BenGrahamReborn
When I use P/E ratios, I vary the ratio to accommodate for dividend, franking credits, growth, and risk. PEG only accommodates for growth, so it is a flawed basis for evaluating dividend-paying stocks, particularly in Australia where dividend imputation is in place.
If CCP paid out had an EPS of $1.00, and it paid 50% of EPS as a fully franked DPS, and it its growth is 10% a year, then using a PEG of 1 would suggest a P/E ratio of 10, and an SP of $10.00. If company XXX paid no dividends, its EPS was $1.00, its growth was 10%, then settling for a PEG = 1 would suggest a SP of $10.00. The common PEG-based valuation of $10.00 for both stocks is clearly nonsense. For CCP, the PEGY ratio is clearly more apt than the PEG ratio.
If CCP had an SP of $10.00, and the above metrics applied, then its PEGY ratio, which factors in DPS, would be:
- (Price / EPS) / (Earnings Growth Rate + Dividend Yield)
- ($10.00/$1.00) / (10% + $.50/$10.00) = 10 / (10 +5) in whole numbers
- 10/15 = a PEGY of .667
The PEGY of XXX would remain at 1. One would need an SP of about $14 to manipulate CCP's PEGY to approximately 1.
To compare CCP with alternative investments, I believe that one should in include franking credits, which would give 10/(10 + 5/7) = .583. The PEGY of XXX would remain at 1. One would require an SP of about 15 to bring this cum-franking-credits PEGY for CCP to 1.
If these values of $14 and $15 seem high, remember that they are based on a growth of 10%, so if you trim that back a smideon, you would get a lower valuation.
A great deal of the investment opinion that Australians read comes from the USA where many companies, including the collections company, Encor Capital, do not pay dividends, and so USA investment rules of thumb are flawed when applied to the Australian setting. When we could buy CCP at a PEG of 1, it was a good bargain, but that should not be confused with a realistic valuation.
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