78  The Alchemy of Stock Market Performance
remaining 10 percent is simply the earnings yield, reflecting what the TSR 
would have been with zero growth and if investors had not changed their 
expectations.
We have found that many people struggle with the earnings yield (zero-
growth return) part of this decomposition. Here’s a simple example of how 
this works. Suppose you have two companies, H and L, each with $100 of 
earnings and zero growth. Since the companies aren’t growing, they don’t 
need to invest, so dividends to shareholders would equal earnings. Company 
H has a P/E of 20, and Company L has a P/E of 15. Exhibit 5.4 shows why the 
inverse of the P/E, the earnings yield, is the return the companies would earn 
if they didn’t grow and their P/Es didn’t change.
In the example, you can see that the TSR of Company H is 5.0 percent, ex-
actly equal to the inverse of the P/E, the earnings yield. Similarly, Company 
L’s TSR of 6.7 percent equals the inverse of its P/E. Note also that Company 
H, with the higher P/E, has the lower earnings yield (or zero-growth TSR). 
This demonstrates that companies with higher P/Es must achieve greater 
growth or improvements in ROIC to outperform the TSR of companies with 
lower P/Es.
The next example shows the impact of debt financing on the TSR decom-
position. Suppose you own a house worth $500,000 and you’ve borrowed 
$200,000 against the house. If the house increases in value to $550,000, your 
equity value would increase from $300,000 to $350,000. A 10 percent increase 
in the value of the house leads to a 17 percent return on your equity.
The same concept applies to companies. Consider Company B, which is 
identical to Company A (our simpler example in Exhibit 5.3) except for its 
debt financing. As detailed in Exhibit 5.5, the difference in financing means 
Company B generated a higher TSR of 18 percent. The traditional approach 
to decomposing TSR suggests that Company B’s shareholders benefited from 
a higher dividend yield and a stronger increase in expectations. However, 
our more fundamental decomposition of Company B, based on earnings yield 
(zero-growth TSR) and changed expectations measured by the unlevered P/E 
EXHIBIT 5.4  Earnings Yield: TSR with Zero Growth
Company H
Company L
Year 0
Year 1
Year 0
Year 1
Earnings, $
100
100
100
100
P/E
20
20
15
15
Value, $
2,000
2,000
1,500
1,500
Dividends (equals earnings), $
100
100
Value plus dividends, $
2,100
1,600
TSR, %
5.0
6.7
Inverse of P/E, %
5.0
6.7

Decomposing TSR  79
(ratio of enterprise value to earnings), shows that the first three parts of the 
company’s decomposed TSR are in fact identical to those of Company A. The 
additional 3.6 percent TSR for Company B arises from the higher proportion 
of debt in its capital, rather than any newly created value. Adjusting for the 
higher financial risk associated with higher debt shows that Company B did 
not in fact create more value than Company A—an important fact for inves-
tors and the companies’ executives.
We can apply this approach to our earlier comparison of Tyson and J&J Snack 
Foods. Exhibit 5.6 shows the TSR decomposition for the two companies. While 
Tyson’s 27 percent annual TSR for 2013–2017 was higher than J&J’s14 percent, 
J&J outperformed Tyson on the TSR derived from growth: growth, net of invest-
ments, contributed 3 percent to TSR, versus a negative amount for Tyson, which 
made significant acquisitions that outweighed its modest revenue growth.
Tyson benefited from a much larger increase in operating profit margin: a 
TSR effect of 22 percent by increasing its margin from 4 percent to 9 percent, 
while J&J’s margin was flat, at about 12 percent. Note that even though ­Tyson’s 
EXHIBIT 5.5  Enhancing TSR Decomposition to Uncover Effects of Leverage
Company B financials
Decomposition of TSR
$ million
Base year
1 year later
%
Traditional
Enhanced
Enterprise value
125.0
137.5
Growth
7.0
7.0
Debt1
(25.0)
(25.0)
Required investment
–
(5.6)
Equity value
100.0
112.5
TSR from performance
7.0
1.4
Dividends
5.5
Earnings yield
–
10.0
Change in P/E2
5.5
3.0
P/E (multiple)
8.0
8.4
Impact of financial leverage
–
3.6
Dividend yield
5.5
–
TSR, %
18.0
TSR, %
18.0
18.0
1 Assumes, for illustrative purposes, that debt carries no interest.
2 Change in P/E multiple for traditional approach vs. change in unlevered P/E multiple in enhanced approach (enterprise value/earnings).
EXHIBIT 5.6  Tyson Foods vs. J&J Snack Foods: TSR Decomposition, 2013–2017
% Annualized
Tyson 
Foods
J&J Snack 
Foods
Difference
Revenue growth
3
6
(3)
Investment for growth
(22)
(3)
(19)
Net impact of growth
(19)
3
(22)
Change in margin
22
0
22
TSR from performance
3
3
0
Earnings yield (zero growth return)
7
4
3
Change in earnings multiple
8
7
1
Impact of financial leverage
6
(1)
7
Nonoperating cash flows
3
1
2
TSR
27
14
13