If one had to choose among CEO candidates, and the board believed that one candidate's leadership was likely to yield a return on capital just one percentage point better than the next best candidate's, that difference would be worth $100 million per year to investors.
The two variables the strategy uses: earnings yield and return on capital.
But the corollary is that the returns to the owners of capital decline.The effect is disguised in the short term by the effect of yields on capital values; a fall in the dividend yield from 4% to 2% doubles share prices (other things being equal).
Standard maximization problem of the firm yields the return on capital (r_{t} = alpha K_{t}^{alpha -1} z_{t}L_{t})^{1-alpha }-d) and real wage (w_{t} = (1-alpha)K_{t}^{alpha }z_{t}^{1-alpha }L_{t}^{-alpha }), where d denotes the depreciation rate on capital.
The yield is a return on capital for tax purposes so all you do is write down your cost basis.
These purchases, which yield a 14% return on capital, show the desperation of the globe's largest and fastest-growing nation to lock up diminishing supplies of oil.
He looked for the usual indicators: low return on capital, low yield, prices within 15% of their 52-week high.
These stocks all score well based on a combined ranking using the return on capital and earnings yield magic formula outlined above.
(For example, if a stock comes in at No. 30 on earnings yield and No. 100 on return on capital, its total rank would be 130; that would be better than a stock that ranked No. 20 on earnings yield and No. 200 on return on capital, for a combined a rank of 220).
Within this universe of 3,500 companies, Greenblatt ranks (separately) companies based on their return on capital and earnings yield, from best to worst, with the best getting a ranking of 1 and the worst, 3,500.
If a company is ranked 598 for return on capital and 347 for earnings yield, the combined ranking is 945.
