 3.61 20.70 5.80
Comfort Delgro 2.60 20.90 2.70
SGX 7.81 24.80 3.60
SingPost 1.92 28.40 3.30
SIA 11.60 37.90 4.00
SMRT 1.580 38.50 1.40

No surprises that property developers, oil and marine companies were trading at low PE ratios. The three local banks had nearly similar PE ratios (PE of 13.0+). Those trading at high PE includes telco companies (which also pays good dividends) and transport companies (which benefitted from low oil prices recently).

As investor, one has to understand the business of each stock and the prospects of these companies in delivering the earnings before he uses PE ratio and Dividend Yield to make buy/sell decisions.

Some stocks jump up at me:
Keppel Corp (PE = 8.7, Dividend yield = 5.60)
SembCorp Industries
SembCorp Marine

I have avoided making a call for property developers. I am not sure of this sector for 2015.

As in any investment advice, please engage buy/sell decision with caution. The entry stock price and exit stock price are matter for careful consideration.

Copyright © 2015, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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