Top 10 Dividend Champions’ Price-to-Earnings Ratios

The price-to-earnings ratio (P/E) is an investment metric commonly used by investors to help determine whether or not the price they’re paying for a company represents a good value.  As Warren Buffett is oft quoted, “Price is what you pay.  Value is what you get.”

Know the difference between price and value.

Price-to-earnings can signal many things.  For instance, if the price per share is 40 or 50 times the current earnings per share of a firm, investors may take that information to mean the company is expected to grow its revenues quickly.  In other words, investors are paying for “promise”.

Conversely, a firm with a share price only 7 or 8 times current earnings per share can be viewed negatively.  Investors may presume the firm’s growth prospects to be negligible since the market isn’t willing to pay a far larger multiple for the promise of increasing future earnings. 

Since signs of growth get media attention and lots of “votes” in the market, investors often gravitate to stocks with high price-to-earnings multiples, increasing the demand, driving up the price, and widening the P/E ratio even further.  Stocks found in a cycle in which excess demand is driven by perception may be referred to as “over bought”.

To avoid paying too much for over bought shares, I prefer Dividend Champions.  In Dividend Farming the objective is to maximize the return while minimizing the risk; the risk of paying too much for an investment. 

Stocks with solid records of dividend growth aren’t usually equated with high growth companies in the context of stock valuation.  As a result, they’re not inclined to be over bought by institutions, momentum investors, day traders, and the like. 

Below are the 10 Dividend Champions with the lowest, generally best, P/E as of 1/31/19.

Company	P/E
Consolidated Edison	3.53
Black Hills Corp.	6.76
Old Republic International	7.22
NACCO Industries	7.80
Artesian Resources	8.49
Franklin Resources	9.20
Nucor Corp.	10.16
First Financial Corp.	11.42
Eaton Vance Corp.	11.64
Community Trust Banc.	12.12

Knowing Dividend Champions are less susceptible to trend induced price inflation than alternatives isn’t a cure-all by itself.  The P/E ratio is still one of several indicators of a company’s ability to be profitable in general.

 

Because price-to-earnings is a ratio it’s possible to have the ratio widen not because the stock is over-bought, but because the firm is struggling to generate earnings.  Mathematically you can increase the ratio by increasing the numerator (over-priced) while holding the denominator steady, or decreasing the denominator (poor earnings) while holding the numerator steady, or some combination of the two. 

Looking for firms with low P/E and other solid metrics, like length of dividend payments, debt-to-equity, and Price-to-Book, discussed in a future post, helps determine whether the price being asked for a particular issue represents a good value.

In the case of the 10 Dividend Champions with the best P/E ratio a true value investor will look beyond that metric alone before adding to his or her dividend farm.  However, filtering by Dividend Champion and rock solid P/E ratios is not a bad way to begin the selection process. 

With that said, be careful when looking at P/E.  Using the P/E based on the trailing twelve-month (TTM) earnings means the ratio is based on something akin to fact.  Alternatively, some investors are interested in the P/E incorporating earnings projections for the coming year. 

In my view using the forecast means my P/E decision criteria becomes one of shear speculation.  In the aviation industry it’s said good information leads to good decisions.  Speculation should not be mistaken for good information whether you’re flying airplanes or farming dividends.  Best practice suggests sticking with the TTM in the price-to-earnings calculation to help generate the margin of safety in your investment and keeping your Dividend Farm healthy and growing properly.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Perspectives offered should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.