The
trail wrote:
jharris wrote:
Here is the problem, the minute growth slows, there will be a
sell-off. P/E ratio will collapse and
stock price will fall.
That's kind of circular logic. Since a sell-off is nearly by definition, a fall in stock price.
Though that scenario is not a given. It's perfectly possible to smoothly transition from "growth" to "income". As growth slows companies can divert less money from "E" into funding growth (capital purchase) and R&D, and hand it back to investors, increasing the dividend and therefore propping up the stock value. There are plenty of companies that do this successfully. (And plenty that don't.)
Circular logic..... implied since they are the same thing- yes.
Sell-off means a fall in stock price. A new calculation of the P/E ratio after the fall in stock price would mean the P/E ratio would also fall.
Companies that have high P/E ratios have that due to one thing or the other, growth or earnings (profit). 4 key numbers at every quarterly report are: earnings and sales from that quarter ended (profit and growth), and the expected sales and earnings for the upcoming quarter (profit and growth).
Based on these figures- a stock valuation is calculated. Trading of the stock occurs and adjusts. That is why there are big moves up or down after earnings reports.
Now, valuations and reality are two different things. That is why we call a stock "undervalued" or "overvalued" when the valuation is compared to the current stock price. A stock that is valued at $80 a share and is actually trading at $100 a share is overvalued and vice versa.
To keep stock price up, yes, there would need to be a change in earnings (profit) when growth slows. Also, yes, when a dividend is offered, that is also taken into account when valuing the stock. Higher the dividend, then the higher the stock valuation.
Normal transition would be- growth for a new company, then it changes to a dividend paying company when the growth slows and positive earnings are present.