A slightly more complicated formula enables us to compare growth rates to earnings, while also taking the dividends into account.
Find the long-term growth rate (say, Company X’s is 12 percent), add the dividend yield (Company X pays 3 percent), and divide by the p/e ratio (Company X’s is 10). 12 plus 3 divided by 10 is 1.5. Less than a 1 is poor, and 1.5 is okay, but what you’re really looking for is a 2 or better.
A company with a 15 percent growth rate, a 3 percent dividend, and a p/e of 6 would have a fabulous 3.
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If you find a business that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you’ve got a terrific investment.
One more thing about growth rate: all else being equal, a 20-percent grower selling at 20 times e...
In general, a p/e ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.
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