PE Values: Investors Do Not Get All The "E"

Includes: AA, CTL, HPQ, S
by: Thomas Blankenhorn

That measure of value, the PE ratio - how much of the "E" part of the PE does the investor see? Who cares if a company has even a PE ratio of 1 if it pays out only a millionth of its claimed profit? As you see, the PE ratio in terms of how it translates into returns to the investor is a terribly misleading measure of valuation. The rest of the earnings get "reinvested" and you can guess what that means - some persons get their hands on it and the investor is ever so happy to get just a small portion of the actual profit even when they based their investment looking at the PE ratio. I seriously doubt that investors really pay attention to comparing the stated PE to what they actually realize from it. Here's where it gets really interesting...

Several Key Metrics For Selected Stocks Including The Effective PE Ratio (As of close on Jan 25, 2013)
Stock Price (1-25-13) 9.03 439.88 40.13 13.68 31.54 16.99 5.64
PE ((ttm)) 50.45 9.97 25.05 3.10 163.4 N/A N/A
EPS ((ttm)) 0.18 44.41 1.05 4.41 0.19 -6.41 -1.44
Dividend (yearly) 0.12 10.60 2.90 0.40 --- 0.53 ---
Cash ($B) 1.86 39.82 0.194 24.1 10.45 11.30 6.33
Debt ($B) 8.83 0 20.71 101 0.902 28.44 21.30
Effective PE 75.3 41.5 13.84 34.2 N/A 32.1* N/A

The portion of earnings that ends up in the hands of the investor is generally small relative to the claimed profit. This means the investor is overpaying even more if he was using the stated PE as a important basis for stock purchases and may even mean the PE value is corrupted by stating a high profit through creative accounting. Notice the chart in that except for my added line at the bottom, it conforms to usual data provided by numerous investing service companies. Look at the EPS that is for the trailing three months but the dividend is given in terms of a yearly figure and not for the most recent quarter. This provides about a 4-fold factor between these two, out of the favor of the investor in terms of the "E" of the PE they get.

The public needs to learn about PE ratios and what percent of the profit ever is given to shareholders from dividends. Think about this: if you ever are paying at PE=20 for example yet the dividends paid out is only 25% of the claimed profit, you are essentially paying at PE=80. If you have rental property and you make certain that a year's worth of rent pays for 10% of the property cost, you are essentially working with a PE=10 investment - you get 100% of the gross profit, not some small fraction of it. The broad stock market PE ratio is already 2X too high based on historical norms for a bad economy but when you consider this reality, you are extremely overpaying.

Looking at Alcoa (NYSE:AA), the company claims to have made 18 cents profit per share for the most recent quarter. What does the investor get? A paltry 3 cents. This is common, but sometimes when a corporation is in dire shape, it will pay out a dividend even when the company is losing money such as for Hewlett Packard (NYSE:HPQ), presumably as an encouragement to get people to "invest". But why is HPQ in their bad position? What are they doing with other people's money? At least Century Link (NYSE:CTL) pays a decent percentage of its claimed profit to the shareholder, but why is its debt at $20B? Is the company well-managed and is this the reason why CEOs get multi-million dollar pay packages? Ford, what a company...$100B debt and yet it claims it made over $4 per share for the most recent quarter and hands the investors who keep the CEOs in their mansions a whopping 10 cents! Facebook as stated earlier, what business does it need to be publicly traded? Do you see anything coming directly from the company directly to the "investor" or is that all going to come about from hope that somehow the stock price goes up and still be meaningful as it pertains to the actual profit? Here we have Sprint (NYSE:S), mired in debt as is usual for U.S. corporations. It doesn't provide a dividend like Facebook, so it's lots of hopium the investors must be high on now.

Look at the debt and cash. Add them up in your head and you'll see it's about $90B cash and $180B debt. What the heck is going on here? Even with Apple pulling up the total, aren't our corporations sitting on a pile of cash? Well, who got suckered into thinking that? I contacted Standard and Poor's directly several times to find out about our record high corporate debt. Seems as though the propaganda reporters failed to subtract the debt from the cash. I could have a million in cash yet owe two million - what does that tell you? As an investor, you have to see this readily and not be unduly influenced.

With these several companies I am highlighting, just the first seven that came to my mind, not chosen on any other factor, does it demonstrate how great of shape the economy is in? House prices are still too high based on historical ratios of median house price per median income, presently at nearly 4, was under 2 in 1960 and ranged from about 2.5 to 3 from 1970 to 1990. How can this be considered good? Food stamp recipients now exceed 48 million. Personal debt at $16 trillion. Total government debt including state and local exceeds $23 trillion or 1.5X GDP. Unfunded liabilities at $122 trillion or 8X GDP. Real inflation rate around 7% yet our government says it's only about 2%. I could say more but I think you all got the picture. We have Bernanke stealing money from everyone, thus far about $20K per person and it gets posted as debt to this country and then diverted through a round-about means at the New York Fed with the illicit POMO and magically stocks fly despite heavy fund outflows for the last several years. This presents a situation that is very scary. Our economy is truly in the toilet yet the mainstream media keeps thrusting the view that we are in a recovery. I say to all, show me some stats that really shows it, and make certain you put it in perspective with the actual inflation rate, population growth rate or other relevant measures and not just throw out some raw numbers. Investors need to be aware of much economic data and it would be nice if the media would not be pushing their stock pumping agenda and thus it makes it an extra burden on those who invest to seek the truth in numbers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.