Followup to my previous post. I noticed you mentioned "excluding one time charges" and the source I linked to is on a GAAP basis. That would be a huge difference between GAAP and pro forma! When comparing to historical P/E levels, I would be inclined to rely more on GAAP, because historically the use of pro forma earnings was not nearly so prevalent as it is today, so the historical P/E levels are probably more representative of a GAAP basis. Still, I'd be interested in looking at the source of your number.

I agree that there is a difference between GAAP and those numbers that exclude one time charges. My source is two major wire house economists numbers. Certainly one can argue that they are in the business of getting people to buy equities, so they report those numbers that are in their best interest. I notice that your source is a website devoted to pushing gold and gold related equities. It certainly is in their best interest to get people to dump stocks and buy gold, hence perhaps why they pump the higher figures.

P/E Ratio, Dividend Payout

Copyright © 1995 - 1997, HRConsultants

The next chart shows the price-to-earnings ratio for the S&P 500. As may be seen, P/E hit an all-time high in 1991 at about 26, decreased to 16 in 1994 as earnings recovered from the 1990-91 recession, and has since increased to a current value of about 23 with the 1995-97 runup in stock prices. The current S&P 500 P/E is at the upper end of its historical range and is comparable to the 1987 high of 23. Thus, from this measure of value, stocks are currently somewhat overpriced. If stocks are bought at one of the historic P/E low points, when the P/E ratio is below about 8 (e.g, in 1942, 1950, 1974, 1980, or 1982), the future expectation is much better than if stocks are bought at current levels.

Another question relating to earnings and yield is the payout of earnings as dividends. The next chart shows the payout percentage for the S&P 500. This chart shows that only about 38 percent of earnings is currently being paid out in dividends. This value is at an all-time low. This is in contrast to previous historic lows, which in the past have occurred near market low points (e.g, 1950, 1974, 1980). Since the S&P 500 index is not near historic lows by any other measure, it would appear that corporations have elected to pay out less of their earnings as dividends, perhaps because current corporate rates of return on invested capital are high, and dividends are doubly taxed.

Go to Next Topic (Return with Reinvested Dividends)

Return to Big Picture Index