Mike Santoli disusses valuation in this weeks Barron’s:
“With those earnings coming, the question is whether the market has already paid for good results in returning to the upper end of its 2011 range. That’s another way of asking how stocks are valued here. The answer probably is fairly at best, and thus the market has at least put a generous down payment on imminent earnings.
Sure, the S&P 500 multiple on the next 12 months’ forecast earnings is below 13, thus seemingly cheap. Yet the biggest 30 mega-cap stocks are so inexpensive and scorned that the other 470 together trade right at their long-term average, notes Morgan Stanley strategist Adam Parker. And Ned Davis Research notes that the median stock has a trailing multiple above 18, above the 42-year median and “neutral at best.” (emphasis added)
Santoli notes the positive: Fed money is still free, corporate deal-making is “percolating” and investors are not yet excessively sanguine (i.e., too bullish).
But the fact that “Traders have built up calluses” to this year’s bad economic news is a negative, not a positive in my book. It means they are ignoring risk and potential downside. And while stocks ain’t terribly pricey, they ain’t cheap either. Have a look at Jim Bianco’s long term dividend chart; its more supportive of a cyclical rather than secular rally.
The Fed is giving the green light to banks to resume paying divvies. I guess this means things are okay, everything is getting back to normal. This must also mean their extraordinary accommodation via zero interest rates should be ending soon as well, right?
“The Federal Reserve cleared some of the 19 largest U.S. banks to increase dividends, buy back shares or repay government aid after “significant improvement” in their capital and the economy.
The banks, including firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co., have increased common equity by more than $300 billion from the final quarter of 2008 through the end of 2010, the Fed said in a paper released today in Washington on its most recent review of bank capital.”
Here is the punchline to the joke:
“Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis,” the Fed said. “The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital.”
If I didn’t see the humor, I might end up crying . . .
MarketBeat (WSJ Blog) – Here’s Why You Should Care about Dividends: ‘Bladder Theory’
A particularly pesky commenter has been tagging some our recent flurry of dividend-focused posts with this question: “Why do people care about the dividend yield? Doesn’t Modigliani-Miller imply we shouldn’t care except for tax reasons? And for tax reasons, it seems no dividend is better since you can choose when to realize a capital gain, but not a dividend.”…The theory suggests investors should be agnostic as to how stocks generate return. For instance, if a stock yields 10% a year, 3% might be in dividends and 7% might be capital appreciation. But if the company, had not decided to pay that money out in dividends that that cash would still belong to the shareholder. It would just be sitting on the balance sheet of the company instead of in the shareholder’s pocket. That cash balance would be incorporated into the market’s view of the company’s prospects, likely raising the capital appreciation component of its total return over time. That’s the theory at least. But in practice there’s an emerging sense it’s not always a good thing for companies to be rolling in cash. Some argue it might be a good discipline for management to be forced to pay out dividends.
MarketBeat (WSJ Blog) – BofA Quant: Dividends Strongest Performing Theme This Year
Savita Subramanian, quantitative strategist for Bank of America Merrill Lynch says that dividend-oriented strategies have delivered the most consistent returns in 2010, but dividends are still an unloved part of the market:
In 2010, dividend oriented strategies have offered the strongest and most consistent returns despite the “risk-on / risk-off” nature of the market, and dividend yield and dividend growth are strategy leaders in the year to date. However, our work suggests we’re still in the early stages of building interest, given that dividend yield still remains a somewhat underutilized investment theme. Fund manager holdings show that Utilities, Staples and Telecom Services – sectors with the most attractive yield – are the most hated sectors, and have been for quite some time.
Comment
The table below breaks down the performance of the S&P 500 stocks by dividend yield:
The top of the table shows the performance of the 135 stocks that do not have dividends
The middle of the table breaks down 365 stocks stocks that do have dividends by quintile (1 =73 lowest dividend yielding stocks, 5 = 73 highest dividend yielding stocks)
Since these measures are calculated on an equal weighted basis, the bottom of the table shows a proper benchmark, the S&P 500 equal weight index
April 23, 2010 was the S&P 500′s 2010 high (1217.28)
What we found is rather surprising:
Year-to-date, owning dividend yielding stocks versus non-dividend yielding stocks has not mattered. The differences shown are not material. This stands at odds with the comments highlighted above.
Since the high of the year, however, higher dividend yielding stocks (quintiles 4 and 5) have materially outperformed the lower dividend yielding stocks (quintiles 1 to 3) and non-dividend stocks.
