Value Factors
We defined the earnings yield ratio (EY) as operating income/enterprise value. We also tested the ratio in two ways: trailing 12-month operating income divided by enterprise value and 5-year average operating income divided by enterprise value. Thus the lower the EY, the more investors are paying for operating income and the larger their expectations of future growth of the company.
Earnings Yield 12 months
Earnings Yield 5 year average
As you can see, trailing 12-months EY is a strong factor (as we defined it) over the test period. The returns in Q1 were higher than in Q5 for all company sizes. It is interesting to note that the factor led to substantially better performance with mid and large companies. Also, for large companies, Q1 outperformed the market by more than 80%, but only 67% of the time with small companies.
Market outperformance was substantial, with Q1 for the mid and large companies outperforming the market by more than 8% per year (pa). Small companies did not perform as well but still outperformed the market portfolio by more than 4,6% pa.
Market outperformance was substantial, with Q1 for the mid and large companies outperforming the market by more than 8% per year (pa). Small companies did not perform as well but still outperformed the market portfolio by more than 4,6% pa.
The 12-month EY was the second most successful single-factor strategy to select large-cap companies. The 5-year average EY is not as strong a factor as the one-year. For all company sizes, Q1 performed better than Q5, but the results were not linear, with Q5 performing better than Q4 for all company sizes.