Category: Investing

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Dr. Ed’s Blog: Dividends, Buybacks, & the Bull Market (excerpt)

Ed Yardeni highlights that a surge in dividends and share buybacks is driving the current bull market:

Most importantly, during the current earnings season, US corporations continue to announce dividend increases and more share buybacks. Previously, I’ve shown that this corporate cash flow into the stock market–which totaled $2.1 trillion for the S&P 500 since stock prices bottomed during Q1-2009 through Q4-2012–has been driving the bull market since it began.

I have one concern: is this surge sustainable or was it precipitated by an increase in marginal tax rates for top income-earners and likely to slow along with earnings?

View chart at Dr. Ed's Blog: Dividends, Buybacks, & the Bull Market (excerpt).

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2013 Profit Margin Expectations | Business Insider

Sam Ro writes:

Overall, Wall Street’s strategists are bullish on stocks for 2013 for various reasons.

One reason worth taking a second look at is expanding corporate profit margins, which are already at historic highs.

A slew of experts like GMO’s Jeremy Grantham, SocGen’s Albert Edwards, LPL Financial’s Jeff Kleintop, and John Hussman think these margins are unsustainable.

But the equity analysts and the companies they cover disagree……..

That is the medium-term outlook, but one has to question whether low effective tax rates and low interest rates are sustainable in the long-term. A weaker dollar has also boosted the conversion of offshore earnings but that is a one-off gain unless the dollar continues to weaken.

Read more at 2013 Profit Margin Expectations – Business Insider.

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The Most Compelling Argument for Equities | Pragmatic Capitalism

Cullen Roche quotes David Rosenberg:

The Fed has also completely altered the relationship between stocks and bonds by nurturing an environment of ever deeper negative real interest rates. Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises future profit expectations.

Cullen also refers to the spread between the S&P 500 dividend yield and the 5-year Treasury Note yield which has widened to 170 basis points (1.70%). What he has not considered is the upsurge in share buybacks over the last decade as a tax efficient alternative to dividends — which means the dividend yield is understated. The spread should be even wider.

via PRAGMATIC CAPITALISM – David Rosenberg: The Most Compelling Argument for Equities.

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On Investment Time Horizons – Seeking Alpha

David Merkel observes that Shiller’s CAPE10 ratio and Tobin’s Q-ratio both “indicate that stocks are not likely to return a lot over the next 10 years”.

The CAPE10 ratio is a long-term, smoothed PE-ratio first popularized by Yale Professor Robert Shiller in his book Irrational Exuberance. CAPE10 compares the current S&P 500 index value to the average of the last 10-years annual earnings. James Tobin’s Q-ratio compares current price to net worth (total company assets minus liabilities).

Merkel points out, however, that “the same is true of most high-quality bond investments …. and high-yield investments when expected losses are netted out…..I am not crazy about buying bonds here. The risk-reward is awkward, but the same is true of stocks.”

Bottom line is investors are being starved of yield by the Fed’s Twist and QE3 operations. Investors may be forced to take on additional risk in order to boost yields, but that could end in disaster, with capital losses if yields rise or earnings fall. Where possible, the safest strategy would be to tighten your belt and sit this out.

via On Investment Time Horizons – Seeking Alpha.

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New Jolt Looms for Investors: Earnings – WSJ.com

Jonathan Cheng: Companies begin reporting second-quarter earnings this week, starting with Alcoa Inc. (AA -2.19%) on Monday. Already, 42 companies—including Ford Motor Co. (F -0.73%) and Texas Instruments Inc. (TXN -2.43%) —have warned investors that profits will be lower than initially expected…….

Companies now are being hit on several fronts. Economies in China, Europe and the U.S. are slowing. That is hurting companies dependent on demand from those countries. As well, the U.S. dollar has jumped against the euro and other currencies, reducing profits made from international sales for U.S. companies.

via New Jolt Looms for Investors: Earnings – WSJ.com.

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S&P 500 dividend yields signal oversold?

