# PEGY Ratio: Does it make sense?

PEGY ratio is calculated as PE ratio/(Earnings Growth Rate + Dividend Yield). Putting aside the discussion of whether forward or trailing P/E ratio should be used, isn't adding dividend yield over estimating the growth rate. After all common stock dividends are paid from net income.

• Cash paid as dividends will not be used to finance internal reinvestment, which drives earnings growth. Arguably G+Y represents the internal + external compounding of returns on equity. – experquisite Dec 3 '14 at 0:28
• That said, we are adding unlike terms, so it doesn't make much sense. – experquisite Dec 3 '14 at 0:40

$$PEGY = \frac{PE}{EG+DY}$$ $$PE = \frac{P}{E_n}$$ $$EG_{forward} = \frac{E_{n+1} - E_n}{E_n}$$ $$DY = \frac{D}{E_n}$$
$$PEGY = \frac{\frac{P}{E_n}}{\frac{E_{n+1} - E_n}{E_n} + \frac{D}{E_n}} = \frac{P}{E_n} \frac{E_n}{E_{n+1} - E_n + D}$$ $$PEGY = \frac{P}{\Delta E + D}$$
• Thanks experquisite, but I still don't get it. P/E ratio tells how many years it would take to double your money. Assume $100 for a share with an annual earnings of$5. The P/E ratio suggests that in 20 years you would double your money, ignoring time value of money. Enter growth rate and PEGY. Since PE ratio does not account for growth rate, PEGY was introduced. If the company earnings in the above example grew at 20% the time required to double your money would be lesser. Dividends are going to reduce earnings 1 for 1. So it does not make sense to include dividends in the denominator. – Karthik Balasubramaniam Dec 4 '14 at 4:43