Posted by: Howard Silverblatt on July 6, 2011
It's been a good first half for U.S. dividend investors. U.S. listed common stocks increased their dividend payment $11.2 Billion in the second quarter of 2011, compared to the $19.0 Billion increase in the first quarter. The decrease is more a result of the great first quarter, than a disappointing second one. For the first half of 2011, the dividend increase of $30.2 Billion already surpasses all of 2010, which had a $26.5 Billion increase. The net result is that if you look at dividends as your pay check, you received a 4.1% increase in the second quarter, and an 11.1% first half of 2011 increase (4.1% for Q2 and 6.7% Q1). S&P 500 investors also received a 4.1% increase, but did better in the first quarter (7.4%) to end up with an 11.9% first half year increase. Dividend decreases continued to decline, with only 21 issues doing so in the second quarter compared to 30 in the first quarter (vs. 34 in Q2,'10 vs. 250 in Q2,'09). Increases declined to 444 in Q2,'11 from a very active and positive 510 in the first quarter (vs. 335 in Q2,'10 vs. 233 in Q2,'09). The dividend increases, combined with a minor second quarter market price decline pushed up the average dividend yield for paying U.S. Domestic common issues to 2.51% on 6/30/2011, compared to 2.39% on the 3/31/2011. Overall, it was a very good Q2 with few decreases, but not the level of the great Q1.
Going forward I expect to see more dividend increases across all sectors, with few decreases, along the line of the second quarter. Investors appear to be coming back to more of a total return mentality, and historically dividends make the difference. I do have some concern if investors start to reward buybacks (SCR - share count reduction), since companies may respond as they did in 2006/7 with more buybacks, impacting cash dividends. I also believe, if the economy continues to improve (slowly), and home and commercial real estate portfolios don't deteriorate, that we could see a second round of Financial dividend increases late in the year, with the increased payment being made in the first quarter of 2012.
For more details see the attached file dividends_20110706.rtf
Posted by: Howard Silverblatt on June 29, 2011
S&P 500 Q1,'11 stock buybacks increased 62.6% to $89.84B from the $55.26B in Q1,'10, but are up just 4.0% from Q4,'10 $86.36B. The 4.0% increase in buybacks from last quarter is significantly less than the 8.1% average price increase, and translates into fewer shares being repurchased. At this point, companies are continuing to use buybacks to control employee options as well as shares used for dividend reinvestment programs (DRP), with few companies venturing outside of the box to purchase additional shares, as was the common practice in late 2005 through mid-2007. So the question is, can the Buyback Bonanza return?
For the full report, use the link buybacks_20110629.rtf
The debate between buybacks and cash dividends dates back to even before I started at S&P, in 1977. In the time since, I've yet to see any convincing evidence -- academic or practical -- which proves that one is better for companies or shareholders than the other. The difficulty of obtaining proof lies in the inability to isolate the cause and effect over long enough time periods. To say that Exxon-Mobil is the largest company in the world today, because it has reduced its share count for 42 of the last 43 quarters (the only decline was in Q2, 2010 for the XTO merger, when the company was prohibited from doing so due to SEC regulations, but made up for it the following quarter), is as indefensible as saying that the Coca-Cola Company is successful because it has increased its cash dividends for each of the last 49 years (the company has paid cash dividends each year since 1893). The cause and effect are not clear; Exxon's profits are what permit the company to buy back shares, just as Coca-Cola's business model is what permits it to increase dividend payments. Then, there is Berkshire Hathaway and Apple, which employ neither buybacks nor dividends. Over the past year, 354 S&P 500 companies have spent US$ 333 billion on buybacks, while 386 issues have paid US$ 213 billion in the form of common stock dividends: 272 issues did both -- with 161 of those issues spending more on buybacks than dividends, and 111 spending more on dividends. When a company repurchases its own shares, the transaction is called a "buyback." Typically, buybacks are done in an open market operation, but, can also be done in a private environment from a large shareholder, or from corporate executives. In general, companies buy shares back in the open market, and the event is an immediate win-win for all. The buying adds upward pressure to the stock, and even if the stock is deteriorating, the decline should be lessened a bit by to the upward pressure. The buyback immediately reduces the share count, which, theoretically, increases each shareholder's wealth in the company. More importantly it reduces the average share count used to determine earnings per share in that quarter, therefore increasing EPS, and showing a lower multiple. This EPS push is known as Share Count Reduction (SCR). Unlike a cash dividend -- which, once paid, is gone forever -- the shares purchased by the company sit in its treasury. From a company's perspective, it owns the shares, and can reissue them at any point -- subject to certain timing limitations. Reissuing the shares, however, would dilute earnings, so the more common use for the shares is for M&A, when dilution is more acceptable to the market.
