Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
Share
⏳Paying for 60 Years of Earnings?!
Published about 1 year ago • 4 min read
A dividend investing forum will be held on March 5th, 2025, and you can attend for FREE. Details are below.
It made me think about Costco (COST), a company I love, with its sky-high P/E ratio of 61.72.
Yahoo! Finance
Then Marks explained something that grabbed me: buying a stock at a P/E of 16 (the historical average since WW2) means you're paying for 20+ years of a company's future earnings discounted back to today.
Because of inflation, today's dollar is worth more than tomorrow's. If a company would make $1M next year and then shut down, you'd pay less than $1M to get a positive return.
It clicked that at Costco's current P/E of 61.72, I'm paying $62 for each $1 of annual earnings – for a company that's only existed for 42 years! To justify today's price based solely on current earnings (with no growth), you'd need Costco to maintain its performance for far longer than it has even existed.
So I'm sticking to my guns and waiting for a better price, even if it means missing out. After all, the S&P 500 just had its best two-year run since right before the dot-com bubble burst. Marks' data shows that whenever people bought the S&P at P/E ratios similar to today's 22x multiple, they earned ten-year returns between +2% and -2%.
I'm also content getting my Costco exposure through an S&P 500 index fund. Looking at the latest weightings, Costco is ranked #16, meaning about $0.91 of every $100 I invest in the S&P 500 flows into Costco. Of course, this works both ways—if market sentiment shifts and selling begins, that amount flows out just as automatically.
SlickCharts.com
Companies trading at high P/Es are essentially "priced for perfection." Any stumble, any slight miss in earnings, and the stock gets hammered. You're paying a premium for flawless execution and continued high growth.
Sometimes it's okay to say "if I miss it, I miss it" – there will always be other opportunities. The market doesn't reward FOMO investors in the long run.
And, Costco's P/E is WAY above the sector average of 17X earnings. Using Costco's 5-year average P/E of 37 and their current earnings per share of $18 would give us a share price of $686. But, given that Costco is a dominant company, I'd feel comfortable paying a 10% - 20% premium and buying in the $750 to $800 range.
Click the image above, sign up for a 7-day free trial, get $30 off an annual PREMIUM SeekingAlpha.com subscription, and check out the Dividend Investing Forum.
But you can check this out FREE if you sign up for Premium and cancel after March 5th as long as it falls within a 7-day window.
Speakers: Steven Bavaria, Steven Cress, Rob Isbitts, Scott Kaufman, Samuel Smith and Dividendology.
*This is an affiliate offer, and I will receive a small commission at no additional cost when you buy a premium annual subscription after clicking the image above.
Special offer: $30 off Premium for the first year. At the end of the free trial (or immediately if you are no longer eligible for a free trial), $269 is charged automatically for the first year of your annual subscription. Auto-renews at the then current annual list price.
Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
Here's your weekly helping of interesting investing information and insights. Opinion A famous short-seller named Carson Block recently said something on a podcast that caught my attention. He thinks AI could wipe out around 15% of office jobs — things like legal work, accounting, finance, and analysis — within three years. That's millions of people who might suddenly need money. And when people need money, they sell their investments. That's important to think about because the stock market...
Here's your weekly helping of interesting investing information and insights. Opinion The P/E ratio has probably scared more investors out of more great companies than any bear market ever has. It’s happened to all of us, and this will 100% shift your mindset. And if you have no idea what the hell a P/E ratio is, it's actually pretty simple. A P/E of 15 means you're paying $15 for every $1 a company earns. The market's historical average is around 15-20x. So when something shoots way above...
Here's your weekly helping of interesting investing information and insights. Opinion March was rough. Our net worth dropped $53,000 in one month and we officially lost millionaire status. But when you zoom out, a 5% drop that matches a 5% market selloff isn't a disaster. The market went down, we went down with it, and now everything is on sale. I'm not panicking. I'm shopping. A down market is actually a gift if you've got time on your side. You're buying the same companies at a lower price,...
