Biggest Dividend Cuts in 1/2 Century
No surprise here:
"Dividend payments by companies in the Standard & Poor's 500 Index may plunge 10 percent this quarter, the biggest decline since 1958, as bank failures and slowing economic growth stifle payouts, S&P said.
The firm also cut its estimated 2008 dividend from all S&P 500 companies to $28.05 from $28.85, representing the slowest annual growth since 2001, according to a statement. Financial companies in the index reduced their payouts 35 times in 2008, almost triple the past five years combined, said Howard Silverblatt, the senior index analyst at S&P."
For the banks, this is a good thing, They need to hoard their capital, and stop sending $30-40 billion a year off their books.
For everyone else, its a sign of financial distress, and a protracted recession. And it points out how dangerous it is to buy something merely due to a high dividend.
S&P 500 Dividends to Fall Most Since '58 This Quarter, S&P Says
Bloomberg, Oct. 21 2008
New Bailout Price Tag: $2.25 Trillion Dollars
On Monday, I said that the total cost of this bailout could scale up to $3 trillion -- I just didn't imagine it would happen by Wednesday.
We learned yesterday that the size of the bailout just tripled, from $750b to $3T. Here is the cost structure:
• $250 billion of capital into banks;
• Guarantee $1.5 trillion in new senior debt issued by banks;
• Insure $500 billion in deposits in noninterest-bearing accounts (primarily businesses accts).
In exchange for this largesse, the treasury, on behalf of taxpayers, receives:
• Preferred shares that pay a 5% (rising to 9% after five years);
•No voting rights for government;
• Warrants to purchase common shares = to 15% of initial investment
All told, its a massive program that makes my earlier forecast of 2-3Trillion obsolete. New forecast is now double: $4-6 trillion dollars . . .
More details at articles below . . .
Drama Behind a $250 Billion Banking Deal
MARK LANDLER and ERIC DASH
NYT, October 14, 2008
Bailout Critic: Plan Could Cost $3 Trillion
ABC NEWS Business, Oct. 13, 2008
Americans Embrace Big Government to Help Solve Market Crisis
Edwin Chen and Matthew Benjamin
Bloomberg, Oct. 15 2008
Devil Is in Bailout's Details
Government's $250 Billion Cash Injection Sparks Welter of Issues
DEBORAH SOLOMON and DAVID ENRICH
WSJ, OCTOBER 15, 2008
Understanding How to Analyze Market Metrics
Longtime readers of mine -- going back to the email days 10 years ago -- will note that at various times I have been bullish or bearish (or both, depending upon different sectors). Regardless of our investment posture, there is always a good faith effort to maintain an analytical rigor and intellectual discipline in our investment approach.
This means sometimes discarding attractive theories, or embracing counter-intuitive ones. It also means questioning your assumptions, stress testing your theories, and whenever possible, having your ideas "peer-reviewed" to identify weaknesses or possible theoretical holes. Blogging has been very helpful in that regard.
That approach also means reading a variety of different viewpoints, theories, and people -- most especially those who I may be in disagreement with; It forces a rethink of current principles, and keeps the reasoning process sharp.
Which brings me to a column on CNBC.com today. In it, Vince Farrell mentions towards the end:
"Jason Trennert, my oft quoted strategist, calculates that dividends on stocks exceed the yield on 3-month Treasury bills. That has happened two other times in the last 50 years and both coincided with major market bottoms."
That seems to be fairly reasonable on the surface . . . but after thinking about it for a few minutes, it struck me as potentially having some hair on it.
A little digging, and the flaws in the reasoning surfaced:
Start with where Real (not nominal) Rates are today: They are currently negative at 3.0%. That makes the 3 Month T-bill rather artificially low. That becomes a second variable worth reviewing: Does this buy metric -- SPX dividends > the yield on 3-month Treasury bills -- work when real interest rates are negative?
The quick test of this theory is to see when the last time Fed engineering might have pushed the 3 month rate below the dividend yield.