The most common use for repurchased shares is to fulfill employee options, thereby, controlling earnings dilution. Options are used to compensate and incentivize employees. The decision to protect earnings from dilution via buybacks is a legitimate management tool. SCR is more controversial, and a more costly form of buybacks. When a company buys a share in the market, say at $50, and then exchanges it for an employee option, with a strike price of $35, it costs the company a net $15. If the company wanted to reduce its share count by one share, it would have to pay the full cost of $50. For this reason, SCR is not a common practice, as companies typically don't hold shares in their treasury indefinitely. That said, the buyback bonanza, which started when buybacks went to US$ 66 billion in the fourth quarter of 2004, from US$ 46 billion in the third quarter of that year, then reached their peak of US$ 172 billion, in the second quarter of 2007, and declined to US$ 24 billion in the second quarter of 2009 was an unusual event. The period (Q4 2004 through Q3 2007) was marked by a strong bull market, as well as the actions of investors who bid up stocks from issues that did buybacks. The "reward" pushed companies to buy more stock -- which was now more expensive -- creating SCR which increased EPS, which in turn added to the upward pressure on stocks. As with all such circles, all was well, as long as all went well. The liquidity and housing bust quickly deflated the buyback bonanza. From there, companies have reentered the buyback arena, with few doing SCR, but most protecting their EPS with sufficient buybacks to prevent dilutions. Currently, through Q1 2011, share counts have been stable to slightly up, with a slight decline if the financial sector is subtracted. While buyback authorizations have increased in size and duration, the actual shares repurchased have been congruent to the issuance, with the major determinant of buybacks being the market price. The higher the price, the more options are in the money, and the more companies will need to spend to protect their EPS. Conversely, a Bear market would remove the value of many options, and reduce the cost of repurchasing what shares the companies do need.
The potential for another buyback bonanza is not unlikely. Companies have an abundance of available cash -- Q1 2011 was the tenth consecutive quarter of record cash for the S&P 500 Old Industrials -- for such operations, with cash-flow at record levels and earnings expected to post an all-time high in the third quarter. What is lacking for increased buybacks --and what I believe is holding companies back, at this point -- is investor reaction. If investors start to bid up stocks which are increasing buybacks, I believe companies will respond with higher levels of actual buybacks, creating SCR, thereby starting the upward cycle again. At this point, there are few signs that investors are reacting in that manner. Last month, two issues drew attention to themselves for their buybacks. Integrated poultry business issue, Tyson Foods (TSN), gained 4.6% as it authorized a large buyback program, after it declined 6.6% two days prior on a poor earnings report; and semiconductor equipment maker, Novellus Systems (NVLS), gained 6.6%, after announcing a debt offering, with the majority of the money being used for buybacks. These are the type of investor reactions (to buybacks) which could push corporations to increase buybacks to the share count reduction level, from the current option-covering buying level.
