Ann: Appendix 4D and Half Year Accounts, page-28

I agree regarding the R&D but I think I think a better measure is dividend yield and growth of dividend (assuming dividend grows as same rate as earnings on average - a fair enough assumption in my opinion). This way, all the R&D spend, capital spending etc etc are already taken care of. Some of the PE ratios of stocks compared to their growth rate were not making sense e.g. equally quality companies with lower growth rate having a higher PE compared to the company with a higher growth rate (for example PE of FPH is higher than RMD even though FPH has a lower growth rate). However, when I compared dividend yield and growth rate together, I found that most valuations make a lot more sense.

@Swage_17,

Well, dividend yield (DY) is really just the inverse of P/E, after adjusting for a retention of portion of earnings (payout ratio, POR) to fund future growth in earnings (and hence, dividends, too), so ultimately P/E and DY are measuring the same thing, but from inverse angles:

Dividend Yield = Earnings Yield x Payout Ratio,
[where Earnings Yield = 1 / (P/E)]


In terms of whether or not a Dividend Yield of 1.4%, with the dividend growing at 12%pa, represents attractive value, one way to test that is by considering an implied payback period on one's capital outlay from such a dividend stream.

You can do the exercise for yourself and you'll find that if you acquired CSL today on a 1.4% DY and the dividend grows at 12% pa into the future, it will take until 2038 for you to break even. (Note: Not generate a decent return on your investment, mind; but just to recoup your capital. )

And that, of course, assumes CLS can grow its dividends at 12%pa for the next 20 years.

For while it is easy to compute that using a spreadsheet, it ignores the reality of what it actually means in practice for a company generating US$2.0bn in NPAT today to grow that profit by 12%pa for 20 years.

Again, do the numbers for yourself and you will find that by 2038 - the break-even date in terms of capital recoupment from dividends - CSL would need to be generating in excess of $17bn in Net Profit.

Capitalising that level of earnings at CSL's current 30x P/E valuation multiple results in a company with a theoretical market cap in excess of US$500bn (~A$730bn!).

In current money terms, that equates to US$290bn (~A$400bn) of market capitalisation, which is a simply enormous company (for context, only 4 companies in the world today have larger market capitalisations: Apple, Microsoft, Google, and Amazon).

And all of that assumes that CSL is able to grow earnings and dividends by 12%pa for the next 20 years which, given the law of large bases, is not very likely and for which there is very little precedent.

So, my view is that it doesn't matter if one views an investment in CSL based on a P/E multiple or a Dividend Yield basis, neither of them make the stock look remotely undervalued; not even reasonably valued, I'm afraid.



"I added to my position recently because of FOMO. Not because its a bargain, but because its 'not very overvalued' at the moment and downside in SP should be limited. I also dont know when an announcement regarding CSL112 will be made and I didnt want to miss that ship.
Your thoughts?"

My thoughts are that FOMO is no basis for investing. In fact, I'd go so far as to say that investing based on the fear of missing out is akin to speculating on an outcome.

Instead, there is significant precedent for investing success using valuation as the central investment discipline.

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