Expert: Paul Henneman - 11/4/2003

Question
Hi Paul.

The way I understand it, a lower Dividend Payout means greater retained earnings, which means a greater potential for growth.

Also, a higher PE suggests the market is expecting higher growth.

So, I expected stocks with relatively lower payouts to also have higher PEs. However, it seems that stocks with *higher* payouts usually have higher PEs. This appears to be the case even within industry sectors.

I'm confused because this trend seems to be contradicting the theory. Can you explain why stocks with higher payouts usually have higher PEs?

Thanks,
Ryan


Answer
Thank you for your question!
You says stocks with higher payouts (meaning higher dividends, I presume) also tend to have higher P/E's. I'm
not sure why you believe this is true, in fact I would tend towards the opposite.
If we think about stocks that pay any dividend at all, they tend to be more established and less growth-oriented companies. Utilities are the classic example of high-dividend paying stocks and you can't find many industries
that are lower growth than utilities.
It could be that what you are looking at is skewed because many high growth companies have no P/E at all. They are losing money. No E in the P/E. Thus, I suppose if you looked at the "average" P/E among high-growth companies it
might be low because so many have a P/E of 0.
Does this make any sense? I hope it is helpful, please feel free to follow up with me if I can be of any additonal service!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEReports.com
www.VEInstitutional.com