Stock investors have a range of factors to consider when determining which stocks offer the best returns. Peg ratios represent one of the many factors used to measure and compare company stock dividend results. In terms of stock price versus future earnings capacity, Peg ratios can give investors a better idea of whether they’re getting a good return on investment both now and in the future.
PEG ratios indicate a stock’s price-to-earnings value divided by growth, or PE/G. In effect, a PEG ratio provides a single value for a stock’s price-to-earnings ratio and recorded growth rate. The PE portion of PEG represents a ratio, in and of itself, that divides a stock’s most recent price by its per-share earnings for the past 12 months. Furthermore, while the P/E ratio provides some information regarding a stock dividend’s track record, past performance may not accurately reflect a stock’s future earnings capacity. The PEG ratio incorporates additional factors that may influence a stock’s future performance.
Projected Growth Rate
Dividend stocks with low PEG ratios result from a company’s price-to-earnings ratios over the past 12 months divided by how quickly or slowly a company has grown over the past few months. So, a company with a P/E ratio of 20 and a growth rate of 15 would have a PEG ratio of 1.33 while a company with a P/E ratio of 20 and a growth rate of 30 would have a PEG ratio of .66. And while the P/E ratio provides information on a stock's pricing, this value alone doesn’t indicate whether a company can sustain its current earnings level. In effect, the lower the PEG value the more likely a company can continue to generate its current price-to-earnings rate, or P/E value.
The price or P/E value attached to a company’s stock lets investors know whether they’re getting a good deal in terms of current market value. This means some stocks may have a cheaper or undervalued price while others may have a more expensive or overvalued price. An undervalued stock may offer a bargain for the investor based on a stock’s past performance; however, a stock’s true earnings value has to do with past as well as future earnings potential. Low PEG ratios identify undervalued stock in terms of their projected growth rate. This leads to investors paying a lower price per share based on each share’s potential for earnings growth.
For comparison purposes, PEG ratios place stock prices in a different light when it comes to price versus value for each share of a company’s stock. A stock price of $20 and another stock price of $50 dollars only indicates price and not number of shares sold. The number of shares sold inevitably impacts the price of each share. So, 100 shares of $20 stock would have an equal value if 40 shares exist for the $50 stock since both equal a total value of $2,000. When factoring in the price-to-earnings, or P/E ratio, the higher priced stock starts to look even more attractive since the basis for the ratio uses fewer shares of stock. In effect, dividend stocks with low PEG ratios assign a value for each existing share of stock regardless of any differences in price versus number of shares.
- ZACKS Investment Research: Understanding Price/Earnings-to-Growth (PEG)
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Jacquelyn Jeanty has worked as a freelance writer since 2008. Her work appears at various websites. Her specialty areas include health, home and garden, Christianity and personal development. Jeanty holds a Bachelor of Arts in psychology from Purdue University.