The prediction value of the price/earnings ratio for headline earnings per share, dividend yields and share returns

Kruger, Sarah Debora (2005-12)

Mini study project (MBA)--University of Stellenbosch, 2005.

Thesis

ENGLISH ABSTRACT: This mini study project aims to investigate the prediction value ofpricelearnings (pIE) ratios. The ability of investors to predict earnings growth is tested by examining the relationship between PIE ratios and excess earnings growth. The study further also investigates the relationship between PIE ratios and two other variables: share returns and dividend yields. The study design was based on that of two other studies: Fuller, Huberts and Levinson (1993) and Hamman, Jordaan and Smit (1995). These studies specifically tested the random walk theory of earnings. In this study all the companies were allocated to one of four PIE portfolios according to the magnitude of their PIE ratio. The relationship between PIE ratios and the dependent variables (earnings growth, share returns and dividend yields) was then analysed by comparing the medians of the dependent variables of the different quartiles (pIE portfolios). The investigation into the relation between PIE ratios and excess earnings growth indicated that companies with high PIE ratios tend to have higher excess earnings growth. The relationship, however, seemed to be more pronounced in the one year results than in the two and four year results. The share returns seemed to be randomly distributed and it was more difficult to identify the correlation with PIE ratios. For a two and four year period however, the lowest PIE quartile delivered the highest returns and the highest PIE quartile performed very poorly. Lastly it was found that companies with high PIE ratios had lower dividend yields and companies with lower PIE ratios had higher dividend yields. Even though some departures from randomness were observed when comparing the PIE quartiles, the variability of the dependant variables at individual stock level was high and indicated random distribution.

AFRIKAANSE OPSOMMING: Hierdie ministudieprojek het ten doelom die voorspellingvermoë van prys/verdienste (PN) verhoudings te ondersoek. Die vermoë van beleggers om winsgroei te voorspel word getoets deur die verwantskap tussen PN-verhoudings en surplus winsgroei te ondersoek. Verder ondersoek die studie ook die verwantskap tussen PN-verhoudings en twee verdere veranderlikes: aandeelopbrengste en dividendopbrengste. Die ontwerp van die studie is gebaseer op dié van twee ander studies: Fuller, Huberts en Levinson (1993) en Hamman, Jordaan en Smit (1995). Die twee studies het spesifiek die ewekansige verspreiding van winste ondersoek. Alle maatskappye in hierdie studie is geallokeer aan een van vier PN-protefeuljes volgens die vlak van hulle PNverhouding. Die verwantskap tussen PN-verhoudings en die afhanklike veranderlikes (winsgroei, aandeelopbrengste en dividendopbrengste) is dan ondersoek deur die mediane van die afhanklike veranderlikes van die verskillende PN-kwartiele (portefeuljes) te vergelyk. Die analise van die surplus winsgroei het aangedui dat maatskappye met hoë PNverhoudings geneig is om beter surplus winsgroei te toon. Die verwantskap blyk egter om duideliker te wees vir 'n eenjaar-periode as vir 'n tydperk van twee of vier jaar. Die aandeelopbrengste het 'n ewekansige verspreiding getoon en dit was moeilik om 'n verwantskap met die PN-verhoudings te identifiseer. Vir 'n twee en vier jaar periode het die laagste PN-kwartiel die hoogste aandeelopbrengs gelewer en die hoogste PNkwartiel het baie sleg presteer. Laastens is daar gevind dat maatskappye met hoë PN-verhoudings laer dividendopbrengste gelewer het en maatskappye met lae PN-verhoudings hoë dividendopbrengste. Alhoewel afwykings van ewekansigheid geïdentifiseer is met die vergelyking tussen kwartiele, was die variansie van die afhanklike veranderlikes op individuele aandelevlak hoog en het gedui op 'n ewekansige verspreiding.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/70304
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