What Is the S&P 500/Citigroup Pure Value Index
The S&P 500/Citigroup Pure Value Index is a score weighted index developed by Standard and Poor's consisting only of those stocks within the S&P 500 Index that exhibit strong value characteristics.
- The S&P 500/Citigroup Value Index is an index of the most strongly scored value stocks in the S&P 500 index.
- Value stocks are identified using value vs. growth criteria including price-to-book, dividend yield, and 5-year growth rates.
- The Pure Value index is score-weighted as opposed to market cap weighted.
Understanding the S&P 500/Citigroup Pure Value Index
The S&P 500/Citigroup Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness weighting scheme. Narrow in focus, The S&P 500/Citigroup Value Index contains only those S&P 500 companies with value stock characteristics as selected by S&P. There are no overlapping stocks between these indices and index constituents are weighted by their Style Scores. The Style baskets are the only regions used to construct the Pure Style indices.
The Standard & Poor's 500, often abbreviated as the S&P or the S&P 500, is a broad stock market index. Based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ, the S&P 500 is one of the most commonly followed equity indices, and is generally considered one of the best representations of the U.S. economy and stock market.
Selection Criteria for the S&P 500/Citigroup Pure Value Index
The value factors are:
- Book value to price ratio: This ratio compares a stock's market value to its book value, and is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower P/B ratio could mean that the stock is undervalued.
- Cash flow to price ratio: This ratio compares a company's market value to its cash flow, and is calculated by dividing the company's market cap by the company's operating cash flow in the most recent fiscal year, or by dividing the per-share stock price by the per-share operating cash flow. Generally speaking, the lower a stock's price/cash flow ratio is, the better value that stock is.
- Sales to price ratio: This ratio is a valuation metric for stocks, and is calculated by dividing the company's market cap by the revenue in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue. Generally speaking, a smaller sales to price ratio is considered a better investment since the investor pays less for each unit of sales.
- Dividend yield: This ratio that indicates how much a company pays out in dividends each year relative to its share price, and is calculated by dividing the dividend per share by the price per share.
The growth factors are:
- Five-year earnings per share growth rate: The earnings per share growth rate is the portion of a company's profit allocated to each outstanding share of common stock, and is calculated by dividing net income, minus preferred stock dividends, by average outstanding shares. Earnings per share serves as an indicator of a company's profitability.
- Five-year sales per share growth rate: The sales per share growth rate computes the total revenue earned per share over a designated period, and is calculated by dividing total revenue by average shares outstanding. Also known as "revenue per share."
- Five-year internal growth rate: An internal growth rate is the highest level of growth achievable for a business without obtaining outside financing, and a firm's maximum internal growth rate is the level of business operations that can continue to fund and grow the company. Internal growth rate is an important measurement for startup firms and small businesses, because it measures a firm's ability to increase sales and profit without issuing more stock or debt.