# Peter Lynch's Secret Formula: PEGY Ratio (Made Him 29% Per Year) Source: https://www.youtube.com/watch?v=imS4TktSjd8 Recap page: https://rapidrecap.app/video/imS4TktSjd8 Generated: 2025-11-26T14:08:20.884+00:00 --- ## Quick Overview Peter Lynch's secret formula, the PEGY Ratio (Price to Earnings to Growth to Yield), yields a better investment assessment by incorporating dividend yield alongside growth, which revealed that MetroCoffee (PEGY: 1.0) was less attractive than The Daily Brew (PEGY: 0.8) in the initial comparison, and in the automotive example, Ford (PEGY: 0.49) was superior to GM (PEGY: 0.63) because Ford balanced steady growth with immediate shareholder income via a high dividend yield. **Key Points:** - The PEGY Ratio is an enhancement of the PEG Ratio, calculated as P/E Ratio divided by (Earnings Growth Rate + Dividend Yield). - In the initial example, MetroCoffee (PEG: 3, Dividend Yield: 10%) yielded a PEGY of 1.0, while The Daily Brew (PEG: 0.8, Dividend Yield: 0%) yielded a PEGY of 0.8, suggesting The Daily Brew was the better value. - Peter Lynch, who achieved 29% average annual returns over 13 years at Fidelity Magellan Fund, invented the PEGY ratio to account for dividends, which the standard PEG ratio ignores. - When comparing Ford (14% Growth + 4.5% Dividend) and GM (17% Growth + 1% Dividend), Ford had a lower PEGY (0.49) than GM (0.63), despite GM having higher growth. - Ford's lower PEGY reflects its strategy of a balanced approach, steady growth, and paying shareholders now + later through its higher 4.5% dividend yield. - GM's strategy involves reinvesting everything, betting on EV transformation, and paying shareholders only through growth, resulting in a lower 1% dividend yield. - The PEGY ratio forces investors to compare companies within similar industries because different industries (like Tech vs. Utilities) have inherently different growth and dividend patterns. ![Screenshot at 00:15: The comparison between MetroCoffee \(PEG: 3\) and The Daily Brew \(PEG: 0.8\) highlights the need for the PEGY ratio, as PEG alone incorrectly suggests MetroCoffee is more expensive relative to its growth.](https://ss.rapidrecap.app/screens/imS4TktSjd8/00-00-15.png) **Context:** The video introduces the PEGY Ratio, an investment metric created by legendary Fidelity Magellan Fund manager Peter Lynch, known for achieving 29% average annual returns over 13 years. This ratio is presented as an improvement over the standard PEG ratio because it factors in dividend yield alongside earnings growth, providing a more complete picture of shareholder value creation, especially when comparing companies with differing capital allocation strategies (growth reinvestment versus dividend payouts). ## Detailed Analysis The video explains Peter Lynch's PEGY Ratio, which stands for Price to Earnings to Growth to Yield, positioning it as a superior valuation tool compared to the traditional PEG Ratio because it incorporates dividend yield. The formula is: PEGY = P/E Ratio / (Earnings Growth Rate + Dividend Yield). The video uses a hypothetical coffee shop comparison: MetroCoffee (P/E: 15, Growth: 5%, PEG: 3, Dividend Yield: 10%, PEGY: 1.0) versus The Daily Brew (P/E: 24, Growth: 30%, PEG: 0.8, Dividend Yield: 0%, PEGY: 0.8). Based on PEGY, The Daily Brew appears cheaper (0.8 vs 1.0), highlighting that PEG alone is misleading when dividends are involved. The presentation emphasizes that PEG ignores dividends, which can lead investors to wrongly assume two companies are equally valued when one pays immediate cash returns. When comparing Ford (PEGY: 0.49, 14% Growth + 4.5% Dividend) and GM (PEGY: 0.63, 17% Growth + 1% Dividend) in the auto industry, Ford's lower PEGY indicates better value due to its balanced strategy of steady growth and immediate shareholder returns via a higher dividend. The video concludes by stressing that PEGY is useful for comparing companies within the same industry because different sectors (Tech, Industrials, Utilities) have fundamentally different growth and dividend patterns. ### PEGY Ratio Definition - PEGY stands for Price to Earnings to Growth to Yield - It is the PEG ratio with the crucial addition of dividend yield - Formula: PEGY = P/E Ratio / (Earnings Growth Rate + Dividend Yield) ### The Flaw of PEG - PEG ignores dividends - Company A (15% Growth + 5% Dividend) and Company B (15% Growth + 0% Dividend) are treated as equal by PEG, but Company A pays you to wait for growth - This realization led Peter Lynch to create PEGY ### Industry Comparison Rules - Always compare companies from the same industry - Different industries (Tech, Industrials, Utilities) have fundamentally different growth and dividend patterns - Comparing across industries using PEGY tells you nothing useful ### Automaker Comparison (Ford vs. GM) - Ford (PEGY: 0.49) employs a balanced strategy (14% Growth + 4.5% Dividend) and pays shareholders now + later - GM (PEGY: 0.63) reinvests everything, focusing on 17% growth with only a 1% dividend, paying shareholders only through growth ### Stock Valuation Framework - Step 1: P/E Ratio (Basic valuation snapshot) - Step 2: PEG Ratio (Growth-adjusted value) - Step 3: PEGY Ratio (The complete picture: Growth + Income = Total value) ![Screenshot at 00:15: The initial comparison showing MetroCoffee \(PEG: 3\) and The Daily Brew \(PEG: 0.8\), setting up the need for the PEGY ratio.](https://ss.rapidrecap.app/screens/imS4TktSjd8/00-00-15.png) ![Screenshot at 01:14: A graphic illustrating the PEGY Ratio formula concept: Higher Growth & Yield balances a higher P/E.](https://ss.rapidrecap.app/screens/imS4TktSjd8/00-01-14.png) ![Screenshot at 02:47: A comparison illustrating the PEG Ratio's flaw: Company A \(15% Growth + 5% Dividend\) and Company B \(15% Growth + 0% Dividend\) are seen as equal by PEG, but Company A provides immediate cash flow.](https://ss.rapidrecap.app/screens/imS4TktSjd8/00-02-47.png) ![Screenshot at 03:39: The calculation comparison showing Ford's PEGY of 0.49 versus GM's PEGY of 0.63, where Ford is deemed the better value due to its dividend component.](https://ss.rapidrecap.app/screens/imS4TktSjd8/00-03-39.png) ![Screenshot at 07:11: The three-step stock valuation framework outlined: P/E Ratio, PEG Ratio, and finally, the PEGY Ratio for the complete picture including income.](https://ss.rapidrecap.app/screens/imS4TktSjd8/00-07-11.png)