No. of Recommendations: 1
I understand the theory behind the "foolish four" and find it quite appealing, but I have a "foolish" question.
My question is that by identifying the foolish four using dividend yield, is only part of the returns picture being captured? It is my understanding that many companies elect to give shareholders their returns not through dividends, but through appreciation of the share price (which they attempt to accomplish through stock buy-back plans). Firms that elect to grant shareholder returns in this manner will generally, all other things being equal, have lower dividend yields, and therefore be less likely candidates for the foolish four than those that elect to grant returns through dividends.
My thinking is that no matter which methods companies choose to grant returns (dividends or buy-backs), the money with which to grant these returns theoretically comes from the same place, earnings. I therefore wonder whether selecting companies with low P/E (price/earnings)ratios (or equivalently, the highest E/P ratios) rather than high dividend yields might better capture the entire returns picture, while still leaving the underlying logic, namely identifying "bargians" or "sleeping giants", unchanged.
I was wondering what thoughts you might have on this subject, and if P/E has been looked at as a potential foolish four measure. If so, is there any backtesting data utilizing P/E (or E/P) as the identifying measure?

Thank you,

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