Category Archives: stock market

Dividends by the Numbers in July 2021

If dividend paying stocks are any indication, the U.S. stock market continued to experience respectable growth in July 2021. The following chart shows the market's dividend increases and decreases from January 2004 through July 2021:

Number of Public U.S. Firms Increasing or Decreasing their Dividends Each Month, January 2004 through July 2021

The dividend metadata for July 2021 is where the market's continued strength really shows its hand:

  • Standard and Poor counted 5,085 U.S. firms declaring dividends in July 2021, an increase of 2,362 over the total recorded in June 2021 and the third highest monthly total in a data series that extends back to January 2004. That figure is also an increase of 1,862 over the 3,223 recorded in July 2020.
  • Some 54 U.S. firms announced they would pay a special (or extra) dividend to their shareholders in July 2021, a decline of 5 from the 59 recorded in June 2021, but an increase of 29 over the 25 recorded in July 2020.
  • 156 U.S. firms announced dividend rises in July 2021, an increase of 75 over the number recorded in June 2021, and an increase of 86 over the 70 recorded in July 2020.
  • 12 publicly traded companies cut their dividends in July 2021, an increase of 6 over the number recorded in June 2021, but a decrease of 15 from the 27 recorded in July 2020.
  • Zero U.S. firms omitted paying their dividends in July 2021, a decline of one from June 2021's total of one. Year over year, that figure is also a decrease of 11 from the number recorded in July 2020.

Since our June 2020 report, the National Bureau of Economic Research has declared the Coronavirus Recession that began after the U.S. economy peaked in February 2020 hit bottom and ended in April 2020.

That determination provides an opportunity to see how simply counting the number of U.S. firms either cutting or suspending their dividend payments to their shareholding owners works as a near real-time economic indicator. The next chart shows the combined total of dividend cuts and omissions in each month from January 2004 through July 2021.

Number of Public U.S. Firms Cutting or Omitting Their Dividends Each Month, January 2004 through July 2021

What we find is that aside from tax law change-driven anomalies that affects the timing of when shareholders might collect dividends, this combined figure is a good indicator to identify periods when recessionary conditions are present in the U.S. economy. As with the so-called "Great Recession" of 2008, the count of dividend cuts and omissions rising above a key threshold works well in picking up when recessionary conditions are negatively impacting the economy.

However, this indicator slightly lags the official end of recessions by up to several months in the time it takes to drop below the key thresholds, which is consistent with dividend cuts and omissions being a somewhat lagging indicator.

That's because there are two types of dividend payers. The first type includes firms who pay variable dividends, often as a percentage of their earnings, which are quick to respond to both deteriorating and improving economic conditions. Firms in this category account for the real time indication of the onset of recessionary conditions. We consider firms in this category to be proverbial canaries in the coal mine with respect to detecting the onset of recessionary conditions in the economy.

The second type includes firms who set their dividend payments independently of their earnings. Because these firms follow this practice, which requires the intervention of their boards of directors, they tend to be slow to respond to the deterioration in their business outlooks when recessionary conditions arrive. Consequently, their actions to either cut or suspend their dividends as their changing business situation dictates is delayed. That lagging effect also applies after recessionary conditions come to an end, with elevated numbers of firms still acting to cut their dividends for up to several months after economic conditions have begun improving.

Together, the two types of dividend paying firms makes the count of dividend cuts and omissions a solid near real-time indicator of the relative health of the U.S. economy, with the advantage of not requiring the additional months it often takes for the NBER to get around to making its official determinations.

The indicator is also good at picking up what might be called microrecessions, which we define as the presence of recessionary conditions that lack the scale, scope or severity to constitute a full-blown national recession as might be determined by the NBER. 2016's oil industry recession falls into that latter category, which could be easily seen in the number of firms within that industry cutting their dividends that year.

All in all, the monthly count of dividend cuts and omissions in the U.S. stock market may be the simplest economic indicator available to investors to quickly assess the relative health of the U.S. economy.

Reference

Standard and Poor. S&P Market Attributes Web File. [Excel Spreadsheet]. Accessed 2 August 2021.

3/2/21: Monetary Easing and Stock Market Valuation

There has been quite a puzzling development in recent years in the monetary policy universe. A decade plus of ultra low interest rates has been associated with rising, not falling, risk premium in investment markets. In other words, a dramatically lower cost of new and carried debt induced by lower interest rates - a driver for lower risk, is being offset by something else. What?

Laine, Olli-Matti paper "Monetary Policy and Stock Market Valuation" (September 18, 2020, Bank of Finland Research Discussion Paper No. 16/2020: https://ssrn.com/abstract=3764721) tries to explain. 

