US Consumers: In Debt We Trust

The Global Financial Crisis (GFC) occurred just a few years ago. One of the reasons for that crisis was American consumers piling up excessive debt. For a short time after the crisis, the personal savings ratio started rising. However Americans are back to old habits again as they gorge on debt like there is no tomorrow. As the US is a consumption-based economy when consumers tighten their wallets the economy suffers. Much of the current rising consumption is fueled by debt as opposed to funded with income. With lending standards loosened again US consumers are willing taking on more debt even while their wages have stagnated for years. For most workers, real wages have been stagnant for years especially since the dot-com crash of 2000. But functional illiteracy with financial matters and high-octane gimmicks by marketers have made workers accumulate additional debt considering stagnant wages, pathetic quality of jobs being created, destroyed retirement savings, soaring taxes, etc.

From an article in the journal article discussing rising debt levels:

If current trends persist through the end of the year, U.S. households will owe as much as they did at the peak of borrowing in 2008.

Global debt has already topped 2008 levels and keeps rising. That’s pretty astonishing so soon after debt-driven crises in the U.S. and Europe and endless worries about too much borrowing in Japan, China and emerging markets.

Total Debt Balance

But for all the hand-wringing, a near-term debt crisis is unlikely. Lower interest rates mean debt payments are far lower than they were before the crisis. In the U.S., household debt compared with the overall economy is way down. And overseas, loans can easily be rolled over.

Yet even with low rates, the cycle of borrowing and rolling over loans has a cost. People, governments and businesses spend now instead of later, likely reducing future growth. The cycle also allows borrowing to go on for years, which can be good—allowing reform to take hold—or not, allowing bad policies go on almost indefinitely.

U.S. households owed $12.25 trillion at the end of the first quarter, up 1.1% from the end of 2015, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, released Tuesday. If the first quarter repeats itself through the end of the year, U.S. household debt will approach its peak of $12.68 trillion, which it hit in the third quarter of 2008.

Source: Trillions in Debt—but for Now, No Reason to Worry, WSJ, May 25, 2016

One of the major source of the debt binge by Americans is the small plastic card called as the credit card  or more correctly the debt card. Here is a chart shows the growing debt mountain in this category of debt:

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Credit Card Debt

Source: Balance Due: Credit-Card Debt Nears $1 Trillion as Banks Push Plastic, WSJ, May 20, 2016

According to the above article, the total outstanding balances in credit card debt is poised to hit $1.0 Trillion this year. That would be close enough to the $1.02 Trillion reached before the GFC in 2008.

The soaring debt levels at the consumer level is not good for the economy as a while. Since wages are not rising and expenses are increasing exponentially for middle class and poor Americans, another crisis can be expect to occur in the future unless changes happen that can support the current high standard of living in this country.

The World’s 20 Biggest Dividend Payers

The Henderson Global Dividend Index from Henderson Global Investors is a long-term study of global dividend trends. The report contains fascinating facts on dividends paid out by firms based on various regions and countries. The latest edition released last month lists the top dividend payers in the world.

The World’s 20 Biggest Dividend Payers are listed in the table below:

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World Top Dividend Payers-2016-Q1

Source: The Henderson Global Dividend Index, Edition 10, May 2016, Henderson Global Investors

A few observations:

  • Almost all of the dividend payers listed above are American or European firms.
  • Energy, pharma, banking and consumer staples dominate the ranking.
  • Between them these 20 firms paid out an astonishing $39.13 billion in dividends in the first quarter.
  • Many of these firms appear in this list year after year. So they can trusted for consistent income.

Investors looking for dividend stocks can use this list to research further and add select stocks in a phased manner. These 20 stocks are listed below with their tickers on the US market and the current dividend yield:

1.Company: Novartis AG (NVS)
Current Dividend Yield: 3.36%
Sector: Pharmaceuticals
Country: Switzerland

2.Company: Royal Dutch Shell PLC (RDS.A)
Current Dividend Yield: 7.60%
Sector: Oil, Gas & Consumable Fuels
Country: UK

3.Company: BP PLC (BP)
Current Dividend Yield: 7.53%
Sector: Oil, Gas & Consumable Fuels
Country: UK

4.Company: AT&T Inc (T)
Current Dividend Yield: 4.90%
Sector: Telecom
Country: USA

5.Company: AstraZeneca PLC (AZN)
Current Dividend Yield: 4.71%
Sector: Pharmaceuticals
Country: UK

