We all know that the stock market has moved up significantly over the past few months. The real question is: is the move up based on the belief that there is enough economic growth available for corporate earnings to continue rising, or is it simply due to a flow of funds?
Let’s analyze this question by taking a look at Wal-Mart Stores, Inc. (NYSE/WMT). Wal-Mart just released its forecast for second-quarter corporate earnings, which was less than most analysts had expected. The company now forecasts corporate earnings on a per-share basis for the second quarter to be $1.22–$1.27, lower than the average estimate by analysts of $1.29. (Source: “Walmart reports a 4.6 percent increase for Q1 EPS of $1.14; U.S. businesses forecast positive comp sales for Q2,” Wal-Mart Stores, Inc. web site, May 16, 2013, accessed May 16, 2013.)
As a sign of the health of America’s economic growth level, Wal-Mart reported that comparable same-store sales dropped by 1.4% between January 26, 2013 and April 26, 2013. Internationally, Wal-Mart is doing better, with sales up 2.9% during the first quarter.
However, corporate earnings suffered during the first quarter due to several reasons, including very cold weather, continuing weak employment levels, and the payroll tax hike. Many businesses that cater to the lower- to mid-level consumer will most likely encounter similar problems due to these issues and general sluggish economic growth.
Recent data have been relatively mixed regarding the potential for economic growth to begin moving upward. However, for Wal-Mart’s corporate earnings, there is the potential for a slightly stronger second half because some of the company’s initial hurdles have been … Read More
If you invested all of your money in the stock market, you would be exposed to extraordinary risk of a market retrenchment.
Of course, you could also make a lot of money, especially with how well things are going in the current bullish stock market that continues to somewhat defy gravity.
Yet this is also the time you need to take some extra precaution and think about where you are at and what your end goal is in the stock market.
You don’t want to risk your entire investing capital on the stock market, in spite of any temptation to do so. This is when you have to fight against the greed that might be in you—the greed that’s in most of us—and it won’t be easy.
Remember what happened after each of the multiyear peaks in the stock market over the past decades, when the stocks retrenched. I’m not saying the stock market is at a peak. In fact, the bulls look like they are in full control and heading higher on the chart.
You just need to be on top of things, and don’t let greed ravage your sensibility toward the stock market.
Chasing dreams is one thing, but being prudent is another.
I’m not going to say you should run for the exit, but you need to be aware of where your capital is being invested and understand the associated risk factors.
The reality is that a sound investment strategy means understanding asset allocation and diversification to increase the risk and return of your portfolio.
By asset allocation, I refer to the asset mix of your portfolio … Read More
One of the biggest worries for investors is the anemic economic growth globally. This has made it extremely difficult to generate corporate earnings going forward. As investors, we are constantly looking for signs that a firm has the ability to increase corporate earnings substantially for the near future.
Ultimately, for corporate earnings to move upward, revenues need to increase as well. With the lack of economic growth internationally, this is becoming a serious problem.
As an example of the extent of weak economic growth internationally, McDonalds Corporation (NYSE/MCD) posted a drop of 0.6% for comparable same-store sales in April. (Source: “McDonald’s global comparable sales decreased 0.6% in April,” McDonalds Corporation web site, May 8 2013, accessed May 13, 2013.)
The company saw its comparable same-store sales in Europe decrease by 2.4%, and the Asia-Pacific, Middle East, and African (APMEA) regions reported a 2.9% drop in same-store sales. Most analysts were expecting a drop of only one percent in Europe and a 1.4% drop for the APMEA region.
A positive note showing the disparity in economic growth was that same-store sales for the U.S. increased 0.7%, versus expectations of a slight decline. As weak as the U.S. is regarding economic growth, much of the rest of the world is in worse shape.
One worry for investors looking at the potential for corporate earnings growth is that much of the sales push by McDonalds has been in lower-priced items. This means that, while revenues might be running at a similar pace, margins will drop.
The chart for McDonalds is featured below:
Chart courtesy of www.StockCharts.com
McDonalds’ stock has performed quite well over … Read More
The Dow Jones Industrial Average rallied for 10 straight days and, in the process, established several record highs. And while the Wall Street bulls are glorifying the upward move, I continue to believe a correction is on the way—I just can’t tell you when or by how much. The thing I would warn you against is chasing dividends on Dow stocks. The average dividend yield on the 30 Dow stocks currently sits around 2.82%.
The top-five dividend yields belong to AT&T Inc. (NYSE/T), Intel Corporation (NASDAQ/INTC), Verizon Communications Inc. (NYSE/VZ), Merck & Co., Inc (NYSE/MRK), and Microsoft Corporation (NASDAQ/MSFT). The problem with chasing the dividends on these stocks is that I feel there is limited upside in the share price appreciation potential at this point.
A contrarian trade you can play is employing the “Dogs of the Dow” investment strategy, which is simple and has beaten the Dow on average since 1972. The five companies included in this group are the lowest-priced stocks.
