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3 PRICEEARNINGS
HISTORY as an indicator of the future Stryker
Corporation 


GENERAL INFORMATION
This section examines the relationship between the company's earnings and the stock's price, in other words, its PriceEarnings history. It also addresses dividends and payout.
Following are the common uses of P/E:
PRESENT PRICE, HIGH
THIS YEAR, LOW THIS YEAR
The present price and 52week high and low prices used on the SSG should be taken from an online source, such as www.finance.yahoo.com. Do NOT use Value Line figures they will not be the most current figures.
Columns A and B:
PRICE
Columns A and B show the high and low prices for the past five years.
Column C: Earnings
per Share
Column C is the earnings per share (EPS) for the past five years.
Columns D and E: Price Earnings (P/E) Ratio
The P/E ratio is calculated by dividing the stock price by the company’s earnings. Columns D and E are the most critical columns in section 3. These two columns show the high price divided by the EPS and the low price divided by the EPS for the past five years. Examine the high and the low P/Es. What is the trend? Are the P/Es increasing, decreasing, or remaining about the same? They should be increasing.
Line 8 in Section 3 is the average historical P/E for the past five years. This number is determined by averaging the numbers in line 7 of columns D and E. If no numbers or outliers have been eliminated in columns D and E, the average price earnings ratio is referred to as the historical P/E. However, if you have eliminated some numbers in the columns D and/or E, then line 8 is called the "signature" P/E. The signature P/E may be a more reasonable indicator of the price earnings history because it has eliminated some of the anomalies.
Line 9 is the current P/E based on the last four quarters. Compare the current P/E in line 9 to the average historical P/E or signature P/E on line 8.
Compare the current P/E to the industry average annual P/E (on Value Line industry sheet). The SSG also prints the Projected P/E based on the next 4 quarters. This projected P/E is based on the estimated earnings per share growth you entered at the bottom of page 1 of the SSG. If the projected P/E is higher, that is favorable. If it is lower than the current P/E, that may be signaling a slow down in growth and a slow down in price appreciation.
Column F: Dividends
Per Share
Most high growth companies do not pay dividends because they prefer to use the
money to grow and expand. Other companies may pay very good dividends.
Depending on the philosophy of the company, dividends may vary or may remain
the same year in and year out. For example, a company may make a conscious
decision to always pay a constant dividend, knowing that there are investors
(e.g., widows and orphans) who want the stability of knowing they will get a
constant dividend check to help pay for household expenses.
Column G: Percent
Payout of Earnings as Dividends
This column indicates what percent of earnings are paid out to shareholders as dividends.
Column H: Dividend
Yield
Dividend yield indicates the effective yield that the stock’s dividend produces. The yield is a financial ratio and is a way of looking at what percent the dividend pays in relation to the stock’s current trading price.
Formula to calculate
the dividend yield is:
Step 1: Divide the dividend by the current price of the stock.
Step 2: Multiply the result by 100 to convert the number to a percent.
Example: (Annual dividend per share ÷ current price per share) x 100
Stryker’s annual dividend per share is $.22 per share.
Stryker’s current stock price per share is $60.78.
The math:
Step 1: .22 ÷ 60.78 = .0036
Step 2: .0036 x 100 = .36 or .4% is the current dividend yield for Stryker (SYK)
Another way of stating this is that for every dollar a shareholder invested to purchase a share of stock at the current stock price, the investor is receiving $.004 per share from the dividend.
ADVANCED TIPS OR
SUGGESTIONS:
Weighting the P/Es in
Section 3 to Determine Future Stock Price
If the P/Es have been trending up or down in one direction, you might not get an accurate picture for evaluating future risk and reward over the next 5 years if you just use the average of the five years, as provided in section 3, line 8. A more advanced method is to weight the high P/E and the low P/E for the past five years.
Unweighted P/Es 

year 
High P/E 
Low P/E 
1997 
51.1 
16.8 
1998 
37.8 
16.4 
1999 
33.8 
14.3 
2000 
28.1 
14.6 
2001 
21.6 
12.4 
Total 
172.4 
74.5 
Average 
172.4/5=34.48 
74.5/5=14.9 
Source: "Advanced SSG Topics," Bob
Adams, NAIC Congress,
Multiply each year by 5,4,3,2, and 1 from the most recent year to the past five years. Then divide the total by 15 not 5 (because the 5,4,3,2,1 adds up to 15).
Weighted P/Es 

year 
high P/E 
low P/E 
1997 
51.1 x 1 = 51.1 
16.8x 1 = 16.8 
1998 
37.8x 2 = 75.6 
16.4x 2 = 32.8 
1999 
33.8x 3 = 101.4 
14.3x 3 = 42.9 
2000 
28.1x 4 =112.4 
14.6x 4 = 58.4 
2001 
21.6x 5 =108.0 
12.4x 5 = 62.0 
Total 
448.5 
212.9 
Average 
448.5/15=29.9 
212.9/15=14.2 
Source: "Advanced SSG
Topics," Bob Adams, NAIC Congress,
Before weighting, the average high P/E was 34.48. After weighting it is 29.9. This high P/E is used to determine the high price in Section 4, line 1. Thus, the weighting process may provide a more reasonable high P/E figure that is more indicative of the future trend of the P/E for this company. The same goes for the Low P/E. Before weighting, the Low P/E was 14.9. After weighting it is 14.2. This number will be used to determine the low price five years out (Section 4B). If the values are too high, for both the high and low P/Es, then values in Section 4 will be affected adversely. Bob Adams, a BetterInvesting presenter, likes to weight the P/Es because he thinks you get a truer picture of what is likely to happen in the future of the company. However, not all individuals believe in weighting the P/Es.
Other Variations to
Calculating P/E
As mentioned in the General Information Section of this section of the SSG,
there are numerous ways to calculate P/E:
.
BetterInvesting, Value Line, and analysts may use different prices to determine the P/E. The PRICE part of the equation in the P/E can be:
BetterInvesting, Value Line, and analysts may use different EPS values to determine the P/E. The EPS variable in the equation can be:
Keep in mind:
Sources:
"What's a P/E, and What's it to Me?," Ellis Traub, Better Investing, March 2001, pp. 1618.
"Interpretation of the Stock Selection
Guide," Julie M. Werner, NAIC Congress,
"BasicsGet Your P/Es in Gear," Laura Berkowitz, NAIC Investor's School Transcript, June 25, 2001. www.betterinvesting.org/chats/transcriptlist.html. Scroll down the page and click on the title "BasicsGet Your P/Es in Gear"
"BasicsPE Judgment," Cy Lynch, NAIC Yahoo Chat, Nov. 15, 1999. www.betterinvesting.org/chats/transcriptlist.html. Scroll down the page and click on the title "BasicsPE Judgment."
"Advanced SSG Topics," Bob Adams,
NAIC Congress,