The underlying question, however, as to whether increased buybacks that create SCR are useful and profitable, remains open. Part of the answer comes from what companies do with the shares. If they reissue the shares through an offering, then the result is measurable - purchased at X, sold at Y. If they use the shares for M&A -- individuals typically prefer shares in a deal, since they tend to be tax deferred -- then the question is: how good is the company management at combining the two companies (products, clients, personal)? In this case, the actual cost of the shares is secondary to the eventual "gains" of the merger. The third choice is for the company to hold the shares -- while they could cancel them, few have chosen historically to do so -- in which case there is no measurable result, since what the company might have done with the cash is never known.
At this point, even as large-cap issues boast strong balance sheets, with good prospects for future earnings growth, they remain nervous about their future, and shy of commitment. If, however, investors start to bid up buyback companies, it would be my belief that companies would respond and short-term stock prices, rightfully or not, would increase.
Posted by: Howard Silverblatt on June 3, 2011
Back in 2002 S&P Indices deleted the foreign issues from the S&P 500, in effect making the S&P 500 a pure U.S. play, which fit well with S&Ps other country indices. But being an American company doesn't mean that you're not a global one. While globalization is apparent in almost all company reports, exact sales and export levels are difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intra-company sales, and hence profits, are sometimes structured to take advantage of trade, tax and regulatory polices. The resulting reported data available for shareholders is therefore significantly less than the desired level for analysis. Traditionally, creating a report with half the data is unacceptable. However, with the utmost of notice and caution, S&P has created annual reports on foreign sales, not as an exact value, but as a starting point to permit a rare glimpse into the sales composition. The 2010 report is not due out until July 2011, due to fiscal reporting, manual data checks, and an enormous amount of research.
I've done an initial overview of the data, and a first glance is available. Overall reporting has remained the same - poor at best. Lots of nice pictures, messages from senior management, and few (if any) tabular tables, which are not required under GAAP via the FASB. Investors need to be careful of what data and statistics they use. To illustrate, based on the current (incomplete data), 2010 foreign sales appear to be 24.6% of total sales; however, if I only utilize the companies which report foreign sales, the rate is 41.6%, and if I eliminate some of the stranger values, such as companies reporting foreign sales of over 100% of total sales or reporting no foreign sales even as they have major foreign facilities, the rate is calculating to 47.0%, slightly ahead of the 46.6% rate for 2009 - this adjusted rate is the one S&P uses, although in the report I show them all.
There are some initial observations from the preliminary data developing. Last year S&P 500 companies paid slightly more to the U.S. government in Federal Income taxes than they paid to foreign entities. This year, while U.S. taxes are running 2% higher, foreign income taxes are running 23% higher, resulting in S&P 500 companies paying more in income taxes to foreign countries than they paid to the U.S. government; recall the dialog over the 2010 General Electric tax rate, as well the current discussions on repatriation, and then there are this mornings job numbers. Operating pre-tax income, reported by even fewer issues, and therefore even more suspect, shows that of the reporting companies, that 52.5% of operating pre-tax income is foreign in nature (remember operating has no legal definition, and pre-tax is a cost-accountants nightmare - so another grain of salt for this number). On a sector basis Information Technology has maintained its foreign sales, with 57% booked as foreign, with Financials showing a reduction, from 41% last year to 37% for 2010 (Financial are still difficult, whether it be sales, earnings, book value, on or off balance sheet items,..). Regional data is not yet available - need to clean up the top level first, however, it again appears that the largest declared region is 'Foreign Countries' - not a lot of help. I would like to say that there are current legislative or policy proposals to require reporting, but there are not. And companies do not want to report the actual values. From an investor side, I can think of fewer things I would like more than to be able to create a matrix based on production and sales: parts made in China, assembled in Europe, and sold in the U.K., with profits translated into the U.S. dollar; fill the currency rates (and maybe a currency hedge, if available) and see the net income impact. My editorial is don't count on it. For now, I'm using 47.0% for a holding position for foreign sales, 'over half' for pre-tax operating from abroad, and expecting to see the data on taxes again used in editorials and position papers, from all sides. The tentative release date for the 2010 report is July 14, 2011 - let them eat cake.
