Earnings, dividends, and valuation

Valuation is the process of determining the current worth of an asset or company. There are many different techniques that can be used to determine value. Here are some of the most commonly used methods.

Earnings per share

Earnings per share (EPS) is most commonly the company's actual net earnings minus its preferred dividends and then divided by its weighted average number of shares outstanding. EPS can be reported in many different ways, some using historical results and others using analysts' estimates for future performance. EPS can also be reported for quarterly or annual periods. Historical EPS variations are derived from either the latest annual reported amount or from the sum of the past 4 quarters regardless of year. This latter form of EPS may be referred to as trailing 12-month, or TTM. Forward-looking EPS estimates may be derived from actual projections of the factors in individual companies' financial reports, sometimes called bottom-up analysis. A forward-looking EPS may also be derived from applying macro projections about the market environment to a company's past performance, which can be called top-down analysis.

Book value per share

This amount is the enterprise's total book value divided by its total number of shares outstanding. Book value is generally derived from the current market values of all tangible assets on the company's balance sheet. It is considered to approximate the money that shareholders could theoretically expect to receive if the company was to have been liquidated and all of its debts paid. Book value per share represents an alternative valuation of a company's shares (i.e., the value of the sum of its parts), and it may deviate significantly from the current market value of that share. Among the potential reasons for this variance are the value that the market puts on a company's management and the market's independent assessment of a company's tangible asset values. Variance between price per share and book value per share can also be driven by intangible asset values such as brand equity and goodwill.

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Dividend yield

Dividend yield measures the immediate cash return that an investor receives from an equity investment. The concept applies to both common equity and preferred equity shares and does not include the market value of any options, warrants, or stock dividends that a company might also distribute to those shareholders. The formula for dividend yield is an annual cash dividend amount divided by current stock price. Typically, the annual dividend amount used is the sum of all cash dividends paid during the prior 12 months. However, dividend yield can also represent a projection using expected dividends for the coming 12 months. In some cases, the projection is an analyst's estimate. In others, it is the most recent quarterly dividend multiplied by 4 (or semiannual dividend multiplied by 2). A dividend yield that uses a projection may be referred to as a forward dividend yield.

You can screen by the Dividends and Earnings criteria discussed in this lesson when using the Fidelity.com Stock Screener. Please see below.

Image: Fidelity Stock Screener with Dividends and earnings sections highlighted.
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© 2013 by DST Systems, Inc. Reprinted with permission from DST Systems, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

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