busterbluth

Muddahudda Wrote:
-------------------------------------------------------
> Thanks AF buddies. My question basically arose
> after reading The Little Book That Beats the
> Market which espouses the Earnings Yield
> (specifically EBIT / Enterprise Value) as the key
> metric. However, another line of thinking that I
> was reading states that if you dissect long run
> returns to equities, then it is the dividend yield
> that is crucial because you receive hard cash. I'm
> trying to figure out a set of screens. I'm
> conscious that earnings yield as stated is pre-tax
> and debt distortions which is helpful in creating
> a level playing field. But cash is cash is cash.
> And paying cash keeps companies honest, sorta.
> Realise that I need to do more reading into this
> and may be losing sight of something basic, but
> thought I would throw it out there.

the long term average returns do depend on the return of equity via dividends, but that just proves how poorly cash is managed by corporate america. Think about this, if a company generates a lot of cash but doesn't return it, then its asset base will increase year over year and act as a deterrent on ROIC. In this scenario the company gradually become a worse business over time thru declining ROIC and no longer screened by the magic formula.