ARTICLES

The PEG Ratio

Since the government of national unity (GNU) came into power in June 2024, there has been a definite improvement in the South African economy. Perhaps the improvement is not as dramatic as some people were expecting, but the progress cannot be denied.

Possibly the best indicator of that is the 28% rise in the JSE Banking index which, before the GNU had been moving sideways for the previous two years. Banks are generally not very exciting investments. They don’t always make it onto the Winning Shares List (WSL), but they are usually risk-free and they are reliable dividend payers. Right now the average dividend yield on the JSE Banks index is 5.5% - which shows that despite their upward move, banking shares remain relatively cheap.

Perhaps the best way to determine whether a share is cheap is to look at its price:earnings growth (PEG) ratio. The PEG ratio compares the growth in a share’s earnings per share (EPS) with its price:earnings (P:E) ratio. The best way to explain this is with an example.

Standard Bank

  Year     EPS       %

Here you can see Standard Banks’s EPS over the past ten years. Thus it produced an EPS of 1487c in 2015 and an EPS of 2644c last year. The PEG takes an average of the percentage growths in the EPS and then divides the current P:E ratio by that – so Standard Bank’s average P:E growth over the 9 years from 2016 to 2024 was 13.26% and if we divide that current P:E ratio of 8.93 by that, we get a PEG of 0.67

Conventional wisdom is that any PEG below 1 represents a share which is under-priced and a PEG above 1 shows that it is over-priced.

Now we can compare this to FirstRand which has the following figures:

FirstRand

  Year        EPS       %

So, this shows that FirstRand shares are currently more expensive than Standard Bank, and possibly over-priced. ABSA comes in with a PEG of 0.29 and Nedbank is at 0.26 – showing that they are both very under-priced. Capitec on the other hand has a PEG of 1.41 which means that its ability to grow earnings is now very well established with institutional fund managers and they are prepared to pay a significant premium for its shares.

If you study the EPS of the various banks, you will immediately see that they all took a bit of a hit in 2021 – because of the massive provisions which they all made that year for bad debts due to COVID-19. Over the succeeding years, those provisions were unwound. However, if we say that 2021 was an aberration and we calculate the PEG just for the years 2022 to 2024 then the results are:

This shows that the most fully valued bank is in fact ABSA while Capitec and FirstRand still look reasonable. Over the past three years Nedbank offers the best PEG value at 0.38, closely followed by Standard Bank at 0.44. Nedbank is now at a dividend yield (DY) of 7.38% which is a very solid return for a large banking share and if you want to buy Capitec you must accept a DY of just 1.43%. But, Capitec has shown its ability to continuously generate above-average returns in this highly competitive industry. We added Capitec to the WSL on 4^th November 2023 and it has more than doubled since then. Nedbank has still not made it onto the WSL.

The PEG ratio is a very useful tool for establishing whether a share is over- or under-priced and you can use it for any blue-chip or secondary share that produces regular profits.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

Rare Earth Elements

Investors worldwide had been of the opinion that Trump’s ability to impact markets was on the decline. His erratic, on-again, off again tariff policies had either disappeared or had been mostly discounted into share prices. His attack on the second largest economy in the world, China, seemed to have been largely resolved, and a meeting with

US Shutdown

There has been much in the media recently about the US government shutdown and the fear among investors that it might begin to affect the stock market, depending on how long it lasts.

A shutdown occurs when the US government reaches its budget limit and requires a bill to be passed through both Houses to extend the government’s spending limits.

New Listings

Two new companies, ASP Isotopes and Greencoat Renewables, have recently come to the JSE. Both are developing companies that have recently made losses and have been funding those losses by raising capital and selling assets. They both have substantial “blue sky” potential but also carry substantial investment risk. This is probably truer of ASP

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments

Sibanye takes off

We have been writing about Neal Froneman and Sibanye for years now. Beginning in 2013, Froneman assembled the Sibanye group over a period of 7 years, buying up mining operations both in South Africa and America at bargain prices. Initially he bought precious metals producers, but more recently he has been diversifying into base metals like zinc and lithium which

The 16 Year Bull Trend

Since the Second World War, the stock markets of the world, including the JSE, have always tended to follow the New York Stock Exchange (NYSE) - and the NYSE is best measured by the S&P500 index (S&P) of its 500 largest companies.

For this reason, we believe it is important for private investors to constantly