Professional investment managers have a wealth of tools and sometimes a team of analyst to scour the market for bargain stocks.
As an average person, who just wants to invest, you don’t need to know how to find a company’s valuation using any of the tools professionals use, like DCF (Discounted Cash Flow Model) or DDM (Dividend Discount Model). However there are some basic analysis you can do with data available on either Bloomberg website or their mobile app.
Below are some of the tools available:
Price-to-Earnings ratios (PE): Just as the name implies, the p/e ratio is basically a comparison of the company’s share price with its earnings. This is done by dividing a company’s price with its earnings per share (EPS). Basically, the lower the p/e ratio the cheaper the stock. Now, what you do with a company’s p/e ratio is to compare it with those of other similar companies in the same sector. It’s also important to note that even within sectors other factors can explain wildly differing ratios. Hence, the ideal thing is to compare historical p/e ratios
Dividend Yield (DY): This compares the dividend per share with the company’s share price. Basically, the higher the yield, the cheaper the stock. Now what you do is to compare the stocks dividend yield with the market average. Ideally, if a stock’s dividend yield is higher than historical market average (5-10%), the market would tend to view the stock as being attractive. However, because dividends are subject to management discretion, they should be viewed cautiously.
Earnings Per Share (EPS): This compares the earnings with the company’s total number of shares outstanding. This is the amount of the company’s profit attributable to shareholders. Along with this, you will need to track the company’s historical dividend pay-out ratio (percentage of profit paid out as dividends). With this two, it is possible to estimate the dividend yield before it’s actually announced by the company at the end of the financial year.
Let’s say, a company is trading at N3.00 and has an EPS of N0.75 after 9-months and a pay-out ratio of 60%. We can estimate the following – Full year EPS of N1.00 and a dividend of N0.60. As such, at its current price of N3.00 the dividend yield would be estimated at 20%. Now, this is double the upper band of historical average dividend yield. So what typically happens is that if a final dividend of N0.60 is eventually declared by the company, the share price will move higher to move that yield close to 10%. Invariably, the expectation is that the share price will move to N5.50.