Alaric wrote:
If all the money stays in the system, the assumed 8% rate of return on Shell will show up better than the 7.5% (2.5+5) rate of return on Diageo. Making alternative and asymmetric assumptions about what happens to cash will tilt the comparison in one direction or the other.
Yes, but to clear, DGE has a ROC of 17%, pays out a 2.5% dividend yield, which leaves 50% of earnings retained and reinvested at 17%. RDSB has ROC of 7%, pays out a dividend yield of 8% and retains no earnings. (If you prefer ROE then the comparison is 36% and 8%).
Plug those in a compounding function and you get a different story to the 8% and 7.5% as described. (Reinvest the 2.5% and 8% as well to keep it a closed system too, if that's preferable).
Now obviously you have no knowledge in advance of whether current ROC (or ROE) will be attainable for the retained earnings, this year, or any other. You also have different ways of measuring ROC, ROE, and indeed earnings. But in general I would look at a combination of Returns on Capital, combined with entry price consideration, say P/E, and measure success (or otherwise) by Total Return. I also look at cash, rather than earnings.