Dangling Delicious Dividends

After my recent articles on current trends in “returning value to shareholders”, I ran across a couple of news stories this past week that caught my interest (and might catch yours as well). The articles focus on the growing trend of U.S. corporations dangling delicious dividends before the income hungry eyes of investors here and around the world.  As I recount some of the insights I uncovered, you will quickly grasp the connection between those insights and what I have posted in recent weeks.

First, I must set this information regarding dividends within context.  Through the first quarter of 2013, low-volatility ETFs and funds (ie. ETFs and funds composed of higher dividend, lower volatility stocks) outperformed the S&P 500, even as that index moved steadily upward.  A large number of stocks in that category come from the consumer staple, utility, master limited partnership (MLP), and mortgage REIT (mREIT) spaces.  However, as anyone holding a diversified portfolio can attest, those issues have been severely punished since March – particularly following the latest market fuss brought on by seriously “mixed messages” cast upon Wall Street and world markets by Fed Chair, Ben Bernanke, and his fellow Fed governors on May 22nd. The market had (more or less) trusted Bernanke’s most recent standard policy line – ie. the Fed would remain accommodative until U.S. unemployment was firmly headed down to the 6.5% level. The usual “default” timeline for that change in Fed easing had been the year 2015. However, on a day I have since marked with a bold blood red “X” on my calendar (May 22), Bernanke himself did not change his tune, but Fed minutes made it clear that a number of Fed governors were becoming increasingly concerned about the challenge of developing a workable “exit plan” for the latest Quantitative Easing (QE) program. The specter of the Fed easing up on the monetary “gas pedal” sent income-related stocks (and bonds) into a steep decline.  (See graph)

GRAPH: The graph above shows the Utilities Sector SPDR ETF (XLU) (the candlestick line) trailing off after the end of April, falling below its 50 day EMA on May 23 and tanking this past week. Showing better performance is the Consumer Staples Sectors SPDR ETF (XLP) in brown, which held up until Mid-May, when it started retreating and finally tanked this past week below its 50 day EMA. The S&P 500 Index (green) shows the best relative performance. An actively managed high yield bond ETF (Peritus High Yield (HYLD) in turquoise) was holding steady until this past week, when it followed a descent nearly as steep as XLU and XLP. Finally, Market Vectors Mortgage REIT ETF (MORT) in pink has been on a steep downward trajectory since late April.

With that being said, the following is still true and may (yet) be indicative of an important trend. If one examines the record of dividend growth within the S&P 500 Index since its beginning (1957) until today, three facts are well worth noting:

1)    The collapse of the mortgage market and the near collapse of numerous U.S. financial firms (beyond the collapse of Lehman Brothers) brought a sudden and record fall in dividends between 2007 and 2010 – especially since big banks were forced to cut or eliminate dividends when they were bailed out by the U.S. Treasury. (Even industrial conglomerate, General Electric (GE) was forced to pare its dividend due to its huge financial arm (GE Capital)).

2)    During the three-year period ending March 30, 2013, the S&P 500 experienced a boom in dividend growth – managing a 13.59% average annual dividend growth rate.  That is a record in the 56-year history of the index!

3)    Despite the record collapse of dividends between 2007 and 2010, the S&P 500 has managed to grow its dividend during the past ten years by an average rate of 7.07% — which is fully 2% higher than the median growth rate during the index’s entire history.

Notable among the prominent dividend “growers” have been (of course) the banks. For example, Wells Fargo (WFC) has increased its dividend by 36% this year and JP Morgan Chase (JPM) lifted its payout by 27%. As you know, technology firms have been among the biggest accumulators of cash during the past several years. Historically, tech companies have applied excess cash toward R&D and the financing of new growth. When they have used cash to enhance shareholder value, the more common strategy has been to buyback shares. But Apple Corp (AAPL) and Cisco (CSCO) are examples of firms recently pioneering higher tech firm dividend payouts. AAPL’s plan to return $100 billion to investors by 2015 combines a series of share buybacks with an increased dividend that now makes it the “largest dividend payer in the U.S.” (it now provides a yearly cash dividend stream of almost $11.5 billion).  When CSCO introduced its dividend in 2011, it ranked as the fortieth largest U.S. dividend payer; since then, it has hiked its payout twice and has risen now to twentieth among the highest U.S. dividend payers!

For what it is worth, in May Goldman Sachs (GS) issued a forecast of prospective U.S. market dividend growth – 11% in both 2013 and 2014, and an additional 9% growth in 2015. GS emphasized that it has not increased its EPS projections – but is now acknowledging the obvious trend of a growing “payout ratio”.  Jumping on the bandwagon of recognizing the growing role of dividends in corporate America, JP Morgan Chase reported this month that the number of U.S. exchange-listed companies announcing a dividend hike has risen this year to the highest level since 2004!  Using the following formula:

TOTAL YIELD =  (sum of all dividends+ announced share buybacks)/ total equity market value

JP Morgan Chase asserts that U.S. Total Yield stands at 4.4%, compared with 3.7% for global equities!  Chase then goes on to report this startling fact:

Within the $15 trillion universe of non-financial equities in the U.S., approximately 2.5% of that equity is being withdrawn each year through share buybacks. As a result of that, the S&P 500 Index Divisor decreases – which (as we explained in recent weeks) improves several key financial ratios, such as EPS and earnings growth per share.  If that “divisor” had remained constant since the third quarter of 2011, then the four-quarter rolling “S&P 500 Operating Earnings Per Share” metric would have risen by only $1.50 instead of the actual reported figure of $3.70!!

And now, to end on a happy note, I offer the following quote from Kentucky Senator Rand Paul. I can’t say that I embrace the range of his political views, but on at least this issue, he and I are in full and total agreement. Referring to the Senate Permanent Subcommittee on Investigations interrogation of Apple CEO Tim Cook in May, the senator said:

“I’m offended by a $4 trillion government bullying, berating and badgering one of America’s greatest success stories. If anyone should be on trial here, it should be Congress… I frankly think the committee should apologize to Apple. The Congress should be on trial here for creating a Byzantine and bizarre tax code!”

Congress should not be allowed to harangue and harass U.S. companies that legally use the loopholes that Congress has included in the U.S. corporate tax code. Those companies are fulfilling their obligation to shareholders by minimizing tax paid. If Congress wants to stop what looks like “corporate tax abuse”, then Congress should rationalize and simplify the corporate tax code rather than merely creating periodic “spectacles” – such as Mr. Cook’s televised appearance responding to congressional criticism!

Submitted by Thomas Petty

 

Related Posts

 

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.