It’s warm and Sunny here in Cleveland, surprisingly (we’ve even had 2 straight days of sun!), in the middle of February. Here I thought the groundhog said we were in for a brutally long winter! However, I didn’t realize we were in for a brutally rising stock market, either! This has brought in new traffic on this dividend investing highway and one thing I have learned over this past/last weekend is – one should update the expected forward earnings per share on at least a quarterly basis, and I’m here to tell you why you should be doing just that.
Importance of Earnings Per Share & P/E Updates
Now that another full year and quarter-end (i.e. 12/31) are more than fully behind us, companies are releasing their press releases and annual reports, i.e. 10-K’s. Being a public accountant and an external auditor, I review and audit my fair share of these. However, what this also means is that another year of “actual” earnings figures is in the books and investor calls, press releases and investor presentations have been underway. But what does this mean for us dividend stock investors? Well, we need to go back to the drawing board and or research on companies, as the price to earnings ratio, one of our amazing dividend diplomat stock screener metrics, is more than likely out of the norm and also outdated. Yes… I know, you cringed, you actually have to do a little homework here : ) Due to the recent surge of the market since 1/1, +5.02% (2/19/17), if you had old/lower earnings metrics in your spreadsheet that you maintain for research, then your price to earnings ratios are more than likely higher than normal! Obviously, earnings could have worsened, but that has not been the trend I’ve been seeing, as well as the forward earnings projections, thanks to the potential tax changes. Therefore, one needs to go back and update these earnings per share figures, so that you can get a more realistic via of the companies you are evaluating – either in your own portfolio or on new targets.
Considerations beyond current EPS!!!
Not just any old, end of year, actual-earnings per share figures. I am actually referring to the forward looking earnings per share. First, this information is easily accessible, and if you are reviewing/screening for “easy to understand businesses” (think Procter & Gamble (PG), Target (TGT), Consolidated Edison (ED) or… yep, you guessed it – the top 5 foundation stocks for dividend investors), I guarantee you there are more than 10+ stock analysts that are reviewing/watching/analyzing your company, and placing an earnings target. I use the average earnings estimate for the up-coming year, and update as each quarter goes on. I prefer investing on the forward earnings potential of a company, as opposed to what they’ve already done, though the proof of how they perform definitely can be seen from past results, so don’t dis-consider prior history fully.
Why is this so important… NOW?
Easy. With the stock market flying high and up over 5% already year to date, to note – this is only through 50 days of the calendar year, not having updated earnings per share numbers more than likely (if they are lower), is going to display that each company that you own, more than likely, is either closer to being over valued, is overvalued or is even more overvalued than before. For example – for Johnson & Johnson (one of my top stocks for 2017), I was using an earnings per share figure of $7.14 instead of the new average based on the latest releases, of $7.38, this causes the P/E to go from to 16.7 to 16.1. Not a huge difference in this situation, but then you have Visa (V), where in my spreadsheet i had $2.59, which at a price of $87.46, led to a P/E of 33.77 (YIKES). However, after reviewing what analysts are expecting, this earnings per share turned to $3.87, which dramatically reduced the p/e ratio to a palatable 22.6. Visa went from an over-priced stock to a reasonable valued one, and you could even compare this to the S&P and argue that it could be a smidge undervalued. Talk about a swing!
Concluding thoughts on updating p/e Ratios
All-in-all – what this comes down to is using the most accurate information in order to make a decision. You don’t want to be the person making a decision with your money based on stale information that doesn’t correlate to the business today, do you? This could obviously go the other direction, where current year earnings was $4.50, but the outlook is less than that, causing the P/E ratio to be lower now than it does look in the future – therefore, you need to take that into consideration. I plan on ensuring/having calendar reminders to update the entities that I hold quarterly, in order to capture any change or adjustment to earnings going forward and the impact to the p/e ratio. This actually takes me only 5-10 minutes each time, so we are still talking less than an hour of work here!
What do you think about updating your earnings per share figures? Do you wait until after the full year is over to evaluate? Are you constantly updating them based on actual quarterly figures and annualizing those current figures? OR are you employing something similar above, and using forward earnings per share to project the forward P/E ratios? Would love to see what methods everyone uses, what thoughts they have about what I’m doing on a going forward basis and/or how often you even look at the P/E ratio, as well as updating your screening metrics! As always, appreciate everyone for rolling through the Diplomats territory and talking investing, savings, strategies, you name it. Talk soon and keep staying focused on the journey : ) Talk soon!
-Lanny