Historically the S&P 500 was considered overbought — and ripe for a bear market — when the dividend yield dropped below 3 percent. A surge in share buybacks in the past two decades, however, disrupted this relationship, with the dividend yield falling close to 1.0 percent in the Dotcom era.

S&P 500 Earnings and Dividend Yields

What happens when we adjust for share buybacks?

In 2011, S&P 500 share buybacks increased to $409.0 billion. With dividends of $298 billion*, that gives a total cash distribution (dividends and buybacks) of $707 billion for a yield of 5.44 percent. Right in the middle of the 5.0 to 6.0 percent range previously considered typical of an oversold market.

* S&P 500 market capitalization of $12,993 billion at June 29, 2012 multiplied by 2.29 percent

Unfortunately share buybacks fluctuate wildly with the state of the market:

S&P 500 Share Buybacks

If we omit the highest and lowest readings, and take the average share buyback over the remaining 3 years, it amounts to $349 billion. That would give adjusted total cash distributions of $614 billion and an adjusted yield of 4.98 percent — still close to the oversold range.

Compare to Earnings Yield

The current reported earnings yield of 6.8 percent, however, is way below the highs (10 to 14 percent) of the 1970s and 80s. Current distributions (dividends plus buybacks) amount to 80 percent of current earnings. Payout ratios above 60 percent are considered unsustainable.

My conclusion is that earnings yield offers a more accurate measure of value. And reflects a market that is fairly valued — rather than overbought or oversold — especially when we consider the likelihood of earnings disappointments.

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Canada TSX: Momentum trades

Bullish

  • New Zealand Energy [NZ] ~ respected support at $3.00; breakout above $3.80 would confirm another primary advance.
  • Rio Alto Mining [RIO] ~ narrow consolidation favors breakout above $4.70, signaling a new advance; support at $4.30.
  • Roxgold [ROG] ~ good support at $1.90, breakout above $2.15 would signal a new advance.

Watch for breakout

  • Tri-Oil Resources A [TOL] ~ narrow consolidation between $3.50 and $3.80 but strong bearish divergence on 21-day Twiggs Money Flow
  • Argonaut Gold [AR] ~ strong resistance at $10.00, support at $9.00
  • Atna Resources [ATN] ~ support at $1.25, resistance at $1.50.
  • Northern Graphite [NGC] ~ 21-day Twiggs Money Flow below zero is bearish but ascending triangle below $2.20, breakout would signal a fresh advance.
  • Pretium Resources [PVG] ~ breakout above $18.00 would signal continuation
  • TAG Oil [TAO] ~ testing resistance at $10.00
  • Americas Petrogas [BOE] ~ testing support at $4.00, respect would favor breakout above $4.50 and a fresh advance.

Americas Petrogas [BOE]

  • Coastal Energy [CEN] ~ recovered above $20.00, follow-through above $21.00 would confirm a fresh advance.

Americas Petrogas [BOE]

Negative Watch

  • Silvercrest Mines [SVL] ~ strong bearish divergence on 21-day Twiggs Money Flow followed by sharp drop to test support at $2.50.
  • Madalena Ventures [MVN] ~ long correction, headed for test of $1.00.
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US Momentum stocks to watch

I set up a stock screen for strong Momentum stocks on Incredible Charts Shared tab (#49419) to run every weekend. Here is a list of the most promising:

  • Arctic Cat [ACAT]

Arctic Cat [ACAT]

  • Cheniere Energy [LNG]
  • DXP Enterprises [DXPE]

DXP Enterprises [DXPE]

  • Healthstream [HSTM]

Healthstream [HSTM]

  • Lion’s Gate Entertainment [LGF]
  • Liz Claiborne [LIZ]
  • Pharmacyclics [PCYC]
  • Regeneron Pharm [REGN]
  • Select Comfort [SCSS]
  • Sourcefire [FIRE]
  • United Rentals [URI]
  • Vocaltec Comm [CALL]

Bear in mind that the market is starting a correction and suitable entry opportunities may only present themselves in 3 to 6 weeks, but I have added them to my watchlist and will re-visit weekly.

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