Abstract
In this study, an investment decision-making model called the profit, dividend, and free cash flow (PDF) model was established based on companies’ profitability, dividend yield, and free cash flow. This study analyzed the stocks purchased and retained for a long period of time, and compared the PDF model with the Taiwan Capitalization Weighted Stock Index (TAIEX) and the F-score model modified by Lai, Doong, Yang, and Miao (2011). The empirical results indicated that the average cumulative return on TAIEX in 2004 was higher than that on the PDF and F-score portfolios. However, from 2005 to 2007, the cumulative return on the PDF portfolio increased from 14.35% to 121.36%. Although the cumulative return dropped to 1.23% in 2008 because of the financial crisis, the figure rose to 134.04% in 2009 and to 310.23% in 2013. The performance of TAIEX and the F-score portfolio was substantially lower than that of the PDF portfolio, but the performance of TAIEX was superior to that of the F-score portfolio. Although TAIEX and the F-score portfolio exhibited a similar trend, the cumulative return on the F-score portfolio was consistently negative. The F-score portfolio demonstrated the lowest performance among the 3 models. In addition, the annual cumulative or excess return on the PDF portfolio was higher than that on the F-score portfolio.
MING YUAN CHENG, MING-CHANG WANG. (2014) A Study of Value Investing: Profit, Dividend, and Free Cash Flow, International Review of Management and Business Research, Volume 3, Issue 4.
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