To start with, some theory - especially for my students in the Investment and Financial Systems courses. Per author, "the value of a stock is the present value of its expected future dividends... Hence, the changes in stock prices must be explained by 

  • either changes in dividend expectations or 
  • changes in discount rates. 

The discount rate, or (approximately) expected rate of return, can be thought as a sum of a risk-free rate and a risk premium. Theoretically, monetary policy should have an effect on stock prices through the risk-free rates. In addition, monetary policy should affect dividend expectations, for example, through the output or debt interest payments of firms. The effect on the risk premium (not to mention the term structure of risk premia), however, is less clear."

Looking at Eurostoxx50 index components, Laine shows "...that the average expected premium has increased considerably since the global financial crisis. This change is explained by the change in long-horizon expected premia. ... monetary policy easing has had a positive impact on the expected average premium."

Specifically (emphasis added): "a negative shock to the shadow rate is estimated to increase average expected premium persistently. Instead, the results show that monetary policy easing temporarily decreases short-term expected [risk] premia. This means that expansionary monetary policy steepens the slope of the term structure of risk premia."

This is not exactly new, as Bernanke and Kuttner (2005) observed that "expansionary monetary policy generates an immediate rise in equity prices followed by a period of lower-than-normal excess returns. ...However, Bernanke and Kuttner (2005) do not study the effect on the long-run excess returns. My results show that effect on long-horizon expected premia has a different sign. This effect on long-horizon premia seems to more than offset the effect on short-horizon premia."

Interestingly, "Contractionary monetary policy increases the short-term premia temporarily, but decreases long-horizon premia persistently. The effect on average expected premium is negative. Thus, monetary policy tightening actually makes stocks expensive relative to the expected stream of dividends. The results provide no evidence that expansionary monetary policy causes stock market bubbles..."

Here is (annotated by me) a chart showing evolution of implied and actual risk premia:


From theory perspective, therefore, monetary policy "can affect equity prices through the dividend expectations, expected risk-free rates or expected premia":
  • "The effect of expansionary monetary policy on the dividend expectations is probably positive, because expansionary monetary policy can be expected to increase output and firms’ earnings.
  • "Expansionary policy probably lowers the risk-free rates, but it is also possible that the effect is totally different. Central bank’s rate cut can increase risk-free rates, if people think that the rate cut eventually increases inflation. 
  • "As for the expected premium, the sign of the effect is unclear. ... Gust and López-Salido (2014) show theoretically that expansionary monetary policy lowers the premium ... where asset and goods markets are segmented. When it comes to quantitative easing, ... investors who have sold their assets to the central bank rebalance their portfolios into riskier assets, which lowers their expected returns. ... Theoretically, it is also possible to argue that monetary policy easing actually increases the expected premium. If one assumes that there exists mispricing like Galí (2014) and Galí and Gambetti (2015), then the sign of the response is ambiguous. ... This means that monetary policy easing increases the expected premium implied by dividend discount model (see Galí and Gambetti, 2015, p. 250-252)."

So, onto the empirical results by Laine: 

  1. "Interest rates have declined considerably since the global financial crisis, yet the expected average stock market return has remained quite stable at around 9 percent. This implies that expected average stock market premium has increased remarkably. This rise is mainly explained by the premia over a discounting horizon of four years.
  2. "These results may seem unintuitive as the prices of stocks have risen, and ratios like price-to-earnings have been historically high. However, high price-to-earnings ratios do not necessarily mean that stocks are expensive, because the value of a stock is the present value of its expected future dividends.
  3. "When it comes to the role of monetary policy, the results show that monetary policy easing decreases short-horizon required premia, but increases longer-horizon premia
  4. "The effect on expected average premium is positive, i.e. expansionary monetary policy lowers the prices of stocks in relation to the expected dividend stream."


Is GE Overvalued?

Our experiment using the relationship between a company's market cap and its forward year aggregate dividends is overdue for an update. When we last left off, we had narrowed in on where we expected the market cap for General Electric (NYSE: GE) would range based only on the historic relationship between GE's market cap and its aggregate dividends established in the period from 12 June 2009 through 8 December 2017. The idea being to project where GE's market cap might go if it were to slash its dividend, which it ultimately did. The following chart shows what that looks like, but updated with data through the end of 2020, with a bonus data point for where GE's market cap stood as of the end of trading on Monday, 26 January 2021.

