What Is Earnings Yield?

The earnings yield refers to the 澳洲幸运5官方开奖结果体彩网:earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (the inverse of the 澳洲幸运5官方开奖结果体彩网:P/E ratio) shows the percentage of a company's earnings per share. Earnings yield is used by many investment managers to determine optimal 澳洲幸运5官方开奖结果体彩网:asset allocations and is used by investors to determine which assets s♛eem un෴derpriced or overpriced.

How Earnings Yield Works

Money managers often compare the earnings yield of a broad 澳洲幸运5官方开奖结果体彩网:market index (such as the 澳洲幸运5官方开奖结果体彩网:S&P 500) to prevailing interest rates, such as the current 10-year 澳洲幸运5官方开奖结果体彩网:Treasury yield. If the earnings yield is less than the rate of the 10-year Treasury yield, stocks may be considered overvalued. If the earnings yield is higher, stocks may be considered undervalued relative to bonds.

Economic theory suggests that investors in equities should demand an extra 澳洲幸运5官方开奖结果体彩网:risk premium of several percentage points above prevailing 澳洲幸运5官方开奖结果体彩网:risk-free rates (such as rates on 澳洲幸运5官方开奖结果体彩网:Treasury bills) in tಞheir earnings yield to compensate them for the hi꧑gher risk of owning stocks over bonds.

Earnings Yield vs. P/E Ratio

Earnings yield as an 澳洲幸运5官方开奖结果体彩网:investment valuation metric is not as widely used as the P/E ratio. Earnings yield can be helpful when there is concern about the rate of return on investment. However, for equity investors, earning periodic investment income may be secondary to growing their investment🐟 values over time. This is why investors may refer to value-based investment metrics such as the P/E ratio more often than earnin🦩gs yield when making stock investments. That said, the metrics provide the same information, just in a different way.

Earnings Yield and Return Metric

For investors looking to invest in stocks with stable 澳洲幸运5官方开奖结果体彩网:dividend income, earnings yield can offer a direct look into the level of return dividend stocks may generate. In this case, earnings yield is more of a return metric, revealing how much an investment may earn for investors rather than a valuation metric showing how investors value the invಌest🌃ment. However, a valuation metric like the P/E ratio can affect a return metric like earnings yield.

An 澳洲幸运5官方开奖结果体彩网:overvalued investment can lower earnings yield, while an 澳洲幸运5官方开奖结果体彩网:undervalued investment can raise earnings yield. This is because the higher the stock price goes without a comparable rise in earnings, the lower the earnings yield will drop. If the stock price falls but earnings stay the same or rise, the earnings yield will increase. 澳洲幸运5官方开奖结果体彩网:Value investors seek the latter scenario.

The inverse relationship between earnings yield and the P/E ratio indicates that the more valuable an investment, the lower the earnings yield, and the less valuable an investment, the higher the earnings yield. However, investments with strong valuations and high P/E ratios might generate lower earnings over time and eventually boost their earnings yield, and this is what 澳洲幸运5官方开奖结果体彩网:growth investors look for. On the other hand, investments with weak valuations and low P/E ratios may generate lower earnings over time and, i🔯n the end, drag down their earnings yield.

Example of Earnings Yield

Ea🌺rnings yield can help investors assess whether or not they want to buy or sell a stock.

In April of 2019, Meta (META), formerly Facebook, was trading near $175 with 12-month earnings of $7.57, which produced an earnings yield of 4.3%. This was historically high as the yield had been 2.5% or lower before 2018. Between 2016 and 2017, the stock increased by more than 70%, while the earnings yield increased from approximately 1% to 2.5%.

The stock fell more than 40% off its 2018 high, while the earnings yield was near its highest historical level, about 3%. After the decline, the earnings yield continued to creep higher as the price fell, reaching over 5% in early 2019 when the stock started to bounce back higher.

The increased earnings yield may have played a role in driving the stock higher, mainly because investors expected earnings to improve going forward. A high earnings yield (relative to prior readings) didn't prevent the stock from seeing a significant decline in 2018.

Earnings yield may also be helpful in a stock that is older and has more consistent earnings. If growth is expected to be low for the foreseeable future, the earnings yield can be used to determine when it is a good time to buy the stock in its cycle. A higher than typical earnings yield can indicate the stock may be oversold and could be due for a bounce higher, assuming no negative news h💯as occurred within the company.