DEFINITION of 'Bond Equity Earnings Yield Ratio - BEER'

The Bond Equity Earnings Yield Ratio (BEER) is a metric used to evaluate the relationship between bond yields and earnings yields in the stock market. BEER has two parts – the numerator is represented by a benchmark bond yield, such as a five- or 10-year Treasury, while the denominator is the current earnings yield of a stock benchmark, such as the S&P 500.

BEER = Bond Yield / Earnings Yield

The Bond Equity Earnings Yield Ratio is also known as the Gilt-Equity Yield Ratio (GEYR).

BREAKING DOWN 'Bond Equity Earnings Yield Ratio - BEER'

Comparing the yield on long-term government debt and the average yield on an equity market benchmark can be used as a form of indicator on when to buy stocks. Investors use the movement in bond yields to determine the direction of the stock market by using a ratio known as the Bond Equity Earnings Yield Ratio, or BEER.

BEER is calculated by dividing the yield of a government bond by the current earnings yield of a stock benchmark in the same market. The current earnings yield of the stock market (or simply an individual stock) is just the inverse of the price-to-earnings (P/E) ratio, that is, earnings/price. The earnings yield is quoted as a percentage, which measures the percentage of each dollar invested that was earned by a company, sector, or the whole market during the past twelve months. For example, if the P/E ratio of the S&P 500 is 25, then the earnings yield is 1/25 = 0.04. It is easier to compare the earnings yield to bond yields than to compare the P/E ratio to bond yields.

The theory behind the ratio is that if stocks are yielding more than bonds, that is, BEER < 1, then stocks are cheap given that more value is being created by investing in equities. As investors increase their demand for stocks, the prices increase, causing P/E ratios to increase. As P/E ratios increase, earnings yield decreases, bringing it more in line with bond yields. Conversely, if the earnings yield on stocks is less than the yield on Treasury bonds (BEER > 1), the proceeds from the sale of stocks is reinvested in bonds. This results in a decreased P/E ratio and increased earnings yield. Theoretically, a BEER of 1 would indicate equal levels of perceived risk in the bond market and the stock market. Analysts often feel that BEER ratios greater than 1 imply that equity markets are overvalued, while numbers less than 1 mean they are undervalued, or that prevailing bond yields are not adequately pricing risk. If the BEER is above normal levels, the assumption is that the price of stocks will decrease, thus, lowering the BEER.

Consider a 10-year Treasury with a yield of 2.8% and earnings yield on the S&P 500 of 4% (P/E of 25). The BEER ratio can be calculated as:

BEER = Bond Yield (0.028) / Earnings Yield (0.04) = 0.7

Using the results above, an investor can conclude that the stock market is undervalued as the ratio falls below 1.

The Bond Equity Earnings Yield Ratio helps investors understand the value created by investing one dollar in bonds versus investing that dollar in stocks. However, critics have pointed out that the BEER ratio has zero predictive value, based on research that was carried out on historical yields in the Treasury and stock markets. In addition, creating a correlation between stocks and bonds is said to be flawed as both investments are different in a number of ways - while government bonds are contractually guaranteed to pay back the principal, stocks promise nothing. Similarly, unlike the interest on a bond, a stock’s earnings and dividends are unpredictable and its value is not contractually guaranteed.

  1. Yield

    Yield is the return a company gives back to investors for investing ...
  2. Gross Yield

    The gross yield is the yield on an investment before the deduction ...
  3. Negative Bond Yield

    A negative bond yield is an unusual situation in which issuers ...
  4. Average Annual Yield

    The average yield on is the sum of all interest, dividends or ...
  5. Yield Spread

    A yield spread is the difference between yields on differing ...
  6. Yield Pickup

    Yield pickup is the additional interest rate an investor receives ...
Related Articles
  1. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  2. Insights

    National Beer Day: How Beer Gets the Economy in High Spirits

    Not only does it tastes great, it also adds to jobs and trade.
  3. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  4. Investing

    Comparing P/E Ratio, EPS and Earnings Yield

    P/E ratios may be the established standard for valuation, but earnings yields are especially useful for comparing returns across different instruments.
  5. Insights

    Beer of the Month Subscription Review: Is It Worth It?

    Learn how you can get access to some of the best craft beers produced in the world, delivered right to your front door every month.
  6. Investing

    Corporate Bonds: An Introduction to Credit Risk

    Understand how corporate bonds often offer higher yields, and discover how it is important to evaluate the risk, including credit risk, that is involved before you buy.
  7. Investing

    ABInBev and SABMiller Merger: The Facts (BUD, TAP)

    Beer is a big business. In the United States, beer sales generated more that $101 billion in revenue.
  8. Investing

    How Bond Market Pricing Works

    Want to know how bond price are determined? Learn the basic rule of the bond market.
  9. Insights

    Is the Craft Beer Industry Driven by Millennials?

    Craft beer has become extremely popular among Millennials. Why the shift compared to past generations?
  10. Investing

    Junk Bonds: A Correction May Be Looming

    Corporate debt issued by companies with riskier balance sheets and lower credit ratings typically carries higher interest rates.
  1. What is the difference between yield and return?

    Return is the financial gain or loss on an investment. Yield measures the income, such as interest and dividends, from an ... Read Answer >>
  2. How are bond yields affected by monetary policy?

    Learn about how bond yields are affected by monetary policy. Find out how this determines the risk-free rate of return and ... Read Answer >>
  3. If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive ...

    See how fixed-income security investors can expect to use coupon rates on semi-annual payments if the bond or debt instrument ... Read Answer >>
  4. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
Trading Center