Aerospace and Defense Stocks Have Outperformed The S&P 500 Based On Total Returns

Posted by on

The Aerospace and Defense sector is one of the hottest sectors in the US equity market. Stocks in this sector have rewarded investors with stable and consistent growth in the past few years. A basket of stocks in the S&P index for this sector has outperformed the S&P in terms of total returns (capital returns+dividend returns) from 2009 thru May 2018 as shown in the chart below:

Click to enlarge

Source: S&P Indices

In the past 10 years the annualized returns for the index is an excellent 13.85%. The 5-year annualized return is even better at 21%.

It is not possible to directly invest in an index. So how can an investor gain exposure to the Aerospace and Defense sector?

A simple and easy way to own stocks in the sector is via an ETF such as the SPDR® S&P® Aerospace & Defense ETF(XAR). This ETF aims to track the performance of the underlying S&P sector index. With total holdings of 35 companies the fund has a market cap of over $24 billion and an expense ratio of 0.35%.

Why are defense stocks an attractive investment for the long-term?

Some of the reasons that make the defense sector attractive for long-term investment are listed below:

  • As the world’s only super-power the US needs plenty of weapons and related resources to maintain the edge over other countries including the perennial enemy Russia.
  • Similar to consumer staples sector in the civilian world, defense and aerospace is a staple sector for the state. Billions of dollars allocated each year in the budget have to find a place somewhere and defense manufacturers are the top beneficiaries of the allocations.
  • Due to ongoing military and war operations and to defend against future threats, defense companies always have a solid backlog of projects to execute.
  • Unlike other countries, profit margins in the sector are extremely high due to the technology involved in the production of various defense systems.
  • The US is one of the top global exporter of weapons. Increasing demand for sophisticated weapon systems from allies tend to keep American arms makers in growth mode.

Some of the companies operating in the sector include:

  • Lockheed Martin Corporation (LMT)
  • Boeing Co (BA)
  • Raytheon Company (RTN)
  • Northrop Grumman Corporation (NOC)
  • General Dynamics Corporation (GD)
  • United Technologies Corporation (UTX)
  • Level 3 Communications, Inc (LVLT)

Download Docs:

Disclosure: No Positions

Comparing Valuations of Eurozone and US Stocks

Posted by on

Eurozone stocks are not expensive relative to their US peers based on Cyclically Adjusted Price to Earnings ratio according to an article by John Oliver at AMP Capital, Australia. He discussed four reasons on why Eurozone stocks are attractive at current levels. From the article:

Eurozone shares remain attractive

While question marks remain over Italy and this will weigh on the Euro, there is good reason to be optimistic regarding Eurozone shares. First, Eurozone shares are not expensive. They are trading on a price to forward earnings multiple of 14 times which is around its long-term average. And their cyclically adjusted price to earnings ratio which compares share prices to a ten-year moving average of earnings (often called a Shiller PE) is around 17 times compared to 32 times in the US. This is largely because Eurozone shares underperformed US shares in the post GFC period. Adjusting for relatively lower bond yields in Europe makes Eurozone shares even more attractive.

Source: Global Financial Data, AMP Capital

Second, the European Central Bank is still pumping cash into the economy and is a long way from rate hikes. Italian risk may keep it easier for longer. This contrasts to the Fed which is engaging in quantitative tightening and raising interest rates.

Third, the Euro is now falling. A rise in the Euro through last year – as Eurozone growth surprise on the upside relative to the US and political risk declined in the Eurozone relative to the US – harmed Eurozone shares. This is now reversing as US growth has started to accelerate relative to the Eurozone.

Finally, while Eurozone growth has slowed a bit it’s still good and thanks to ongoing monetary stimulus and a now falling Euro is likely to remain so. In turn this is good for profit growth.

Source: Italy is a worry – but 3 reasons not to be concerned about an Itexit, AMP Capital

Below are three points to remember before jumping into Eurozone equities:

  • US stocks have always commanded a premium relative to European stocks as American firms’ growth potential is usually higher.
  • Though Eurozone stocks are lagging in recent years they have beaten US stocks in the past in some years.
  • Eurozone stocks tend to have higher dividend yields than their American peers but for US investors dividend withholding taxes can take a substantial bite out of the yields.

Share Classes, Currencies and Exchanges of China Stock Market 2018: Chart

Posted by on

The equity market of China is complex to say the least. Due to capital flow restrictions, there are many different share classes and currencies that they can be traded with. There are seven different types of share classes. A-Shares are allowed for trading only for domestic investors and foreigners are not allowed to own those.

The table below shows the various share classes, currencies and the exchanges they are listed:

Click to enlarge

Source: Chinese Equities: Market Access, Equity Benchmarks & A-Shares, WisdomTree

The Top 10 Cheapest Airlines In The World 2018: Chart

Posted by on

The world’s cheapest airlines were published earlier this year by the Australian travel site Rome2Rio. According to their study, based on average price per kms in US dollars, the cheapest airlines are in Asia. The ranking was topped by Air Asia, Air India Express and Indonesia Air Asia.

The World’s Cheapest and Most Expensive Airlines are shown in the chart below:

Click to enlarge

Source: Statista

Sadly none of the US airlines are the cheapest in the world.

For the full details including cheapest airlines in the domestic category please visit 2018 Global Flight Price Ranking: What’s the world’s cheapest airline?.

Dividend Returns vs. Capital Returns of Australian Stocks From 1998 To 2017

Posted by on

The S&P/ASX 200 is the benchmark index of the Australian equity market. However a better benchmark for the overall Australian market is the S&P/ASX 300 index. It contains the S&P/ASX 200 components and 100 smaller companies. This index accounts for 89% of the Australian equity market as of March, 2018.

Capital returns of a stock changes over time and are volatile. However the dividend returns component of total returns of a stock remains stable and provide dependable returns year over year. Capital returns vary based on investor sentiment, overall market conditions, P/E expansions, etc. However dividend payouts are set by a company at a certain level and dividends paid out change based on earnings.

Over the long-term dividends account for a decent portion of overall returns and are stable. Unlike capital return, dividen returns are always positive. The Australian example shows below that dividend returns were positive even during the Global Financial Crisis(GFC) of 2008-09.

The composition of Australian Total Returns fro 1998 to 2017:

Click to enlarge

Source: Lower your volatility with dividends, Australian Dividend Investor

The key takeaway for investors is that total return is important and investors should not just consider stock price appreciation alone when making an equity investment.

Related ETF:

  • iShares MSCI Australia Index Fund (EWA)

You can also check out The Complete List of Australian Stocks Trading on the US markets for potential investment opportunities.

Disclosure: No Positions

Related post: