Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 8 of 25
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The financial system consists of various financial institutions that coordinate money flow between savers and borrowers.
Financial institutions are grouped into two categories
1 · financial markets, direct finance, including the bond market and the stock market
2 · financial intermediaries, indirect finance: including banks and mutual funds
The two most important financial markets are
· the bond market
· the stock market
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When reviewing the stock of any public corporation, you should focus on three numbers: price, dividend, price-earnings ratio.
These numbers are widely reported on the internet.
Figure B is data for Apple Inc. as of September 7, 2018 (180907)
· $223.10 is the stock price on this date
· 1.31% is current dividend payout to those who buy the stock at this price
· 19.36 is the current price-earnings (P/E) ratio
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Price
The most important piece of information about a stock is the share price.
Those who previously bought a share Apple stock at $200 could sell for a profit of $23.10 on 180907.
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Dividend
Corporations typically pay out some of their profits as dividends to their stockholders.
Profits not paid out are retained earnings, kept and mostly used by the corporation for additional investment.
Apple started paying a dividend in 2012, before it kept all profits in retained earnings.
On 180907 dividend payout to shareholders of $2.92 per share = $2.92/ $223.10 = 1.31%
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P/E ratio
A corporation's earnings, its profit, is
· the amount of revenue it receives for the sales of products
· minus costs of production
Earnings per share (EPS) is
· the company's total earnings
· divided by the number of shares of stock outstanding (on the market, not held by Apple)
The P/E ratio is
· the price of a corporation's stock
· divided by the amount the corporation’s EPS
Here
· the stock price is $223.10
· the price/earnings ratio is 19.36
· so the EPS is $223.10 / 19.36 = $11.52
The typical P/E ratio is about 15.
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Currently, Apple’s P/E ratio is 19.36.
A higher than typical P/E ratio of 15 might indicate
· a corporation's stock is expensive relative to earnings
· people expect earnings to increase in the future
· the stock is overvalued
A lower than average P/E ratio might indicate
· corporation's stock is inexpensive relative to earnings
· people expect earnings to decrease in the future
· the stock is undervalued
Stock market price is based mostly on future profit expectations not current profits, so it is not unusual to see P/E ratios much higher than 15.
Apple previously could pay zero dividend and now pays a dividend of only 1.31%.
This is because people anticipate earnings and stock price will go up in the future resulting in a future bigger dividend payout.
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Amazon’s P/E ratio on 180907 was 177.86 (compared to Apple’s 19.36).
This means stock buyers anticipate in the future Amazon will have much higher earnings and stock price and pay a large dividend.
Amazon does not yet (as of 230227) pay a dividend, it is either holding earnings in retained earnings or is investing it to grow the company.
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do not respond to daily fluctuations
hibi no ōtō ni taiō shinai
日々の応答に対応しない
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