It turns out that they had done so recently. Indeed, the dividend yield on the S&P500 has been above the 3 month T-bill for quite a while now -- since February 2008. (Recall the emergency Fed cuts made just prior to that). If you made any purchases on the basis of SPX Yield exceeding 3 Month T Bill, you ended up with some jumbo losers on your hands.
Hence, we must repeat our prior admonishment against relying on Single as opposed to Multiple Variable Analysis in making any market forecasts or buy decisions. More often that not, you can find varying degrees of correlation, but end up lacking a causation sufficient to make an informed investment decision.
I would suggest those who like to use this metric to rerun their analysis -- but run a cross check with a 2nd variable of real versus nominal rates. You may find a rather a different set of results . . .
S&P500 Yield (blue) Vs 3-Month Treasury Yield (red) against SPX (gray)
chart courtesy of Michael Panzner
Single vs. Multiple Variable Analysis in Market Forecasts (May 2005)
“A Whiff of Panic . . .” (January 22, 2008)
Farrell: Touching Bottom in this Bear Market?
Jul.22 2008, 7:23 AM ET
Its Unanimous: Banks Have Bottomed!
Barron's: Buy Banks -Selectively (cover story)
Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day -- and were all proven correct?
Perhaps the caveats are worth noting -- I found it interesting that all publications had some moderating hedges in place (as opposed to some recent embarrassing cover articles).
As we noted early this week, we covered most of our shorts in the financials, and are now looking for a bounce play in these names. However I remain unconvinced that Banks are now a good long term investment.
Why? The business model of Leverage and Capitalization is now kaput. Its a new era of De-leveraging, and Re-capitalizing.
A long time ago, Banks were 3-6-3 spread players. Pay your depositors 3%, make loans at 6%, be on the golf course at 3pm. But the end of Glass Steagell, and the mergers with investment banks, have put an end to that simple but profitible business. For the past 10 years or so, we seen a model that involved taking on a lot of risk, then leveraging it up 25X, 35X, even 65X (for Fannie).
Now that model has come unglued. Banks of all types are unwinding risk, de-leveraging (selling off assets held on borrowed money) and raising capital. This means that until a new model is developed, profits will be anemic and the shareholder capital structure is about to get wildly diluted.
Freddie Mac (FRE), with its $6B cap, is seeking to raise $10B. That will be enormously dilutive to both future earnings, and shareholder equity. Remember that Lehman Brothers (LEH) capital raise? $6 Billion secondary priced at $28 with 8.75% coupon and an %18 conversion premium? The stock is now $19m, the cap is $13.3B. After the last debacle, good luck with future capital raises -- they are likely to be treated much more skeptically.
Is "the" bottom in?
Well, it certainly looks like "a" bottom is in.
But longer term, this is a sector that is likely to have continued write downs, weak earnings prospects, and a whole lot more regulation and government supervision than it got away with in the past. P/E compression may also be in the cards -- especially if we see some dividend cuts from some of the bigger houses.
Unless you have a decade long time horizon, does that make you want to rush out and own these things anytime soon? Me neither . . .
UPDATE: July 20, 2008 8:23pm
The last time out, they recommended as "cheap" Merrill (MER), Citigroup (C), UBS, HSBC (HBC), Morgan Stanley (MS), Deutsche Bank (DB), Bank of America (BAC), Credit Agricole (ACA) Washington Mutual (WM) and Credit Suisse (CS).
Ouch . . .
Hitting Bottom? Several Banks and Brokerages Are Ready to Pop Up for Air
BARRON'S COVER MARCH 24 2008
Forbes Video: More bank write-downs, U.S. recession, Avoid Home Builders (3/28/08)
Quote of the Day: Citibank on Glass Steagall (July 08, 2008)
Video: Still Too Bullish (Apr. 1 2008)
What to Bank On
Barron's JULY 21, 2008
Jitters Ease as Citi, Rivals Show Signs of Bottoming Out
WSJ, July 19, 2008; Page A1
Hope, and Hints, That Financial Stocks Have Finally Touched Bottom
NYT, July 19, 2008
Corporate vs Personal Income Taxes
The Sunday NYTimes has an interesting commentary from Harvard prof Greg Mankiw on Corporate taxes:
Compared with other ways of funding the government, the corporate tax is particularly hard on economic growth. A C.B.O. report in 2005 concluded that the “distortions that the corporate income tax induces are large compared with the revenues that the tax generates.” Reducing these distortions would lead to better-paying jobs.
