Monday, April 23, 2012

Shares Per Earning?

In the heyday of gargantuan Urban Assault Vehicles, before petroleum topped $100 per barrel, the joke was that fuel efficiency could be measured in gallons per mile not miles per gallon. I have written on this blog critically about established companies that refuse or decline to pay a dividend to their shareholders. Recently, Apple (AAPL) decided to reinstate dividends after a 17 year absence, in an effort to draw down some of its reported $100 billion stockpile of cash, and incidentally to reward shareholders. Their announced quarterly dividend of $2.65 translates to an annual dividend yield of about 1.85% at today's stock price.

I've mentioned how the Price-Earnings ratio (PE) is often used as a rough measure of valuation, with a 15/1 PE ratio being a traditional conservative target. Apple currently trades at a fairly reasonable PE of 16. I've also noted the recent increase in dividends by financial institutions, to yields around 2.5%.

E*Trade's website is currently touting high-yielding stocks, with the highest yield (by AT&T) at 5.7%. Wow I thought. What's their PE ratio? As it turns out, their annual dividend of $1.76 is significantly higher than their earnings per share of $0.61 (trailing 12 mo. earnings for those curious). And their PE ratio is a not so appealing 47.

That means, AT&T is currently paying out dramatically more to shareholders in dividends than the company is earning. The shares trade for about what they did a year ago, having come up from a trough in the fall. What is their strategy here? Their quarterly dividends have been above $0.40/share since 2008, and have slowly increased from the $0.20s to the $0.30s, and into the $0.40s over the past decade.

Clearly they have a treasure chest of cash ($23 billion to be accurate), else they couldn't sustain such a dividend through thick and thin. The yield at least in part explains the share price. But how sustainable is this approach? With 5.9 billion shares outstanding, they're spending more than $10 billion per year in dividends, or about $6.75 billion per year more than they are earning. Three to four years then it would seem, unless they increase their market share.

*Full disclosure: I personally own neither Apple nor AT&T stocks, and have no immediate plans to purchase either.

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