## Saturday, July 30, 2016

### What is Dividend Yield?

It is not uncommon for readers of newspapers to come across companies listed on stock exchanges to come out with advertisements proclaiming their stellar annual results. These advertisements may most probably include an item on dividends stating, “Annual Dividend 300%”. While the reader may be awestruck by the large percentile number, some may not have actually understood its actual import. What is a dividend, annual dividend paid and dividend yield? Let us examine in the following paragraphs.

Dividend:
Companies exist to produce products and render services to satisfy the needs of people. In the process of meeting customer needs, corporations also strive to earn profits and distribute a portion of the profits to the shareholders in the form of dividends. In other words, dividends are the rewards to investors for having invested in the company.

Quantum of Dividend:
Dividend paid can be expressed in many different ways; as an absolute figure like \$350 million or as a percentage of the total net profit of the company, 30% of the net profits or as dollars per share, say \$0.50 per share or finally as a percentage of the nominal or face value of the share, say 300% of the nominal value of the share, which was the subject matter of the above sited advertisement.

Dividend Yield:
The quantum of dividend expressed in various ways is of little significance to the investor unless it is translated into a relationship to the price paid or amounted invested.

Let us examine the dividends paid by two companies, NMDC Ltd.  The following data is extracted from the website of the popular financial newspaper, ‘The Economic Times’:

The face value of NMDC’s share is Rs.1, which means that the company paid Rs.1.50 and Rs.9.50 per share to shareholders on the two occasions for the financial year 2015-16.

The current market price of the share is Rs.100 on 29th July 2016 and therefore the website shows the dividend yield of 11%. The yield has been obtained by applying the formula:

Dividend Yield = (Total Dividend Received ÷ CMP) × 100

(Rs.11 ÷ 100) × 100 = 11%

The website calculated the yield based on the current market price of the share as the site is not an investor, does not hold shares, does not have a cost of investment, therefore.

However, an actual investor has a cost of investment, being the price paid while purchasing the share. Suppose an investor had actually purchased NMDC shares at say at Rs.83 apiece, the dividend yield is:

Dividend Yield = (Total Dividend Received ÷ Cost of Investment) × 100

(Rs.11 ÷ 83) × 100 = 13.25%

When different numbers of shares were purchased at different prices, then we take the weighted average holding cost as the cost of investment for calculating the cost of investment. Let us assume that an individual had purchased 100 shares at a price of Rs.126 and another 200 at Rs.100, the weighted average cost of investment will be:

 Purchase 1 100 126 12,600 Purchase 2 200 100 20,000 Total 300 32,600

Weighted Average Cost of Investment = 32,600 ÷ 300 = 108.67

The Dividend Yield for this investor will be:
(Rs.11 ÷ 108.67) × 100 = 10.12%

Thus, ‘Dividend Yield’ is a very important metric with which an investor is able to measure the return on his investment from a particular stock or scrip.

## Tuesday, July 26, 2016

### How to Calculate ‘Price to Earnings Ratio’?

Voyaging the exciting field of value investing requires scholarship of some central yet simple financial metrics of which ‘Price to Earnings Ratio’, also christened ‘PE Ratio’, is a key member. In the present essay, let us discover it.

As the title indicates, the proportion has two components, Price and Earnings. Price is the current market price of the stock and earnings is ‘Earnings Per Share’ or ‘EPS’, the meaning and the mode of computation of which are published in separate articles, elsewhere on this site.

Continuing with the example of NMDC Ltd. used in the other essay, summarized information assembled from the audited financial statements of NMDC Ltd., for the financial year 2014-15 show: Operating revenue 12356.41, total expenses 4740.29, non operating income 2265.40, exceptional items of charge 113.01, corporation tax 396.47 and miscellaneous debits 0.44. All numbers are expressed in Indian Rupees (Rs.) in crores  (10 millions) and the company has an equity capital of Rs.396.47 crores of nominal value of Rs.1 each, that is 396.47 crore shares.

On drawing up the profits and loss statement, the results will be as follows:

 Rs. In crores (one crore = 10 millions) Total Operating Revenues 12,356.41 Total Expenses 4,740.29 Operating Profits 7,616.12 Non Operating Revenues 2,265.40 Profit Before Exceptional Items 9,881.52 Exceptional Items 113.01 Corporate Income Tax 3,346.21 Miscellaneous Charges 0.44 Net Profit for the year 6,421.86 Number of Equity Shares (In crores (10 millions) of nominal value of Rs.1 each 396.47 Applying the formula EPS = Net Profit ÷ number of equity shares Earnings Per Share – Rs. Per share 16.20

The current market price (CMP) of the scrip on the website of the popular financial newspaper ‘The Economic Times’ today, 26th July, 2016, is Indian ‘Rupees’ 100.25.

‘Price to Earnings’ is obtained by dividing the CMP by the EPS.

Therefore, PE = 100.25 ÷ 16.20 = 6.19.

Recommended PE multiple for making a purchasing decision is a number below 10, and this scrip meets the criterion.

## Sunday, July 24, 2016

### How to Calculate 'Earnings Per Share' or 'EPS'?

Contrary to conventional financial statements, profit and loss account, balance sheet and statement of cash flows, which portray the financial picture in the company’s perspective, ‘Earnings Per Share (EPS)’ interprets the same information from the shareholder’s viewpoint. Mostly investors are interested in knowing what the corporation has earned for them, and EPS fulfills this requirement, exactly. In this article, let us examine how EPS is calculated.

Summarized information assembled from the audited financial statements of NMDC Ltd., for the financial year 2014-15 show: Operating revenue 12356.41, total expenses 4740.29, non operating income 2265.40, exceptional items of charge 113.01, corporation tax 396.47 and miscellaneous debits 0.44. All numbers are expressed in Indian Rupees (Rs.) in crores  (10 millions).

On drawing up the profits and loss statement, the results will be as follows:

 Rs. In crores (10 millions) Total Operating Revenues 12,356.41 Total Expenses 4,740.29 Operating Profits 7,616.12 Non Operating Revenues 2,265.40 Profit Before Exceptional Items 9,881.52 Exceptional Items 113.01 Corporate Income Tax 3,346.21 Miscellaneous Charges 0.44 Profit for the year 6,421.86

The balance sheet and schedule number 2.1 reveals that the company has an equity capital of Rs.396.47 crores of nominal value of Rs.1 each, that is 396.47 crore shares.

Dividing the net profit for the year by total number of equity shares we obtain he ‘Earnings Per Share (EPS)’.

 Rs. In crores (10 millions) Profit for the year 6,421.86 Number of Equity Shares ( In crores (10 millions) of nominal valye of Rs.1 396.47 Earnings Per Share – Rs. Per share 16.20

Our mathematical labors reveal that NMDC Ltd., had earned for its members Rs.16.20 for every equity share having a face value of Rs.1. On the current market price of the share of Rs.98.10, the EPS amounts to a tax-free return of 16.51%, indeed impressive, considering obtainable interest rate of about 7.50% for bank fixed deposits, which attract a tax rate of about 33%.

Thus, ‘Earnings Per Share’ or ‘EPS’ throws valuable perspective of the returns earned by the investee corporation for its shareholder.