GE Market Cap vs Forward Year Aggregate Dividends at Dividend Declaration Dates, 12 June 2009 - 11 December 2020

As modeled relationships go, that's pretty clunky. And since we have collected a lot more data points in the period since GE's 2018 dividend cut, we updated the model to include all the data from 12 June 2009 through 11 December 2020. The next chart shows what the updated model now looks like:

GE Market Cap vs Forward Year Aggregate Dividends at Dividend Declaration Dates, 12 June 2009 - 11 December 2020

We're also using some basic statistics to show the upper and lower level of what the variation in the historic data indicates is the 'typical' range in which the observations will fall. We've set those levels to be two standard deviations away from the main trend line, within which we would expect the data to fall 95% of the time, assuming the variation can be described by a normal distribution.

As of 27 January 2021, GE's market cap was just above where it was when it last declared dividends on 11 December 2020, which falls within the upper end of the expected range. Should GE's stock price rise above the indicated upper level, unless it is accompanied by the serious prospect of a dividend increase, it could indicate that the company's stock has become relatively overvalued, which would be a strong signal to sell.

So how do you read GE's announcement of its improving cash flow from 26 January 2021? Since a firm's ability to pay dividends depends both on its earnings and cash flow, the rise of GE's cash flow during 2020-Q4 marks a potential turnaround for the long-troubled company. If sustained, GE will be able to afford a dividend rise.

Is that what's going on here? Because if it isn't, the argument that shares of GE are becoming overvalued and its nearing time to sell becomes stronger if its shares are really trading within the vertical range they have since 2018.

Considering this information, if you were an investor holding shares of GE, how would you make your investment decisions?

150 Years of the S&P 500

Sophie Backs: Wall Street (via Unsplash)

In 1956, Standard & Poor created a new stock market index. Composed of the top 500 (or so) individual company stocks in the U.S. stock market and weighted according to their market capitalization within the index, the index itself has become the standard gauge of the larger U.S. stock market. 2021 marks the 65th year the S&P 500 daily stock market index has been in existence.

But the index has a deeper history. In 1928, Standard Statistics Bureau, one of the pre-merger companies that later became today's Standard & Poor, created a daily composite stock market index made up of 90 individual stocks of U.S. corporations, with historical data going back to 1925 to provide some built-in history for the new index. The combination of 50 industrials, 20 railroads, and 20 utility companies provided one of the first broad measures of the U.S. stock market, expanding beyond the 30 industrial firms covered by the Dow Jones Industrial Average. Around the same time, Standard also created a weekly index to track the collective stock market performance of 500 U.S. companies, which is eventually what took over in 1956 as a daily index.

Of course, these companies didn't suddenly materialize into existence in 1928. Many of these firms have stock price data that extends back much earlier. In 1938, the Cowles Commission for Research in Economics worked out their equivalent market index performance going back to 1871, which means we really have 150 years worth of data for the U.S. stock market. Before 1871, the stock price data for publicly traded companies becomes too sparse to track, which is why the historical data only goes back this far.

We thought we'd mark the sesquicentennial for U.S. stock market data with the following charts, showing the average monthly index value, the trailing year dividends per share and trailing year earnings per share for the S&P 500 and its predecessor indices from January 1871 through December 2020. Please click the images to access full size versions of the charts.

S&P 500 Average Monthly Index Value, January 1871 - December 2020 (Linear Scale)
S&P 500 Trailing Year Dividends per Share, January 1871 - December 2020 (Linear Scale)
S&P 500 Trailing Year Earnings per Share, January 1871 - December 2020 (Linear Scale)

Thanks to exponential growth, the data on these charts look something like hockey sticks, so we generated the following charts to show the same data on a logarithmic scale.

S&P 500 Average Monthly Index Value, January 1871 - December 2020 (Logarithmic Scale)
S&P 500 Trailing Year Dividends per Share, January 1871 - December 2020 (Linear Scale)
S&P 500 Trailing Year Earnings per Share, January 1871 - December 2020 (Linear Scale)

If you'd like to get the data for any point of time shown on these charts, we have dedicated tools that can accommodate you. The links below will take you to the historical data we make freely available.

The S&P 500 at Your Fingertips

Our signature tool providing access to the whole history of the S&P 500's average monthly prices, trailing year dividends and earnings per share! As a bonus, it also calculates the rate of return that would have been realized between any two calendar months, with and without the reinvestment of dividends, and also with and without the effect of inflation.

Investing Through Time

If you invested $1,000 in the S&P 500 in June 2009, roughly how much would it have been worth ten years later? What if you invested $100 in the S&P 500 in each month from February 2006 through December 2020 - how much would that portfolio be worth today? Our Investing Through Time tool can help you answer questions like these!

Cashing Out of the S&P 500

It's one thing to build up a nest egg, it's another thing to make it last for as long as you might need it! This tool puts the history of the S&P 500 to use to see how your investment withdrawal strategy would have fared through some of the best and worst eras for the U.S. stock market.

