05-31-2015, 07:05 PM
I'm reading an article in Harvard Business Review called "Investing in a dividend boost." In the article there's a chart showing a relationship between the P/E Ratio of a company with its Dividend Payout Ratio. The higher the payout ratio, the higher the p/e ratio. The lower the payout ratio, the lower the p/e ratio.
Using the linear line of best fit on a scatter-graph of S&P 500 companies' payout-to-price/earnings, I discovered the following formula:
Price-to-Earnings = 0.4933*Payout Ratio + 9.472. Any company falling below this line would be considered under-priced, and any company falling above this line would be considered over-priced.
For example, GSk has a payout ratio of 38.45, which implies a fair P/E ratio of 0.4933*38.45+9.472 = 28.44. Given GSK actual P/E ratio of 7.09, GSK should be considered undervalued.
Using the linear line of best fit on a scatter-graph of S&P 500 companies' payout-to-price/earnings, I discovered the following formula:
Price-to-Earnings = 0.4933*Payout Ratio + 9.472. Any company falling below this line would be considered under-priced, and any company falling above this line would be considered over-priced.
For example, GSk has a payout ratio of 38.45, which implies a fair P/E ratio of 0.4933*38.45+9.472 = 28.44. Given GSK actual P/E ratio of 7.09, GSK should be considered undervalued.