1.7 Monitoring equity performance
For those equities in issue their current market value and some indicators of their performance are provided in the daily press. Table 3 shows the closing levels and the volume of shares traded in respect of a selection of companies on the London, New York, Frankfurt and Tokyo Stock Exchanges on 7 June 2005.
Table 3: Selected MNC equity prices – 7 June 2005
|Company||Price||High *||Low *||Yield||PE||Traded volume|
In Table 3 what do the terms ‘PE’ and ‘yield’ mean? Why do they vary so much from company to company?
PE is the price/earnings ratio – the ratio of the price per share to the earnings per share in the last reported period. Yield means the dividend per share paid by the company as a percentage of the share price.
The different PE ratios reflect the differing risk characteristics of the companies (and their business sector) and the view held by investors about the growth prospects for the company. A company with substantial growth potential will have a high PE relative to a peer company with limited scope for growth. Additionally a high PE may reflect a company which is experiencing business difficulties (and hence is generating low earnings) but one which investors expect to recover.
The differing dividend yields reflect, to a degree, current performance by the companies in generating earnings and different policies towards distributing these earnings through dividends. Here there are clear international differences which the data in Table 3 bring out. Japan and, increasingly, the USA have traditions of paying out low, or no, dividends. In contrast the UK has a tradition of paying higher dividends – although this tradition was, to a degree, rooted in the tax advantages to certain shareholders (specifically tax credits to pension funds) that were removed in 1998.