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Definition

This term describes the share of a company with a reputation for consistently growing its earnings. The rating of a company is dependent on the consistency with which it can grow headline earnings and dividends. If a company has a track record of growing its profits and dividends by, say, 15% per annum for the past 10 years then its shares will be very highly-rated. On the other hand, if it moves from profits in one year to a loss in the next, then its future earnings become much less reliable and its rating will be commensurately lower. The rating of a company is expressed in its price:earnings ratio (P:E) and its reciprocal, the earnings yield (EY). Companies with a high P:E and a low EY are highly rated by the investment community. Put in another way, investors will have to pay more for 100c of earnings from a highly rated company than for 100c of earnings from a poorly rated company. In general, blue chip shares will be highly rated because they can boast a long track record of steadily rising earnings.

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