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2020 | OriginalPaper | Buchkapitel

1. The Ford Dollar: The Mysterious Multiple

verfasst von : George Calhoun

Erschienen in: Price and Value

Verlag: Apress

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Abstract

Suppose you want to enter into a financial contract with a reliable counterparty to receive a cash payment of $1.00 every year on December 31, for some number of years into the future. Let us assume the counterparty is a large corporation – say, Ford Motor Company – operating a successful ongoing business which generates a reliable cash flow.

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Nächstes Kapitel The Value Triangle

Interestingly, Finance theory makes an argument that the value of the claim is not dependent upon whether the cash is paid out. This is the famous (and perhaps spurious) “dividend irrelevance theorem” proposed by Miller and Modigliani some 50 years ago. “Value does not depend on payout. Value is indeed based on expected cash flows over the life of an investment, but the timing of the payout is not important; the value is independent of whether the firm pays out dividends in the short term or only pays out dividends on liquidation of the firm” (Stephen Penman, Accounting for Value, Columbia Press (2011), p. 38).

Ford is currently paying out 60 cents of that claim in cash, as its common stock dividend. The rest is reinvested in the presumed hope of growing the business and increasing the payout in future years. Five years previously, Ford was paying out only 40 cents per share; so the dividend payout has grown by 50%. Other companies have been more successful in growing the payouts. Johnson & Johnson (JNJ), a so-called dividend aristocrat, has increased its dividend by a factor of ten in the last 20 years. These examples help illustrate the rationale of viewing a “claim” on a dollar of earnings as a valid and valuable proposition, even if the entire dollar is not paid out in the current period.

That is, you would receive $1.90 in cash payments – all of its earnings – from Ford (in this imaginary example) plus a capital gain of about $1.80 from the sale of your share in the market.

Of course, the multiple (the P/E ratio) itself may change. The analyst may wish to adjust the multiple to take into account other expected changes in the situation – say, new regulations that may constrain the growth prospects of the business in some way. But the general principle holds: the P/E ratio is seen as a metric that can allow us to relate future fundamental performance – changes in sales, earnings, and so on – to the future share price. It is first and foremost a forecasting tool.

See Chapter 4, Section 4.2.1.

Adapted from Burton G. Malkiel, “The Efficient Market Hypothesis and its Critics,” Journal of Economic Perspectives, Vol. 17, No. 1, Winter 2003, pp. 59–82.

Burton G. Malkiel, “The Efficient Market Hypothesis and its Critics,” Journal of Economic Perspectives, Vol. 17, No. 1, Winter 2003, pp. 59–82.

This data is apparently derived in part from Robert J. Shiller, Irrational Exuberance, 2nd Edition, 2006.

Reprinted with permission from the Federal Reserve Bank of San Francisco, “Valuation Ratios for Households and Businesses,” FRBSF Economic Letter 2018-01, January 8, 2018,

www.frbsf.org/economic-research/publications/economic-letter/2018/january/valuation-ratios-for-households-and-businesses/

. The opinions expressed in this article do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

Michelle Clayman, “In Search of Excellence: The Investor’s Viewpoint,” Financial Analysts Journal, May–June 1987, pp. 54–63.

Adapted from Michelle Clayman, “In Search of Excellence: The Investor’s Viewpoint,” Financial Analysts Journal, May–June 1987, pp. 54–63.

The “disasters” beat the S&P 500 average by an astounding 12.4% per year. And they had virtually the same “beta” (a measure of market “risk” or volatility) as the “excellent” companies.