Of course, a corporate tax cut would affect the federal budget. And any change in tax policy has to be made against a background of a looming fiscal crisis, which threatens to unfold as baby boomers retire and start collecting Social Security and Medicare. In 2007, corporate taxes brought in $370 billion, representing 14 percent of federal revenue. Cutting the rate to 25 percent would seem to cost the Treasury about $100 billion a year.
Part of that revenue loss, however, would be recouped through other taxes. To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts. To the extent that workers would benefit, they would pay higher payroll and income taxes. Increased economic growth would tend to raise tax revenue from all sources.
Mankiw suggests dropping the corporate tax rate, and making up the revenue short fall with a Pigou tax of 40 cents a gallon on gasoline. That has precisely zero chance of passing.
To give it some context, consider this excellent chart assembled by Time's Justin Fox:
Justin adds some caveats:
-Corporate income is taxed twice -- once as corporate income and once as either capital gains or dividend income (which are both counted under personal taxes)
-Economists teach that corporations are often able to pass on much of their tax burden to employees and/or customers.
-Relatively high corporate tax rates incentivize corporations to find ways to run their profits through lower-tax jurisdictions
-Corporations are just legal constructs owned and operated by people who, for the most part, pay taxes.
A chart for the corporation-bashers among you
Time, May 21, 2008 9:09
The Problem With the Corporate Tax
N. GREGORY MANKIW
NYT, June 1, 2008
Where Have S&P500 Returns Come From?
Our colleagues over at Plexus Asset management in South Africa put out a fascinating study of the history of S&P500 returns. Prieur du Plessis writes:
"Albert Einstein described compound growth as the eighth wonder of the world. Although he may have passed away in 1955 – coincidentally the year when yours truly saw his first ray of light – the concept of compounding remains the single most important principle governing investment. Compounding simply means that you can earn interest on your principal investment amount, as well as earn interest on top of interest. The power of compounding can make an investment grow much faster than would otherwise have been the case, and is obviously based on the assumption that interest or dividends are reinvested in the same asset...
More compelling proof that the odds are stacked against the capital-growth-only brigade is gleaned from an analysis of the components of the total return figures. Let’s go back to the total nominal return of 9.2% per annum and see how that was made up. We already know that 2.2% per annum came from inflation. Real capital growth (i.e. price movements net of inflation) added another 2.2% per annum. Where did the rest of the return come from? Wait for it, dividends - yes boring dividends, slavishly reinvested year after year, contributed 4.8% per annum. This represents more than half the total return over time!"
The chart reveals all:
Fascinating stuff -- thanks, Prieur!
COMPOUNDING: IT’S A KIND OF MAGIC …
Prieur du Plessis
Plexus. Independent Insight in an Uncertain World.
Tel.: +27 21 970 2400
Disturbing Trends: Dividends & Earnings
Over the past few years, I have noted (repeatedly) that despite record earnings (Quarter after Q of double digit year-over-year gains), increasing dividends, M&A activity and rich Share buybacks, stocks have been very rangebound. The analogy I favor is that each of those four items are an engine of a 4-engined plane. With all four spinning mightily, most indices are about where they were (give or take a percent) 2, 3, or 4 years ago. Only the Dow is above its 2,000 highs.
The danger of this four engined craft is that if any of the engines fail, the plane can be expected to lose altitude. Not crash into the mountains in a fiery conflagration, but seek a lower altitude before regaining stability.
The Earnings Question:
That process may be underway in the 3rd quarter. Despite the Dow reaching a record high (about 50 points from Dow 12,000 as I write this), both earnings and dividends are less robust than previous quarters. So far, we have seen increasing evidence that this Quarter's earnings -- as well as forward guidance -- are coming in softer than Q1 or 2.