Posted by: Howard Silverblatt on May 26, 2011
For over seventy years, the relationship between employee and employer not only encompassed the exchange of services for compensation, but extended to obligations in the form of pensions and Other Post Employment Benefits (OPEB), specifically medical care. These benefits are staples of the American dream and marketplace with their related expenditures built into the cost of products and services. As U.S. economic dominance has shifted, the ability of U.S. companies to pass along the costs -- which many foreign competitors do not have -- associated with retirement to consumers has significantly diminished to a level that endangers many companies' competitiveness. The bear markets of 2000-2002, and 2007-2008 drastically reduced private funds' pension fund reserves, while the bull markets of 2003-2007, and 2009 to the present added some of the amounts back, although the funds remain significantly underfunded. The current recovery in S&P 500 earnings -- which are matching pre-recessionary levels and are expected to post a record for 2011 -- combined with the 2010 record level of both cash-flow and free cash-flow, have resulted in a record level of available cash, which by historical comparisons drastically exceeds current needs, at a time when income is still increasing. The result is that even with massive underfunding, S&P 500 pension costs have now become a reasonably-controlled expense to corporations, with costs and outflows fitting well within income and assets levels, as well as, cash-flow. S&P Indices® however, believes that the current state of the regulated pension system includes archaic accounting regulations that distort the financial position of pension funds and their sponsors, in addition to, a pay-as-you-go OPEB system with very little funding or legal guarantees.
The new reality for companies is that pensions have become an acceptable expense, with new social limits to its growth and limited area for its expansion. Companies have successfully shifted a considerable amount of the risk associated with defined programs to set contribution programs, transferring the risk from the company to the individual. The result is a legacy program which over the next several decades will mostly work its way out of the last bastions of the U.S. labor market, and out of existence.For individuals, the personal wealth depletion -- via lower housing prices and current market evaluations, combined with prolonged high unemployment and lower pension and OPEB benefits (as longevity and the cost of staying healthy continue to escalate) -- has left potential retirees with little ability to retire. The current economic reality of strained government programs, the need for additional revenue (taxes), reduced spending (entitlement programs) and higher social costs have heralded a return to the retirement of prior generations: you work for most of your longer life and spend your remaining years in retirement in a reduced lifestyle.
The new reality replaces the American dream of a golden retirement for soon-to-be baby boomers, which based on their available resources, leaves few options for a comfortable retirement, and there are fewer years for boomers to significantly add income to their retirement resources - outside of working longer. Even with a 15% equity return and a market recovery of over 45% over the past two years, S&P 500 companies still could not put a dent into the pension underfunding situation.
Underfunding slightly improved to a US$ 245 billion shortfall, from a shortfall of US$ 261 billion in 2009; 1999 was a $280 billion surplus.
Pension funding rate increased to 83.9% from 81.7%.
Discount rate declined to 5.31% from 5.81%.
Expected return rate declined to 7.73% from 7.83%, 10th consecutive annual decrease Funds transfer equity profits to reallocate asset positions, maintaining a reduced equity allocation of 51%.
Companies have shifted a considerable amount of the risk associated with pensions to the individual.
Defined pension now appear to be a legacy program, which over the next several decades, will mostly work its way out of the last bastions of the U.S. labor market, and out of existence.
OPEB underfunding remains massive and unfunded.
Underfunding slightly reduced to US$ 210 billion from US$ 215 billion in 2009.
US$ 274.1 billion in OPEB obligations, and only US$ 64.5 billion in assets.
Pay-as-you-go OPEB remains a target for cuts, concerns and human casualties.
The responsibility of providing post-retirement medical care is now shifting away from corporate programs to individuals and to U.S. social policy.
