So you think Glaxo’s cheap?
Posted on July 20, 2007 by Richard Beddard
Filed Under Investing |
Along with many of the world’s largest companies, Glaxo’s trading on a low price earnings ratio in comparison to recent years, and smaller fish. Its pe is about 13, which represents unthinkable value compared to the go-go years of the late 1990’s.
Well, here’s another lesson from John Littlewod*1. In the early fifties, Glaxo was a go-go stock too. But then company directors preferred to keep a cushion of earnings and assets and investors valued shares “almost exclusively by reference to the dividend yield”:
Glaxo Laboratories was a growth stock by the standards of the 1950s and its shares yielded 3.85%. The dividend was covered nearly 12 times by earnings to give an earnings yield of 45%, or pe ratio of just over two.
One of the first men to spot the money locked up in companies was the financier and philanthropist Charles Clore. His bid for J. Sears & Co, a shoe manufacturer,:
…jolted companies into becoming more liberal with their dividend policies. It prompted the first step in a long process that, over some 40 years, would in broad terms, take the accepted valuation of equities from a 15 to 20% earnings yield in the 1950s, or PE ratios of 5 to 6, to around 15 regularly and, on occasions in the 1970’s, 1980’s and 1990s, over 20. Equity values would come to be multiplied some three or four times simply because of a change in the basis of valuation. Profits have multiplied some 20 times or more over the last 50 years*2 or so, but share prices have risen 75 times…
Footnotes:
- ‘The Stock Market: 50 years of capitalism at work’. See also: Supply and demand 60 years on…
- Mr Littlewood was writing in the late 90’s
Comments
One Response to “So you think Glaxo’s cheap?”
Leave a Reply
[...] fascinating information on the drivers of returns on equities between the fifties and the nineties dug up by Richard Beddard, has a worrying aspect. Much of the gain came from one-off changes, so [...]