It’s certainly true that the share market is forward looking not backwards looking, which makes quoting a historical price-to-earnings (PE) ratio or an historical dividend yield largely redundant. What happened last year – while interesting perhaps – doesn’t automatically translate into this year or future years.
Two sectors where this is particularly relevant at present are the resource sector and the mining services sector. For example, up until about a week ago, coal miner New Hope Corporation Limited (ASX: NHC) was trading on a stated PE of 20 (based on a share price of $3), however after this week’s half year results which reported a profit drop of 67%, the “E” for the most recent two halves has dropped and at a share price of $3, New Hope is now trading on a PE of 32! Investors who only looked back saw a stock trading on a PE of 20, those that were looking forward and accurately forecast a weakening in earnings for the coal miner would have already priced in a higher PE multiple.
Hopefully the above illustrates the dangers which can lurk in placing too much emphasis on historic earnings – particularly for companies that are prone to large swings in earnings. Utilising recent historic data for forecasting a very stable company such as Woolworths Limited (ASX: WOW) is not so dangerous.
AMP Limited (ASX: AMP) has been a disappointing investment for shareholders over the past five years with the company struggling to produce adequate returns for shareholders. Investors in fact would have been better off owning the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) which has rallied around 46% since April 2009; AMP’s share price has gained just 1%.
While the past few years have certainly been ordinary, there are reasons to be positive about the future potential returns from this wealth manager. Looking forward, analyst consensus forecasts have AMP paying a full year dividend in financial year (FY) 2016 of 29.5 cents per share. With the share price currently at $4.90, this implies a forward dividend yield of 6%.
This yield compares favourably with some of its more highly priced peers such as Challenger Ltd (ASX: CGF) which is currently trading on FY 2016 dividend yield of 5%.
While AMP’s historic yield of 4.7% might not seem that enticing to income-seeking investors, the point is that the future looks brighter than the past. A purchase of AMP’s shares at today’s prices could very well be yielding 6% by FY 2016.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.