Canadian Dividend Investors
1
Fair Share Value
For the investor, a too-high purchase price for the stock of an excellent company
can undo the effects of a subsequent decade of favorable business developments.
1
Warren Buffett
The fair share value represents the maximum price you should pay for the shares, based on their expected financial return. Ideally, you should only buy the shares of a company when the market price is lower than the fair share value. The greater the discount from the fair share value, the greater the factor of safety against overpaying.
The fair share value of every company is subjective because it depends on other investors’ expectations of the company’s future financial success. While there are several methods for estimating the fair share value for common shares, in my opinion, the most useful approach is based on the axiom that the fair price of any asset is equal to the price that buyers have been willing to pay for the same asset in the few years, whether it be for a house, a used car, or the common shares of a public company.
Many factors will affect a company’s market price, including, for example, its earnings, financial prospects, management ability, investor sentiment, and overall economic conditions. However, the financial value of a share is fundamentally a function of a company's earnings potential. The historic price to earnings (P/E) ratios can therefore provide a good indication of the range in prices investors have paid for the common shares, relative to a company's earnings.
Conveniently, Value Line provides historic data for both the prices and the annual earnings for those companies included in their coverage universe. For example, the highest and lowest annual prices and annual earnings for Sun Life Financial are highlighted on Figure 1, which shows a portion of the Value Line report for the company dated October 31, 2025.
The highlighted data in Figure 2 has been copied into the table shown in Figure 12.2. The highest and lowest P/E ratios were then calculated for each year using the respective values, and the results are presented in the last two lines of the table.
As shown, the highest P/E ratios in recent years (2019 to the end of 2025) ranged from 10.7 (in 2021) to 16.9 (in 2025). Based on these values, it is reasonable to expect that the highest probable P/E ratio by the end of 2026 will be about 15. Since the Value Line analyst estimates that the earnings for Sun Life Financial to the end of 2026 will be $6.00, it can be expected that the probable maximum market price for the shares to the end of 2026 will be about $90 (15 x $6.00).
Figure 1: Data used to estimate the probable highest and lowest market price for Sun Life Financial for the 2026 fiscal year.
Figure 2: An example showing how the highest and lowest probable market prices in the forthcoming year (2026) were estimated for Sun Live Financial.
Similarly, the lowest P/E ratios in recent years (2019 to the end of 2025) ranged from 8.3 (in 2021) to 13.6 (in 2025). Based on these values, it is reasonable to expect that the lowest probable P/E ratio by the end of 2026 will be about 10. If the earnings to the end of 2026 are $6.00, then the lowest probable market price for the shares to the end of 2026 would be about $60 (10 x $6.00). The estimated average or fair share value for the shares in 2026 can be calculated to be $75[($60+ $90)/2].
In summary, by the end of 2026, the market price for a common share of SLF is expected to fall somewhere between $60 and $90, with an estimated average or fair share value of $75. Of course, unforeseen events could have a positive or negative effect on SLF’s business, so that the market price may fall outside the expected range before the end of 2026. Nevertheless, based on the foregoing analysis, I would consider buying the shares anytime the price falls significantly lower than the expected fair share value of $75.
It is apparent that there is considerable room for judgment in the choice of the values used to calculate the fair share value. For this reason, you should always check your estimate of the fair share value with other trustworthy sources. There are good reasons why it is called the art, not the science, of investing !
1. Attributed to Warren Buffett. Source unknown.