For Immediate Release
Chicago, IL – October 21, 2021 – Stocks in this week’s article are Royal Dutch Shell plc (RDS.A), The Gap, Inc. GPS, United States Steel Corporation X and Silicon Motion Technology Corporation SIMO.
4 Solid Bets that Boast High Earnings Yields
Investors often use the P/E ratio and other valuation metrics to pick undervalued stocks with solid upside potential. One can also use another interesting ratio. Earnings yield, expressed in percentage, is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing stocks, if other factors are similar, investors can look out for stocks with higher earnings yield. This is because stocks with higher earnings yield have the potential of providing comparatively greater returns.
Just like the case with dividend yield, firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced. Earnings yield captures both the tangible and intangible yield of a firm as opposed to dividend yield, which only takes into account the tangible yield.
Importantly, earnings yield can also be used to compare the performance of a market index with the 10-year Treasury yield. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.
Earnings Yield: Simply the Inverse of P/E
Earnings yield is nothing but the reciprocal of one of the most popular valuation metrics, i.e. the P/E ratio (stock price/earnings per share). Thus, a firm having a P/E ratio of 10.2 will logically have an earnings yield of 9.8% (100/10.2). In fact, as the concept of earnings yield is already indirectly captured in the P/E ratio, earnings yield as an investment valuation metric is not as widely used as the P/E ratio.
Having said that, it should be noted that earnings yield is an important tool for investors with exposure to both stocks and bonds. With regard to this, earnings yield can be more illuminating than the traditional P/E ratio, as the former facilitates the comparison of stocks with fixed-income securities.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1813333/4-solid-bets-that-boast-high-earnings-yield
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Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
United States Steel Corporation (X) : Free Stock Analysis Report
The Gap, Inc. (GPS) : Free Stock Analysis Report
Silicon Motion Technology Corporation (SIMO) : Free Stock Analysis Report
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