Quarterly Data for the S&P 500, Since 1871

This is the only tool you'll find anywhere for indicating the quarterly earnings and dividends per share that would have actually been reported for the S&P 500 (and its predecessor indices and components), going all the way back to the first quarter of 1871....

Image credit: Photo by Sophie Backes on Unsplash

Dividends by the Numbers for December 2020 and 2020-Q4

If you looked just at dividend rises and cuts, December 2020 would appear to be a pretty healthy month for the U.S. stock market. But one key measure of stock market health fell far short of every other December on record during the previous 16 years: extra, or dividends.

These are the bonus dividend payments that companies sometimes make to their shareholding owners, often at the end of a calendar year when they've had exceptionally strong earnings. 2020 was not that kind of year for the bulk of publicly traded firms in the U.S.

We've tallied up December 2020's number of firms announcing dividends, including the number of increases, reductions and omissions (or suspensions), along with the month's extra dividend total for extra dividend payments, where only this figure stands apart from all the other data that suggests strong year-ending results for the stock market.

  • 3,557 U.S. firms declared dividends in December 2020, an increase of 432 over the 3,125 recorded in November 2020. That figure is also 1,549 lower than what was recorded a year ago in December 2019.
  • Only 13 U.S. firms announced they would pay a special (or extra) dividend to their shareholders in December 2020, a decrease of 65 from the number recorded in November 2020 and 122 lower than what was recorded a year ago in December 2019. This figure is extremely low compared to all other Decembers on record from 2004 through 2019, where the second smallest total is 2019's 135. By contrast, the best December on record for extra dividends was 2012, when 483 firms paid a special dividend as part of the Great Dividend Raid event.
  • 147 U.S. firms announced they would boost cash dividend payments to shareholders in December 2020, an increase of 22 over the number recorded in November 2020, and an increase of 21 over the total recorded in December 2019.
  • A total of 24 publicly traded companies cut their dividends in December 2020, an increase of 9 over the number recorded in November 2020 and also a decrease of 2 from the 26 recorded in December 2019.
  • Three U.S. firms omitted paying their dividends in December 2020, an increase of 2 over the number recorded in November 2020. That figure is also an increase of 2 over the total recorded in December 2019.

Focusing on ordinary dividends, the following chart shows the number of increases and decreases announced each month from January 2004 through December 2020.

Monthly Number of Publicly Traded U.S. Firms Either Increasing or Decreasing Their Dividends, January 2004 - December 2020

December marked the end of 2020-Q4, so let's tally up the totals for the U.S. stock market's dividend metadata, covering increases, decreases, and extra dividends:

  • 457 firms announced they would increase their dividends during 2020-Q4, up 245 from 2020-Q3, but only up 29 from 2019-Q4.
  • Some 52 companies announced they would reduce their dividends, down 10 from 2020-Q3's total of 62, and down 15 from 2019-Q4's total of 67.
  • There were 124 extra dividends announced during 2020-Q4. That total is double the 62 announced in the preceding quarter, but is down by more than half of the 253 announced a year earlier in the fourth quarter of 2019.

Since we're at the end of the calendar year, let's also run through the annual numbers:

  • 2020 saw the declaration of 1,483 dividend rises, which is down 325 from 2019's 1,808.
  • There were 526 dividend cuts announced in 2020, up 217 from the 309 recorded in 2019. This number is also just one shy of the record 527 dividend cuts recorded in the recession year of 2009.
  • 334 U.S. firms announced they would pay extra, or special dividends to their shareholders in 2020. This figure is down 213 from 2019's total of 547 extra dividends.

We make a point of focusing on dividend cuts, because this data tells us which industries are experiencing the greatest level of distress in the U.S. economy. We sample this data from Seeking Alpha's dividend news and the Wall Street Journal's dividend declarations database.

There were just nine firms in our sample during December 2020. Three hail from the oil and gas industry, three are Real Estate Investment Trusts (REITs), and there are one each from the banking, consumer goods, and chemical industries. Here is the short list for the month, where we're not distinguishing between firms that pay variable dividends and firms that set their dividends independently of their earnings and cash flow:

Previously on Political Calculations

We've been listing the firms that have announced dividend cuts or suspensions from our near real-time sampling of these declarations in our previous editions. Please follow these links to see all the dividend cuts and suspensions we've tracked during the coronavirus recession.

References

Standard and Poor. S&P Market Attributes Web File. [Excel Spreadsheet]. 30 November 2020.

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database].

Wall Street Journal. Dividend Declarations. [Online Database when searched on the Internet Archive].