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Quick question for someone:

When looking at the P/E ratio for comparing different companies, are the companies' dividends included in the P/E ratio, or not?

Thanks for your response.

Robert
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Hi Robert!


Welcome to the Motley Fool... I had to refresh my understanding of the P/E so I looked at the info on one of my favorite sites for definitions, take a look at the following.


http://www.investopedia.com/terms/p/price-earningsratio.asp

Price-Earnings Ratio - P/E Ratio
What Does Price-Earnings Ratio - P/E Ratio Mean?
A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

Market Value per Share / Earnings per Share

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).


Of course this question is somewhat relative and there are other facts to be learned - Take a look at this link for additional info concerning the P/E, which shows what I entered into the Investopedia search box.

http://www.investopedia.com/search/searchresults.aspx?
q=Price+to+Earnings+calculation&submit=Search

Good luck on your learning about Investing!

~hildy
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Hi again Robert...


Sorry about that last link, I should have checked it before submitting my response to you! It should have been this link:



http://www.investopedia.com/search/searchresults.aspx?q=Pric...


Good luck RJ.
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Hi, Robert!

When a company reports earnings it is before dividends are paid out. So the denominator part of the P/E ratio includes any money the company intends to pay out for dividends. If you look at a company's income statement you generally won't even see the amount paid out in dividends. You'll need to look at the financing part of the cash flow statement to see that.

This makes sense when you think about it. A company's earnings should be independent of what they plan to do with those earnings. This makes it easier to compare two companies with each other.

That said, a dividend payout can sometimes be implicitly baked into the P/E ratio. If two companies are equal in all respects except one offers a dividend, more often than not the dividend-paying company will sell at a premium to the non-dividend company, as so many investors like dividends.

Mike
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