PE Ratio For a 'No Growth' Company
Quote:
Originally Posted by
Beagle
The ten year Govt stock risk free rate was 0.55% the other day when I looked.
Ben Graham's well known PE for a no growth company was 8.5 for a 10 year risk free rate of 4%. 1 / 8.5 = earnings yield of 11.76% WHICH
is a 7.76% premium over the risk free rate.
Using that same premium over the risk free rate now gives 7.76% + 0.55% = required earnings yield of 8.31% = PE of 12.
With interest rates where they are and looking to stay at historical lows for the foreseeable future I see the right PE for a no growth company as 12.
This post doesn't really follow from the other posts in this thread from umpteen years ago. But I think it should go here nevertheless.
I pulled the above quote from the Oceania thread, Beagle post 6891.
Beagle has used an 'fixed premium' of 7.76%. I think it is interesting to consider to use of a multiplicative premium calculated as follows: 11.76%/ 4% = 2.94
No risk rate = 0.55%
Required earnings rate = 0.55% x 2.94 = 1.62%, which implies a PE of 100/1.62 = 62
So by this logic it makes sense to buy just about whatever you like because interest rates are so low ;-P
SNOOPY