November 22, 2007 | posted by Michael Baxter in IABN |

When is no hope a good thing? Answer: when, by hope, you refer to a company’s p/e ratio.

Those clever economists at Capital Economics got their slide rules out yesterday, and came up with some pretty interesting findings.

First, let’s consider hope. An analyst does not look at hope the way the rest of us do; he or she instead measures hope quite precisely, by taking a company’s projected profit, and dividing it into the company’s valuation.

And here is the good news. Right now, the average hope, or p/e ratio, of FTSE 100 companies is just 11.1. This compares to an average this year of 12.5, a five-year average of 14.7, a ten-year average of 18, and a 30-year average of 14.1

In short, right now, p/e ratios are low. Very low. Despite shares climbing by 50 per cent over the last three years or so, average p/e ratios have fallen. This differs dramatically from the late ‘90s, when p/e ratios took off faster than an Airbus was supposed to.

Dividends are not half bad either. The average dividend yield is 3.3 per cent; that’s higher than the year average, the five-year average and the ten-year average. Interestingly, the 30-year average is higher, however, but then bear in mind that interest rates are much lower these days, so you would expect dividends to be low too.

Actually, the 30-year average for dividends is 4.1 per cent. Bear in mind, however, that inflation is much lower today. In fact the UK RPIX index is currently growing by 3.1 per cent, so the dividend yield is just a fraction down on that. But over the last 30 years, the RPIX inflation rate has averaged 5.4 per cent, so for most of that time average dividends were a lot lower than inflation.