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Adjusted Earnings Yield

The earnings yield is a company’s earnings per share divided by its price per share. Earnings yield has frequently been used to predict real return for stocks. Since earnings are not reported on a real basis, Stephen Wilcox presented a technique in the September/October 2007 Financial Analysts Journal to adjust earnings yield to better represent real return. Statistical tests show that this measure better predicts future real returns than other popular valuation measures.

There are two primary adjustments considered:

  • An accounting adjustment to convert historical cost measures to current value
  • An adjustment to liabilities to reflect the real cost of capital as principal values erode due to inflation
For more information, see all articles on: Fundamental Analysis, Investing in Stocks, Investment Returns, Ratio Analysis, Research, Valuation

See also:
  • Yield Elasticity
  • The Gordon Growth Model Estimate of Equity Risk Premium
  • What is a Stock Worth? Part 3 – Sources of Cash Flows
  • The Yield Curve as Economic Indicator
  • Standardized Unexpected Earnings (SUE)
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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