Prices are up so are values

Donald Saltz

March 27, 1992|By Donald Saltz

For many investors -- those who follow the stock market carefully and who have good memories -- there is a major investment dilemma: whether to consider buying shares that have had a strong run-up over the years but, on fundamentals, are still good buys.

Take, for example, the shares of T. Rowe Price Associates of Baltimore, which were initially sold to the public in 1986 at $24 a share. Since then, the shares have split 2-for-1 and, in recent months, the price was near $50 a share -- that's near $100 on the stock that was sold in '86.

Recently, T. Rowe Price shares have been $38 to $39, or $76 to $78 on the original issue, which represents more than a tripling in their value.

Investors who keep this history in mind might have a psychological block about buying a stock that has more than tripled in price in less than six years. However, Price's earnings have maintained growth comparable to the advance in the share price, and the dividend has done the same.

The investment industry is as attractive today as it was six years ago. In fact, the price-earnings ratio on this stock is currently about 19; it stretched all the way up to the 40s in earlier trading days.

McCormick & Co.'s share price is now in the mid-20s, equal to its high during 1989. The twist is that McCormick has had two 2-for-1 stock splits since then -- in late 1989 and just a couple of months ago. That makes the current price four times the 1989 high.

McCormick's P-E ratio at the time of its 1989 peak was more than 20. It's slightly higher now -- a P-E in the middle 20s -- but not that much more. It is the quadrupling of the share price in about 2 1/2 years that will discourage a lot of investors from acquiring McCormick shares. A quick review of the company's position will probably counter that feeling.

McCormick's dividend payout in 1989 totaled 68 cents a share; the current rate is 36 cents, but the dividend growth rate has accelerated. McCormick has also stepped up its product expansion, as well as its plans to acquire smaller companies in the spices and flavorings business. Yet, its share price based on the P-E ratio has not moved ahead so much that it should discourage new investment.

Bethesda-based Washington Real Estate Investment Trust finished 1989 at $19 a share with a dividend payout of $1.02 a share. The share price is now $25 to $26, and the dividend is up to $1.24 a share. Although the share price is one-third higher and the yield a little lower, the trust has a stepped-up growth pattern that makes the shares as attractive at the current price as they were at the lower price more than two years ago.

Successful corporations that are among the nations' largest, such as Procter & Gamble, which now owns Noxell Corp. of Baltimore, tend to move up consistently. A would-be buyer might well look back and note that P&G, now $100 a share, sold for $70 a share at the end of 1989.

The investor should consider P&G's steady P-E of about 20 despite increased earnings, and a dividend yield that hasn't changed much -- it's down only from 2.6 percent to 2 percent. Still, the $30-a-share increase in P&G will discourage some conservative investors from buying.

When considering a stock, one's judgment should not be determined by the number of points it has gained over a period of time. Rather, a decision to buy ought to be based on earnings and dividends and the growth in those two categories, along with future prospects.

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