No. of Recommendations: 6
Jim has mentioned several times about how a good company performance
will show up in the sustainable ROE numbers.
I decided to do a test. It is not very scientific as I just use the 30
DOW constituents. I used these because of the easy availability of the
ROE numbers for the last 10 years (2002 - 2011) from Valueline.
ROE10 is the average ROE over the last 10 years where provided by
Valueline. Note that numbers less than 0 and > 100% are reported by
them as NMF. I manually calculated these. I think there were only 2
companies where I didn't have the full 10 year history of ROE but I
just averaged what I had.
R10, R15 and R20 are the annualized total returns over the last 10, 15
and 20 years.
I sorted descending by ROE10 and then grouped them into 5 quintiles of
6 companies each.
ROE10 R10 R15 R20
37.5% 10.7% 7.0% 12.2%
27.1% 7.6% 6.1% 10.8%
21.6% 11.3% 10.9% 13.1%
17.6% 5.0% 3.4% 10.7%
10.9% 7.9% 2.4% 7.9%
Make of it what you will but I done think it actually shows a very strong
correlation. For example, if I remove the bottom company (AA) from the
bottom quintile, the 5 remaining companies average:
ROE10 R10 R15 R20
11.6% 10.6% 3.6% 9.1%
Obviously this takes no account of the type of business or the valuation
levels at the start and end of the periods.
This probably needs a much broader study to be of any use but I thought I'd
post it anyway.
StevnFool