The theory is that these Dow companies are facing some issues, but with a turnaround, they can generate some above-average returns and, as such, are viewed as contrarian stocks.
Let’s take a look at the strategy.
At the close of March 15, the five dogs of the Dow were:
1. Alcoa Inc. (NYSE/AA; $8.58)
2. Bank of America Corporation (NYSE/BAC; $12.38)
3. Intel ($21.20)
4. Cisco Systems, Inc. (NASDAQ/CSCO; $21.68)
5. Hewlett-Packard Company (NYSE/HPQ; $22.42)
Now take a look at the results, assuming you bought these five dog stocks based on the close on December 31, 2012 with the advance to March 18.
The table shows four … Read More
When it comes to long-term investing, one factor that needs to be considered is that the dividend yield can provide a large portion of the total return. While everyone likes to pick the highflier that will move up a tremendous amount, the truth is that having a portfolio of stocks that continually increase their dividend yield can help increase total returns of a portfolio.
It is expected that for 2013, S&P 500 companies will pay out at least $300 billion in dividends. This is an even higher amount than the $282 billion paid in dividends for 2012. (Source: Demos, T., Russolillo, S., and Jarzemsky, M., “Firms send record cash back to investors,” Wall Street Journal, March 7, 2013.)
Long-term investing that incorporates companies issuing a stable and increasing dividend yield over time can help mitigate the gyrations of the market.
Not only are corporations flush with cash and looking to pay an attractive dividend yield as compared to U.S. Treasuries, but companies are also buying back record levels of shares.
According to Birinyi Associates Inc., in February, corporations announced a total of $117.8 billion in share buybacks, the highest monthly total since 1985.
Generally speaking, both share buybacks and issuing a dividend yield are positive for long-term investing. However, I do worry that companies are buying back shares at levels that are elevated.
I think it would be far more beneficial for long-term investing if corporations had a flexible approach regarding paying back cash. Meaning, when the stock price declines, corporations should then accelerate share buybacks, and when their share prices are up significantly, corporations should increase their dividend yields…. Read More
March 1 is a very big day for many people. Unless Obama and the Republicans make a deal prior to that date, billions of dollars in spending cuts will be enacted.
Of all the areas that will be hit, I think the defense market sector will bear the brunt of the cutbacks and the future viability of corporate earnings in this sector is certainly in doubt.
At this point, Pentagon officials are now planning for $46.0 billion in cuts for the remainder of 2013. The total amount to be cut in the military market sector is $1.2 trillion over the next decade. (Source: Nissenbaum, D., “Pentagon Readies Budget Ax,” The Wall Street Journal, February 11, 2013.)
The U.S. Department of Defense has already laid off approximately 46,000 part-time workers. We could see additional layoffs, as well as furloughs. There are thousands of other workers employed at private firms in the defense market sector that will be affected, as budget cuts will crimp corporate earnings.
Clearly, for the defense market sector, the future is cloudy at best. Corporate earnings for most companies throughout the defense market sector will have difficulty growing. When total revenues are declining, higher corporate earnings are extremely rare.
Unfortunately, this pain is actually needed for the long-term fiscal health of the country. While corporate earnings will be reduced and jobs will be lost in the defense market sector, continuing to spend such a massive amount of public funds in this area is irresponsible and clearly not warranted at this time.
Looking at 2011 data, the U.S. military spending was 41% of the total for the entire world. … Read More
With the recent data over the past few months showing home prices continuing to rise, many investors might believe they’ve missed the boat. The homebuilder stocks have seen a substantial increase in corporate earnings, resulting from higher home prices and elevated production levels; this has led to a massive increase in their share prices.
The market is a forward-looking mechanism. Investors predicted the increase in home prices that we are now witnessing and the resulting rise in corporate earnings in these homebuilder stocks.
Yet another data point just came out, finding that 87.5% of single-family homes in 152 cities had an increase in home prices during fourth quarter 2012 compared to the same quarter in 2011. The number of residences exhibiting higher home prices is increasing, as only 79.0% of metropolitan areas showed an increase in home prices for the third quarter 2012. (Source: “Fourth Quarter Metro Area Home Prices Show Strongest Performance in Seven Years,” National Association of Realtors web site, February 11, 2013.)
While housing inventories are at 12-year lows and the interest rates of mortgages remain low, home prices are set to continue rising for the near future. Firms that are leveraged to higher home prices will see significant increases in corporate earnings.
However, there are still firms that can benefit from higher home prices and that are able to continue growing their corporate earnings over the next several years. But these companies might not be the ones that come to mind for investors when they think of the real estate investment industry.
One company that I have mentioned before when it was trading much lower is … Read More
As corporate earnings season continues for S&P 500 companies, it is becoming quite evident that revenue growth is lacking across many sectors of the economy. However, we are continuing to see growth in corporate earnings per share.
How is this possible? One method is through share buybacks. S&P 500 corporations, which are generating very high levels of cash, are buying back shares and reducing the number outstanding, which increases the corporate earnings-per-share level.
