U.S. Company Earnings, Earnings Growth, and Equity Performance in the New Millennium

Abstract

This article tests the empirical implications on portfolio performance of using an investment strategy focused on investing in stocks with consistent forward-looking earnings per share (EPS) growth. Using actual company-level EPS and stock return data from the start of the new millennium through 2016, the methodology formalizes an annual perfect-foresight stock selection approach to classifying companies into portfolios defined by consistency in EPS growth based on a rolling three-year forward-looking EPS window. The article presents the performance of the resulting portfolios in the new millennium and some of their key attributes, such as the forward-looking discounted earnings yield and the return on investment as measured by the ratio of the return and the earnings yield. The author&’s major conclusion is that consistency in EPS growth was the key to price appreciation in the new millennium. The empirical evidence also suggests that the companies with the most consistent EPS growth generally also have a high forward-looking EPS earnings yield. According to the author, the data corroborate that these companies not only were a bargain in terms of future earnings purchased per dollar but also generated the highest return per unit of earnings.