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To shed light on these and other equity data worldwide, let us consider some typical information for a hypothetical newspaper and company expressed in pence (£ sterling). 2013 Company High Low 175 150 Coldplay Price 200 Change Dividend + or - net +5 8 Cover Yield P/E Mkt. 5 5 (1) Prices The first two columns show the highest and lowest prices in pence for the ordinary shares (common stock) during the year. Early in the year these prices will be the extremes from the previous year. These place the current price in perspective.

3 The Price-Earnings Ratio: Past and Future If dividends do not drive equity prices, or explain only part of their movement, an alternative strategy for analysing market forces is to focus on earnings. The simplest selection criterion would be to identify companies that have experienced the largest increase in earnings per share (EPS) over the past year. However, performance is not an absolute. It must be related to some standard of comparison. Like dividend per share, EPS ignores relative movements in share price that establish whether a stock’s EPS delivers an appropriate return commensurate with risk.

Conversely, if the payout is cut it could also indicate that a firm is struggling and also hit the share price. But there are flaws in Gordon’s argument. Some companies do not pay dividends, or their payout may be erratic, yet their price will rise if the market believes the prospects for the company, however long term, are good. You will also recall that when a share sells ex-div, its price falls by the amount of the dividend. In other words, a dividend received is equivalent to a capital gain lost.

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