PE ratios: The franking factor

We show how franking credits on top stocks mean they are cheaper than you think.

Summary: Franking credits add more than 2% per year to the returns of many investors. Calculations of price/earnings ratios don’t reflect the benefit of franking credits. But it is possible to work out a company’s earnings yield including franking credits, as well as its PE ratio including franking credits.

Key take-out: If the value of franking credits is factored in, many companies’ earnings yields and PE ratios appear much more attractive.

Key beneficiaries: General investors. Category: Shares.

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