She Caught the CATY, and Left Me a Mule to Ride: Improving on Dividend Yield as an Indicator of Stock Valuations and Expected Returns

Laurence Articles

The title of this essay refers to two things: (1) a great Blues Brothers song; and (2) a new measure of market valuation set forth by Philip Straehl and Roger Ibbotson, the CATY or cyclically adjusted total yield.

Straehl and Ibbotson [2017] developed the CATY as a substitute for Robert Shiller’s CAPE or cyclically adjusted price-earnings ratio, a measure that I’ve covered in two prior articles.3 The CATY differs from the CAPE in that the former considers cash flow to the investor to be the relevant measure of corporate performance for the purpose of valuing the stock market. This is in contrast to the use of profits (“earnings”) in the CAPE and in the traditional price-earnings or PE ratio.

But Straehl and Ibbotson’s CATY, while innovative and relevant, is an incomplete measure of cash flow to the investor. It is incomplete because, of the three components of cash flow to the investor, it includes only two: dividends and share buybacks. It should also include “cash takeovers.” By cash takeovers I mean funds received by shareholders in merger and acquisition activity where the shares acquired are paid for by the acquirer in cash.

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