From April 2011 through October 2012, S&P 500 companies bought back and retired approximately eight billion shares, according to FactSet. This has been a significant driver for corporate earnings over the last two years. (Source: Cheng, J., “Investors See a Way Forward: Buybacks,” Wall Street Journal, January 21, 2013.)
If this level of share buybacks for S&P 500 corporations continues this year, we can expect to see corporate earnings increase by between five percent and 10%, without any organic growth in corporate earnings and flat revenues.
Another driver for S&P 500 share prices will be that the dividend yield will still remain very attractive when compared to U.S. Treasuries.
While revenue growth needs to begin to increase substantially at some point, I think 2013 will be another year in which the combination of a strong dividend yield and modest corporate earnings growth will result in the continuation of investment funds rotating out of the bonds and into equities.
Personally, I think a lot of buybacks are ill timed. While I like to see corporate earnings increase, the problem with many S&P 500 companies is that they tend to buy shares at the wrong time.
When the S&P … Read More
Over the last few years, the aggressive monetary policy plan by the Federal Reserve has left many income investors in a difficult position. The low level of interest rates has reduced the income-generating potential of traditional fixed-income products.
Increasingly, more people are creating an investment strategy, looking for stocks with a solid dividend yield to add income to their portfolio.
For dividend yield investors, 2012 was a great year. In total, the S&P 500 corporations paid $281 billion in dividends in 2012, a record high, according to analyst Howard Silverblatt at S&P Dow Jones indices. (Source: “Dividends Galore: Expect Another Record Year in 2013,” Wall Street Journal, January 7, 2013.)
The total paid out in dividend yield was a 17% increase from 2011, and a 14% increase from 2008, which was the previous high until 2011. As I’ve written before, special one-time payments played a large role in dividend yield for 2012. More corporations announced special dividends in December 2012 than at any other time since 1955.
Even though dividend yield taxes are going up, I still believe that due to the low interest rate environment, more institutions will be creating an investment strategy that will focus on placing their funds with companies that pay out a solid dividend yield.
Part of creating an investment strategy is to anticipate what other investors will do. While I do believe interest rates will eventually rise, this most likely won’t occur in 2013. For many people, this will leave an investment strategy to still favor dividend yield over the relatively low rates of fixed income.
With the 10-year Treasury yielding approximately 1.9% and … Read More
The economic data continue to come in much weaker than central bankers have been hoping for around the world. With the financial crisis in Europe continuing to unfold, and now China slowing down substantially, all of this is putting pressure on the U.S. economy as well. We are seeing a slowing across the board, and this has investors looking for safety and yield. Safety is coming in the form of U.S. Treasuries. However, investors seeking income need to look further than U.S. Treasuries and so are turning to dividend yield. This has pushed prices of dividend paying stocks up, and conversely, the dividend yield has come down.
The distortion that U.S. Treasuries are making with a yield of approximately 1.6% is profound. Income seekers can no longer hold U.S. Treasuries with any expectation of a positive return over the next 10 years. When taking into account any level of inflation, U.S. Treasuries look like a bad investment for the next decade. While many aren’t placing funds in U.S. Treasuries for its yield but for safety, this leaves the income-seeking investor in a difficult position. They are now forced to look for stocks with a dividend yield to provide income.
One sector many investors overlook is preferred shares. Preferred shares offer a higher dividend yield than common shares. Because they don’t trade as often, many investors aren’t aware of them. One easy way to get a diversified portfolio is through an exchange-traded fund (ETF) like the iShares S&P U.S. Preferred Stock Index Fund (NYSE/PFF).
This ETF has over 250 holdings of preferred shares with an attractive dividend yield. With one share, … Read More
The rush into the safety of U.S. debt instruments, like 10-year Treasury notes, is doing much to distort the mechanism of the financial markets, throwing a monkey wrench into the investment strategy of many people. With the yield of the 10-year Treasury now trading at approximately 1.55%, it is becoming increasingly difficult for savers to earn enough money on their assets. There are fewer good avenues for a high dividend yield. As other investors have poured money into “safer” assets, it has raised the price and thus lowered the dividend yield. One must be careful not to move into extremely risky assets just for their dividend yield. The potential loss in the value of the asset might wipe out any dividend yield.
When taking into account inflation, investing your money in 10-year Treasury notes at just 1.55% could be a very costly mistake. You are essentially willing to make no money after inflation and perhaps even lose money. The rush into the 10-year Treasury does not consist of small retail investors, but rather large institutions that are parking their money until a better opportunity arises. As a small retail investor, I would caution against following the large funds; in fact, I like to go against them. They are like massive boats; very slow to adjust once they start moving in one direction.
One area that makes sense over an investment horizon greater than a decade consists of stocks that pay a good dividend yield and specifically preferred shares. Preferred shares can be thought of as being in between common shares and bonds. They have a higher dividend yield than common … Read More