Similarly, from December 31, 2009 to April 23, 2010, lower dividend yielding stocks (quintiles 1 to 3) and non-dividend yielding stocks outperformed the higher dividend yielding stocks (quintiles 4 and 5).
Conclusion
When the market is rallying (through April 23), the more speculative non-dividend and lower dividend yielding stocks outperform the more conservative higher dividend yielding stocks. When the market is moving sideways-to-lower (since April 23), higher dividend yielding stocks outperform.
This is not new and not unique to this environment. Instead this is fairly typical market action. It suggests the opinion that dividend yielding stocks present a unique opportunity is not supported by market returns.
My disdain for the efficient market hypothesis came about by observing the difference between the stock and bond markets. It was apparent that the Fixed Income traders were of a “rational” mindset so often lacking in the equity world.
Indeed, I have frequently called Bonds the market that acts as “Adult Supervision.”
So I got a kick out of Mike Santoli’s reminder this morning in Barron’s:
“It’s for good reason the stock market was dubbed “the bond market’s idiot kid brother.”
Mike also points out an interesting data point regarding the Industrial’s dividend yield:
“Telling a similar story in a different way, the dividend yield of the Dow Jones Industrial Average components, at 2.65%, is essentially equal to the 10-year Treasury yield. The folks at Morgan Stanley note that over the past 50 years the Dow’s yield has exceeded that of the 10-year Treasury for only one period—the end of 2008 into early 2009, as the financial crisis climaxed.”
The decision to allow Lehman Brothers to go belly up has been roundly criticized by many people as a mistake that cost AIG dearly. That turns out to be an incorrect conclusion, a classic causation versus correlation error. It is much more accurate to observe that the same factors that drove Lehman into bankruptcy also drove AIG to the brink.
It began with rates so low that everyone in the nation decided they wanted a house (and the bigger, the better). This included many people who could not afford one. So these folk applied for mortgages from a new kind of lender, one that operated with little regulation and even less supervision. These lenders were able to give loans to these people – bad credit risks, too little income, no equity – due to their unique business model. They could ignore traditional lending standards because they did not plan on holding these mortgages very long; They could specialize in higher commission sub-prime loans because they were “lend–to-securitize” originators. They made higher risk loans, then flipped them to Wall Street firms, who repackaged them into complex mortgage backed securities. These same investment banks had too little capital and used too much leverage, but that didn’t stop them from buying too much of this paper from each other. It didn’t matter much anyway, since it was rated triple AAA rated by S&P and Moody’s, so there wasn’t anything to worry about. Underlying all of these transactions was the assumption that home prices in the USA never went down. Oh, and, this entire series of events took place at a time when the dominant political philosophy was that it was impossible for this to go wrong . . . the self-regulating markets, you understand, would see to that.
Barron’s Bob O’Brien says that GE’s shares were down on an otherwise up day for equities, as shares dropped to trading below $6 a share, the lowest since 1991. Will slashing dividends hinder rather than help?
“J.P. Morgan Chase & Co. slashed its quarterly dividend late Monday to save $5 billion a year and said that its first-quarter has been “solidly profitable” so far.
Shares of the giant bank climbed 4.7% to $20.42 during after-hours trading. The stock closed down 2% at $19.51 during regular trading.
The quarterly dividend will be 5 cents a share in future, down from 38 cents. That will help J.P. Morgan (JPM) retain $5 billion in common equity a year, bolstering its financial strength in case the recession is longer and deeper than expected.
“Extraordinary times require extraordinary measures,” said Jamie Dimon, chief executive of J.P. Morgan, in a statement. “Our action today is being done as a strong precautionary measure to help ensure that our fortress balance sheet remains intact — even if conditions worsen significantly.”
What the hell took so long?
The entire sector should have ceased dividends the instant they started receiving taxpayer dollars . . .
Since the S&P 500 dividend to earnings payout ratio has skyrocketed to 113% with dividends being cut at a record pace, the price-to-dividend ratio high for both the coming Supercycle Bear Market low and for the eventual end of the Supercycle Winter Period remains as elusive to panicking investors as the price-to-earnings ratio low. But we have reversion-to-the-extreme estimates.
"It's the end of the world as we know it and I feel fine" say the French as consumer confidence in May rose to the highest since Nov '10 as they welcome and get excited about new Pres Hollande. Also, the French 10 yr bond yield touched the lowest on record this morning. June consumer confidence in Germany held at 5.7, just .2 pts off the highest since Mar '11. To the euro bond debate which is now taking on greater rhetoric with those with high bond yields wanting them and those with low ones saying no way, ECB member...
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