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Zacks.com featured highlights Marathon Oil, The Mosaic, Univar Solutions and Global Ship Lease
Zacks Equity Research
8 min read

In This Article:

For Immediate Release

Chicago, IL – May 2, 2022 – Stocks in this week’s article are Marathon Oil MRO, The Mosaic Co. MOS, Univar Solutions Inc. UNVR and Global Ship Lease GSL.

4 High Earnings Yield Picks to Spruce Up Your Portfolio

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 the one with higher earnings yield. This is because stocks with earnings yield have the potential to provide comparatively greater returns.Marathon Oil, The Mosaic Co., Univar Solutions Inc. and Global Ship Lease are some stocks boasting high earnings yield.

You must have heard of dividend yield (Dividend per share/ Market Price), which is one of the classic metrics for evaluating stocks. If we substitute dividend per share with earnings per share, we get the earnings yield. 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 the firm, as opposed to dividend yield, which only takes into account the tangible yield. The ratio of dividend yield to earnings yield indicates the proportion of earnings directly distributed in the form of dividend payout.

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. In fact, with regard to this, earnings yield can be more illuminating than the traditional P/E ratio as the former facilitates comparison of stocks with fixed-income securities.

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