For the full S&P 500 Pension and OPEB report, please click here pensions_and opeb_2010_data.doc
Posted by: Howard Silverblatt on May 19, 2011
For 18 consecutive quarters, from Q2,'02 through Q3,'06, S&P 500 operating earnings increased at least 10% each quarter. Initially the gains were a rebound from the earnings declines of the 2000-2002 Bear market and recession, and later on they were reflective of an accelerating market and recovering economy. Then came the housing bust, liquidity, unemployment, and for a brief period, true fear. However, with Q1,'11 earnings mostly behind us (97% reported), the S&P 500 has now posted five consecutive quarters of double-digit earnings gains. Based on current estimates through Q4,'12, the index is expected to post another seven consecutive quarters of double-digit gains, bringing the run to at least 12. In addition, Q3,'11 is expected to post an all-time high for earnings, at US$ 25.09 per S&P 500 share (or US$ 228.7 billion in aggregate), outpacing the current record of US$ 24.06 (US$ 213.7 billion in aggregate) set in Q2,'07. Therefore, at least according to the estimates, another five consecutive quarters of earnings records after Q3,'11 can be expected; nice if it happens. Now before you target your party-pooping Bear gun at me, just because I question that all quarters may not be record-setting quarters does not make me a Bear. Earnings, in my opinion, are doing quite fine. Q1,'11 posted near-record earnings (and if I 'play' with the Financials they did make a record), cash flow has set an all-time record (and the last time I checked, mark-to-anything doesn't change cash flow); cash itself appears ready to set another record level for Q1,'11, and in my S&P Indices 2010 Annual Pension and OPEB report, I'm characterizing the US$ 455 billion in underfunding as "an acceptable and manageable expense, well within income and assets levels." In addition, companies have accomplished all this in a high unemployment environment, with consumers displaying a bit less than their typical spend-thrift ways. However, double-digit record-setting earnings for (at least) another record six consecutive quarters in this environment, maybe, but. One but that I've come to watch and use in my analysis is the top-down estimates, compared to the bottom-up which is used much more than top-down. While bottom-up quantifies all the issues and permits issue comparisons, analysts do have a history of being a bit optimistic - the sun, as well as earnings and stock prices, will come out (and up), tomorrow, or at the very least the statement after that. However, top-down estimates, typically from economists and strategists (many of whom are economists by training), have a history of seeing problems in the economy (which impact earnings and prices) before individual analysts see it. To be fair (and unbiased, of course), top-down estimates are also typically slow to reflect the resolution of a problem. Given that top-down estimates now indicate that things may be a bit more volatile and less optimistic than bottom-up estimates predict, a second look at the market seems advisable, especially when so many agree that earnings will only go up (not everyone loves a crowd).
Currently, 2011 full year estimates for both bottom-up ($98.06) and top-down ($94.89) estimates predict that 2011 will be a record year (not sure if that's a buy or sell signal), beating the record set in 2006 ($87.72), with both also expecting Q3,'11 to set a quarterly record (bottom-up $25.09, top-down $24.07, with the current record of $24.06 being set in Q2,'07). However, top-down is pointing to a much slower growth rate after that, with next year's earnings growth rate estimated at 6.7%, compared to the bottom-up estimate of 14.0%. Both annual estimates set new records for 2011 ($111.79 for bottom-up and $101.21 for top-down) and show growth, but bottom-up is over 10% higher. The concern I have is that we appear to be focusing on bottom-up only, dismissing the group that has a decent (but nowhere near perfect) record of sending up an early warning signal. The fact that top-down estimates show growth is a positive sign, but the reduced rate of growth suggests that we should reexamine what we are paying for forward growth, least we get ahead of ourselves. If you are a committed long-term holder who will hold the stock regardless, then the difference is a blip on the scope. But for the rest the investing public (a not so silent majority), accepting any forward estimate, which mostly everyone says is going straight up, deserves a watchful eye, and maybe even some set limit orders.
Use link to file and data Everything is beauiyful.doc