Saturday, December 27, 2008

A Modern Approach to Graham and Dodd Investing - By Thomas P. Au

As I am put on hold for the Security Analysis book by Benjamin Graham and Dodd, I thought of going through the following

A Modern Approach to Graham and Dodd Investing - By Thomas P. Au
This book can be previewed at google books .link below.

Per my current reading, the first 2 chapters are basic concepts around financial analysis on value, growth oriented investment analysis factors and how Benjamin and Dodd viewed it and how Warren Buffet has extended those ideas.

Quick takeaway, stock can be viewed very similar to bonds. Just like discount, premiums on bonds ( against par value) determine the yield against current market interest rate, the premium/discount on stocks ( against book value) determines the dividend yield against the dividend distribution rate.

To illustrate, assume book value of stock is $10 per share, $1 is earning for an year and 60 cents paid as dividend. For this scenario
Dividend distribution rate = D/B = $0.6/$10 = 6%
Naturally, the remaining 40 cents or 4% makes the Earnings reinvestment rate.

With the above said, let us assume the price of the stock trades at a discount, say $6, then the dividend yield 10% ($ 0.6/$6) is greater than the Dividend reinvestment yield, thereby forming an analogous comparison to the bond behavior.