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FCF yield vs dividend yield

FCF yield is unlevered free cash flow over market cap. On $55,000,000 of FCF and $1,100,000,000 of cap it is 5 percent. Dividend yield is cash over price on a different teaching sheet. Those 5 percents are not one firm.

 FCF yieldDividend yield
FormulaUnlevered FCF / market cap.Dividend / price. Trailing uses the dividend just paid. Implied uses next year's.
Teaching sheet$55,000,000 over $1,100,000,000 is 5 percent.A $2.00 dividend just paid, Gordon price $41.60. Trailing 4.81 percent. Implied 5 percent on next year's $2.08.
When the denominator movesHold FCF at $55,000,000, cut the cap to $550,000,000: the yield rises to 10 percent. The cash did not rise.A $3.50 dividend on a $72.10 price is 4.85 percent trailing and 5 percent implied again, because k−gk - g is 5 percent again.
What the 5 percent isCash the operations produced, over today's cap.Next year's dividend over a Gordon price, equal to k−gk - g on that identity.
What it is notA dividend. Plenty of firms print a 5 percent FCF yield and pay none of it out.Free cash flow. A dividend is cash the firm chose to send.
On this page

Cash the operations produced, against cash the firm sent

FCF yield is unlevered free cash flow divided by market capitalisation:

FCF yield=Unlevered FCFMarket cap\text{FCF yield} = \frac{\text{Unlevered FCF}}{\text{Market cap}}

On $55,000,000 of unlevered FCF against $1,100,000,000 of market cap that is 5 percent. The $55,000,000 is the teaching-bridge cash from how free cash flow works. This page divides that cash. It does not rebuild the bridge.

Dividend yield is a dividend over the price of the share. On the Gordon sheet a $2.00 dividend just paid, growing at 4 percent, with a 9 percent required return, is a $2.08 next dividend and a $41.60 price. Trailing yield is 4.81 percent. Implied yield is 5 percent, equal to k−gk - g.

How FCF yield works owns this 5 percent. How dividend yield works owns the 4.81 and the implied 5. They share a family name. They do not share a dollar stack. Do not paste the Gordon coupon onto this $1,100,000,000 cap.

A matching 5 percent is still two firms

Keep FCF at $55,000,000. Cut market cap to $550,000,000. Yield is 10 percent. The cash did not move. The denominator did.

The second dividend sheet is a $3.50 dividend just paid, growing at 3 percent, required return 8 percent. Next year's dividend is $3.605. The price is $72.10. Implied yield is 5 percent again, because k−gk - g is 5 percent again. Trailing yield is 4.85 percent.

Both first sheets print a 5 percent. One is unlevered FCF over a $1,100,000,000 cap. The other is next year's dividend over a $41.60 Gordon price. Lining them up as one yield is how a cheque the operations produced gets read as a coupon the firm sent.

FCF yield against earnings yield is cash against accounting profit. Dividend yield against earnings yield is the coupon against profit over price. This is educational material, not financial advice.

Worked examples

5 percent on \$55,000,000 of FCF

Unlevered free cash flow is $55,000,000. Market cap is $1,100,000,000. What is FCF yield?

  1. FCF yield is FCF over market cap: 55000000/1100000000=0.0555000000 / 1100000000 = 0.05.
  2. That is 5 percent.

FCF yield is 5 percent. Unlevered FCF is $55,000,000. Market cap is $1,100,000,000.

A \$2.00 dividend on a \$41.60 Gordon price

The dividend just paid is $2.00. Growth is 4 percent forever. Required return is 9 percent. What is the price, and what are the two yields?

  1. Next year's dividend: 2.00×1.04=2.082.00 \times 1.04 = 2.08, so $2.08.
  2. Price: 2.08/(0.09−0.04)=2.08/0.05=41.602.08 / (0.09 - 0.04) = 2.08 / 0.05 = 41.60, so $41.60.
  3. Implied yield: 2.08/41.60=0.052.08 / 41.60 = 0.05, 5 percent, which equals 9−49 - 4.
  4. Trailing yield: 2.00/41.60=0.04812.00 / 41.60 = 0.0481, 4.81 percent.

The price is $41.60. Next year's dividend is $2.08. Implied yield is 5 percent. Trailing yield, on the $2.00 just paid, is 4.81 percent.

10 percent on a \$550,000,000 cap

Keep FCF at $55,000,000. Market cap is now $550,000,000. What is the yield?

  1. FCF yield: 55000000/550000000=0.155000000 / 550000000 = 0.1.
  2. That is 10 percent. The cash did not change. The cap halved.

FCF yield is 10 percent. FCF is still $55,000,000. Market cap is $550,000,000.

A \$3.50 dividend on a \$72.10 price

Dividend just paid $3.50, growth 3 percent, required return 8 percent. Price, implied yield, trailing yield?

  1. Next year's dividend: 3.50×1.03=3.6053.50 \times 1.03 = 3.605, so $3.605.
  2. Price: 3.605/(0.08−0.03)=3.605/0.05=72.103.605 / (0.08 - 0.03) = 3.605 / 0.05 = 72.10.
  3. Implied yield: 3.605/72.10=0.053.605 / 72.10 = 0.05, 5 percent again, because 8−3=58 - 3 = 5.
  4. Trailing yield: 3.50/72.10=0.04853.50 / 72.10 = 0.0485, 4.85 percent.

The price is $72.10. Next year's dividend is $3.605. Implied yield is 5 percent. Trailing yield is 4.85 percent.

Common questions

Why do both first sheets print 5 percent?

Coincidence of two teaching sheets, not an identity. The 5 percent FCF yield is $55,000,000 over $1,100,000,000. The 5 percent implied dividend yield is k−gk - g on a $41.60 Gordon price.

Is FCF yield a dividend you will be paid?

No. FCF is cash the operations produced. A dividend is cash the firm chose to send. Plenty of firms print a 5 percent FCF yield and pay none of it out.

Is a higher FCF yield better?

Not on its own. The third sheet's 10 percent is the same $55,000,000 of cash on a $550,000,000 cap. The cash did not improve. The denominator shrank.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.