<< What do you mean by this? They certainly aren't paying out much in dividends so the premise here is 25 times earnings infers these stocks see capital growth of 4% a year? >>
I agree, it's a strange way of looking at it. Fairly simplistic, but if you owned a business and you paid 25 times earnings for it, you'd do so expecting that the earnings would go in your pocket (as the owner), or be reinvested back into the business which increases the value of your business.
For example, if the corner oil change shop has a record of net profits of around $50,000 per year, you might want to buy that business for $1,250,000 (a Price to Earnings ratio of 25). That $50,000 in your pocket each year would be an annual return of 4% on your investment.
If you can grow earnings beyond the $50,000 you get an even better rate of return in the future.
It's a simplistic way of explaining why a PE of 25 is reasonable, especially considering your options of money markets, bonds, or whatever.
Dave |