The WSJ reported that:
"The strong forecasted earnings growth is perhaps the single most important piece of evidence pointing to a strong economy in 2007," wrote Dirk Van Dijk, head of research at Zacks, in a note earlier this week. The ratio, which has fallen below one -- that is, more companies issuing downward revisions, "is the canary in the coal mine, indicating that this pillar is perhaps not as strong as previously thought," Mr. Van Dijk said."
And, if Commodity & Energy prices remain depressed, the S&P500 will lose even more oomph. Those two sectors have accounted for a disproportionate share of the 14% year-over-year gains of the SPX in Q2.
The key question will be by how much. Psychologically, there is something significant about the y-y double digit gains. Let the SPX slide below 10% profit gains, and that will be a clear sign of decellerating economics -- and trouble.
So far, earnings have been mixed. After the Alcoa/Genetech/Legg Masson misses, there were strong numbers from Pepsi and Costco. But it has hardly been consistent, and the forward guidance is less than robust.
Consider this short list of headlines grabbed from The Street.com Thursday night; It certainly looks like more downside than upside to me:
Centex Cuts Outlook
EZCorp Guides Higher
DryShips All Wet
H-P Names New Ethics Chief
NYMEX Approves IPO
Beige Book's Goldilocks Tale
Abiomed Sees Lighter Sales
La-Z-Boy Slashes Forecast
CalAmp Profit Plummets
Wendy's Outlines New Strategy
ConAgra Names Finance Chief
Video: Restaurant Earnings
Oil Up as Gas Stockpiles Grow
Minn. Suit Galls UnitedHealth
Delta Nixes Merger Idea
DOJ Probes SRAM Market
Cramer Video: Market Speaks
Gold Edges Higher
Transmeta Surges on Intel Suit
Thursday's Daily Blog Watch
Genzyme's Sales Fall Short
Gold Kist Rejects Buyout Bid
Is Biolase Letter Perfect?
Pepsi Hits Quarter
Harley-Davidson Roars Ahead
McDonald's Sees Earnings Beat
Big Boost for Simclar
Domino's Sales Decline
CNet Keeps Family Ties
TheStreet.com's Top 10
How this plays out over the next few weeks may be a function of forces beyond fundamentals. I suspect the strength we have been seeing will attenuate as we get closer to the mid-term elections.
Dividends Begin to Slow:
As Barrons noted last week, for the first time since their resurgence in 2003, dividend increases declined in Q3: According to Standard & Poor's research of dividend data on 7,000 publicly traded companies, the number of payout boosts slid in three of the past four months. July and September suffered the heaviest declines. The drop was relatively small -- increases fell 3.6% compared to the year ago period.
Barron's quotes Howard Silverblatt, a senior index analyst at S&P:
"The slowdown...is quite disturbing, especially in light of the enormous expenditures on buybacks" noted . Silverblatt thinks the major question is whether buybacks are increasing at the cost of dividend hikes. He noted that October is usually a busy month for payout enhancements and that the approaching earnings season "will be a critical time to evaluate" the slowdown in boosts. Unlike dividends, announced buybacks don't always materialize. (Even if they get started, they may not be completed.) In contrast, "dividend increases are a very big leap of faith that a company will have the cash flow to make the payments," Silverblatt asserted."
Consider the following data points regarding dividends:
• Companies in the S&P 500 are projected to spend ~$220 billion on dividends in 2006;
• That figure represents a 9% increase over 2005;
• Stock repurchases are up 12%, to $410 billion in 2006.
• For the first 3 Qs of 2006, dividend enrichments edged up 2.8% (compared with '05's initial 3Qs);
• Special (non-recurring) dividends advanced 19% in the 1st 9 months of the year, while reinstatements advanced 25%;
• S&P counted 14 dividend cuts last quarter -- 75% more than a year earlier.Omissions dropped 21%, while 29 companies decreased their payouts this year; The total of "passed payouts" was flat.
The action in the market at present is a function of liqudity and momentum; It is not fundamentally driven.
As noted above, I suspect it will continue until the election . . .
Real Downer: Number of dividend boosts slips in third quarter
SHIRLEY A. LAZO
BARRON'S October 9, 2006
Lookahead: Earnings Await
DAVID A. GAFFEN
October 6, 2006 7:27 p.m.