Editorials

Earnings yield—trailing earnings per share divided by price—is beloved by value investors for a simple reason: it translates easily into language we understand. A stock trading at $87.86 with trailing annual earnings of $6.65 per share yields 7.5%, which you can compare directly to a 10-year Treasury at 4%, or to last year's bond yields, or to the overall market's earnings yield. It feels concrete, comparable, quantifiable. The appeal is obvious.

But earnings yield harbors a subtle and costly trap—one that has ensnared countless investors evaluating cyclical businesses. The trap is this: the "E" in the ratio may not be earnings at all; it may be an earnings outlier, drawn from a single moment in an economic cycle that may never recur. When you divide a cyclical peak or trough by the current price, you are not calculating the yield on future earning power; you are comparing an ephemeral number to today's reality.

Earnings yield is simply the inverse of the price-to-earnings multiple:

Earnings Yield = EPS / Price = 1 / P/E Ratio

Or conversely: Earnings Yield % = (Earnings Per Share / Stock Price) × 100

Its appeal lies in directness. If you own a stock trading at 13 times trailing earnings (a P/E of 13), you have an earnings yield of roughly 7.7%—a figure you can pit against the risk-free rate, dividend yields, and other available returns. It becomes a shorthand margin-of-safety screen: "I'll only buy stocks with an earnings yield above 6%" or "I'll only pay for stocks when their earnings yield exceeds the 10-year bond yield by at least 3 percentage points."

Warren Buffett and Charlie Munger have long discussed earnings yield as part of their toolkit. In their minds, a business should be valued on its normalized earning power—the sustainable earnings it can produce year after year under ordinary operating conditions—compared to alternative investments. Earnings yield, used this way, is a rational shortcut to valuation.

The problem emerges when an investor mistakes reported earnings for normalized earnings.

Cal-Maine Foods, Inc. (ticker: CALM) is the United States' largest producer of shell eggs. At first glance, eggs seem like a commodity product—they are. The company sells to Walmart, supermarket chains, food distributors, and foodservice operators, and it competes on price, service, and compliance. Most sales contracts are tied directly to market-quoted wholesale egg prices, which fluctuate sharply based on disease outbreaks, feed costs, seasonal demand, and overall industry supply.

Look at what happened to Cal-Maine's earnings over the past two years:

Fiscal Year 2025 (ended May 31, 2025): Diluted EPS of $24.95

Fiscal Year 2026 (ended May 30, 2026): Diluted EPS of $6.63

That is a drop of 73.4% year-over-year. The company did not deteriorate; its operational footprint remained largely intact. What changed was the price of eggs. In fiscal 2025, the company benefited from a spike in wholesale egg prices—driven in part by avian influenza reducing supply industry-wide. By fiscal 2026, prices had normalized and compressed margins.

Now consider the investor who, in late fiscal 2025, looked at Cal-Maine trading at around $100 per share with trailing earnings of $25 per share. That investor would have calculated an earnings yield of 25%—a figure that would make any value investor sit up and take notice. Twenty-five percent compares extraordinarily favorably to a 4% Treasury. The stock would appear absurdly cheap.

But the investor who bought at $100 per share on the basis of a 25% earnings yield was making a hidden assumption: that the company would continue earning $25 per share in perpetuity. A single year's earnings, drawn from an inflationary commodities cycle, was being projected forward as normal earning power.

Fast-forward to fiscal 2026. The same investor now owns shares in a company with an earnings yield of just 7.5%—a dramatic repricing that reflects not a change in the business's fundamental value-creation capabilities, but a reversion to normalized commodity prices. The investor bought a cyclical peak's earnings yield and discovered (too late) that it was merely an ephemeral blip.

Earnings yield is a static ratio built on backward-looking data. It answers the question: "What was the payout of earnings in the past 12 months relative to today's price?" But for a commodity producer, this is the wrong question. The right question is: "What is this business likely to earn when commodity prices are neither depressed nor inflated?"