6.Company: Vodafone Group PLC (VOD)
Current Dividend Yield: 6.17%
Sector: Wireless Telecom
Country: UK

7.Company: Telstra Corp Ltd (TLSYY)
Current Dividend Yield: 5.50%
Sector:Telecom
Country:  Australia

8.Company: Siemens AG (SIEGY)
Current Dividend Yield: 3.46%
Sector:Industrial Conglomerates
Country: Germany

9.Company: Bhp Billiton Limited (BHP)
Current Dividend Yield: 5.61%
Sector: Metals & Mining
Country: Australia

10.Company: Exxon Mobil Corp (XOM)
Current Dividend Yield: 3.39%
Sector: Oil, Gas & Consumable Fuels
Country: USA

11.Company: Pfizer Inc (PFE)
Current Dividend Yield: 3.46%
Sector: Pharmaceuticals
Country: USA

12.Company: HSBC Holdings PLC  (HSBC)
Current Dividend Yield: 7.84%
Sector: Banking
Country: UK

13.Company: PepsiCo (PEP)
Current Dividend Yield: 2.94%
Sector: Beverages
Country: USA

14.Company: Banco Santander SA (SAN)
Current Dividend Yield: 4.81%
Sector: Banking
Country: Spain

15.Company: Chevron Corp (CVX)
Current Dividend Yield: 4.25%
Sector: Oil, Gas & Consumable Fuels
Country: USA

16.Company: Johnson & Johnson (JNJ)
Current Dividend Yield: 2.79%
Sector: Pharmaceuticals
Country: USA

17.Company: GlaxoSmithKline (GSK)
Current Dividend Yield: 6.45%
Sector: Pharmaceuticals
Country: UK

18.Company:Procter & Gamble Co (PG)
Current Dividend Yield: 3.25%
Sector: Household Products
Country: USA

19.Company: Microsoft (MSFT)
Current Dividend Yield: 2.78%
Sector: Software
Country: USA

20.Company: Philip Morris International Inc (PM)
Current Dividend Yield: 4.03%
Sector: Tobacco
Country: USA

Note: Dividend yields noted above are as of June 3, 2016. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long SAN

The FP500: Canada’s Most Profitable Companies

FP magazine recently published its ranking of top 500 Canadian companies based on revenue. The #1 rank went to George Weston Ltd. with 2015 revenues of over $46 billion followed by Royal Bank of Canada(RY) and auto parts maker Magna International Inc (MGA).

The following graphic shows the top five most profitable companies and other lists:

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Top profotable firms-canada

The graphic below shows the most indebted firms:

Canada Most Indebted frims

 

Source: THE FP500 – The premier ranking of Corporate Canada, Financial Post

Four of the top five profit making firms are banking institutions.

The complete list of the FP 500 firms and other fascinating details can be found here.

Disclosure: Long RY, MGA

On The Difference In Returns Between S&P 500 Price and Total Return Index

The S&P 500 Index that is benchmark of US equities is a price index – meaning dividends are not included in the return calculations. Since this index is the most popular and reported by the media all the time, investors may use this index to compare their portfolio performance. This is not the correct way to benchmark one’s portfolio return against an index. Assuming an investor reinvests dividends the better way to measure the performance of US stocks is to use the S&P 500 Total Return Index which includes dividends reinvested.

Of the 500 companies in the index, 425 paid dividends at the end of 2015, So when these dividends are reinvested the return will be higher over the long-term due to the effect of compounding. The difference between the S&P 500 Price Index and Total Return can be substantial over many years such as 5 years as shown in the chart below:

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SP 500 Price vs Total Returns

 

In the past 5 years, the price index returned 65% compared to the total return index return of about 84%. That is a gap of 19%.

Over 10 years the difference in returns is even higher.

SP 500 Price vs Total Returns-10 years

Source: Yahoo Finance

Here is another chart showing the returns from 1988 thru mid 2013:

SP 500 Price vs Total Returns Long-Term

Source: Inside the S&P 500: Dividends Reinvested, S&P Indexology Blog

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Unfortunately there is no ETF that tracks the S&P 500 Total Return Index.

Disclosure: No Positions

Debt to GDP Ratio of Select Countries

Debt levels have increased globally since the financial crisis of 2008-09. Both government and private debt have soared after the crisis. The following chart shows the Debt to GDP Ratio of select countries:

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Debt to GDP in select Countries

Source:  The Absolute Return Letter June 2016, Absolute Return Partners

Japan has the highest debt with the debt-to-GDP ratio well above the 400% mark. The US figure is also high at over 300%.