For a business like Cal-Maine, commodity cycles are not anomalies—they are the nature of the business. Egg prices swing on:

• Disease outbreaks (particularly avian influenza, which has ravaged the U.S. flock multiple times in recent years)
• Feed cost cycles (corn and soybean prices are commodity-driven)
• Seasonal demand variations (eggs are consumed year-round but demand fluctuates)
• Global competitive dynamics (tariffs, import prices, competitive capacity)

When you calculate earnings yield using a single year cherry-picked from the top or bottom of a cycle, you are not measuring the yield on the business's sustainable earning power. You are measuring the yield on an outlier.

Consider Cal-Maine's quarterly earnings per share in fiscal 2026:

• Q1: $4.13
• Q2: $2.14
• Q3: $1.07
• Q4: –$0.74 (net loss)

The company went from profitability to outright loss in the span of a single fiscal year, because commodity prices compressed. An investor using a trailing earnings yield calculated at Q1 or Q2 would have been anchored to an entirely unrepresentative figure.

Buffett and Munger have long advocated for normalized earnings or owner earnings—the cash the business can sustainably produce for its owners, stripped of transient windfalls or one-time disasters. In evaluating a cyclical business, the investor's job is to estimate what the business will earn, on average, through a full economic cycle—a notion that requires judgment, not just a spreadsheet calculation.

For Cal-Maine, a normalized earnings power might look something like this:

If you assume the company can produce earnings somewhere between the $25 of fiscal 2025 and the $6.63 of fiscal 2026—perhaps averaging $12–15 per share over a 5–10 year period, depending on disease prevalence and feed prices—then the normalized earnings yield would be closer to 13–17% at recent prices around $83. That is still compelling, but it is not the 25% mirage.

Better yet, examine the owner earnings: cash generated from operations, minus the capital required to maintain competitive position. For commodity producers, this often means looking at cash flow from operations and capital intensity, not just reported net income. Moatkeep's computed owner earnings per share for CALM stands at $6.18 as of its most recent quarterly update—a figure that factors in reinvestment requirements. At $83 per share, that yields roughly 7.4%, closer to the current market assessment.

The point is not that Cal-Maine is expensive or cheap today. The point is that a single year's earnings yield, especially in a cyclical business, is a poor guide to value.

If earnings yield is so flawed for cyclical businesses, why use it at all? Because it remains a useful screening tool if you understand its limitations:

1. Use it as a starting point, not an ending point. An unusually high or low earnings yield should prompt investigation, not a buy or sell decision. Ask: "Why is this yield so different from the market average? Is this year exceptional?"

2. For stable, non-cyclical businesses, trailing earnings yield is more reliable. A software company or a toll road operator with steady, predictable earnings year-over-year is better suited to a simple E/P analysis than a commodity producer.

3. Always compare multiple years. Look at earnings yield across the past 5–10 years. If you see extreme outliers, you are likely witnessing a cyclical peak or trough, not normalized earning power.

4. Supplement earnings yield with owner earnings and cash flow yield. A cyclical business's true earning power is revealed by its average free cash flow over a full cycle, not its trailing net income.

5. Understand where in the cycle the business sits. Is the industry awash in new capacity, or is it running tight? Are commodity prices near historical highs or lows? A business's normalized earning power looks very different at the bottom of a cycle than at the top.

For Cal-Maine in mid-2026, an earnings yield of 7.5% requires you to ask: Is this the floor, the ceiling, or somewhere in between? Without answering that question, the yield tells you almost nothing.

Earnings yield is a powerful tool for comparing relative valuations across asset classes. But it is a snapshot of earning power as measured in a single moment. For cyclical businesses—commodity producers, manufacturers with volatile input costs, financial institutions exposed to credit cycles—that snapshot is often a caricature, not a portrait.

The investor who reaches for earnings yield as a shortcut to value is vulnerable to buying at cyclical peaks (when earnings yield looks irresistible) and selling at cyclical troughs (when earnings yield looks abysmal). This is the classic "buy high, sell low" mistake dressed in the language of value investing.

Instead, adopt Buffett and Munger's habit of thinking in terms of normalized economic earnings—the sustainable cash generation power of the business through an average cycle. That requires more work than plugging EPS and price into a calculator, but it separates the investor from the crowd that mistakes a single year for perpetuity.

Earnings yield is not a flawed metric; it is an incomplete one. Use it as a first question, not a final answer.