OECD: Net Government Debt Offers A Better Picture Of Government Financial Health

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Gross Government Debt as a percentage of GDP gets attention when we evaluate government finances. However according an article by Patrick Love at the OECD, Net Government Debt is also an important factor to analyze in addition to Gross Government Debt. This is a valid argument since assets held by a government is also important as those assets can be sold off to pay off liabilities or can be a significant source of generating income. From the article:

In analysing the sustainability of government finances, the focus tends to be on gross government debt as a percentage of GDP. However, as gross debt does not take into account the asset side of government balance sheets, this measure only tells part of the story. Assets may generate income or be sold in order to redeem part of gross debt, and are therefore very relevant in assessing the financial health of government as well. A government with a high level of liabilities but also with significant amounts of assets on its balance sheet may be better off than a government with a lower level of liabilities and hardly any assets. Therefore, net government debt, which incorporates information on assets, constitutes a useful additional measure to gross government debt. It provides insight into the capabilities of governments to service debt in the longer run and thus presents a more comprehensive and nuanced picture of government financial health.

The chart below shows gross and net financial debt as a percentage of GDP in 2013 for select OECD countries:

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Gross-and-Net-government-Debt-OECD-Countries

Source: Statistical Insights: Government assets matter too, not just debt by by Patrick Love, OECD Insights

Norway, Japan, Finland, Luxembourg, Sweden, Slovenia and Greece have large amount of financial assets. So they rank lower on the basis of net vs. gross government debt. United States, Hungary, Italy, Poland, Belgium and the Slovak Republic have low financial assets on their balance sheet. Hence the difference between their net and gross government debts is not substantial.

The chart also shows the Scandinavian countries are better than other European countries based on net government debt.

The Top 10 S&P 500 Companies By Sales, Net Income and Market Capitalization

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Apple Inc. (AAPL) seem to be losing its shine. The stock has been in a flat to downward trend for many months now. In 5 years, Apple stock has more than doubled. However in one year, it is down about 15% excluding dividends and year-to-date it is basically flat.

Despite the lackluster performance, Apple still commands a market capitalization of over $585 billion, making it the most valued company in the S&P 500. Apple is also the most valued firm in the world. Apart from Apple, what are the top 10 firms in the S&P 500?

The following charts shows the top 10 firms in the S&P 500. Please note the data shown in the charts are from early Feb, 2016.

1.The Top 10 S&P500 Firms by Net Income:

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Top 10 SP500 Firms by Net Income

2.The Top 10 S&P 500 Firms by Sales:

Top 10 SP500 Firms by Net Sales

3.The Top 10 S&P 500 Firms by Market Cap:

Top 10 SP500 Firms by Market Value

Oil giant Exxon Mobil Corporation (XOM) used to be on top of the largest market capitalization company rankings. But due to the collapse in oil prices and investors’ fascination with technology firms such as Apple, Alphabet, etc. today Exxon Mobil has a market cap of just $348 billion.

Source: Alphabet vs. Apple: Which is Bigger? by John Butters, Factset

Disclosure: No Positions

Knowledge is Power: Buyback Mirage, Damagers of Capitalism, Cartels Edition

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Thought of the day: By how many billions of dollars retail shareholders will be wealthy if legalized looting by fat cats is outlawed?

Andre-1

Photo Courtesy of: Andrej Ciesielski

For more awesome photos of Andrej visit his site.

Dividend Growing Stocks Outperform Dividend Payers

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Companies that grow dividends year-after-year tend to outperform based on total returns those that just pay dividends. One of the reason for this outperformance is due to the effect of compounding. When additional shares are purchased with dividends reinvested every year, over many years the returns are amplified.

The following chart illustrates the above theory:

Click to enlarge

Dividend Growers Outperform-NEW

Source: How to pick dividend stocks, Fidelity Investments

So instead of focusing on stocks with high dividend yields, investors must pick dividend growers for a long-term portfolio.

The S&P 500 Dividend Aristocrats Index measures the performance of S&P 500 companies that have increased dividends every year for the past 25 consecutive years. The top constituents of this aristocrats index are listed below with their current yields:

1.Company: Grainger W.W. Inc (GWW)
Current Dividend Yield: 2.04%
Sector: Industrials

2.Company: Cincinnati Financial Corp (CINF)
Current Dividend Yield: 2.95%
Sector: Insurance

3.Company: Illinois Tool Works Inc (ITW)
Current Dividend Yield: 2.15%
Sector: Industrials

4.Company: McCormick & Co (MKC)
Current Dividend Yield: 1.79%
Sector: Consumer Staples

5.Company: Dover Corp (DOV)
Current Dividend Yield: 2.59%
Sector: Industrials

6.Company:  Leggett & Platt (LEG)
Current Dividend Yield: 2.72%
Sector: Consumer Discretionary

7.Company:  Emerson Electric Co (EMR)
Current Dividend Yield: 3.48%
Sector: Industrials

8.Company: Genuine Parts Co (GPC)
Current Dividend Yield: 2.69%
Sector: Consumer Discretionary

9.Company: Target Corp (TGT)
Current Dividend Yield: 2.75%
Sector: Retail

10.Company: 3M Co (MMM)
Current Dividend Yield: 2.70%
Sector: Industrials

Note: Dividend yields noted above are as of Mar 24, 2016. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure; No Positions

Why Portfolio Diversification Is Important

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Diversification in a portfolio is an important strategy for long-term success. A well-built portfolio should not be concentrated heavily on a single stock or asset class or sector. Rather a portfolio should hold various assets such as growth stocks, dividend stocks, domestic stocks, foreign stocks, commodities, ETFs, closed-end funds, bonds, etc.

Holding a diversified group of assets cushions a portfolio during rough market conditions and also provides stable and consistent returns when markets overshoot.

The following table shows the benefits of a diversified portfolio:

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Diversity_Quilt_new_02b

Source: Why Global Diversification Matters by Anthony Davidow, Charles Schwab

Why hold a diversified portfolio?

  • More than half of the revenue from S&P 500 firms come from outside the U.S.
  • The market capitalization of stocks trading overseas is higher than the market cap of US stocks.
  • Thousands of stocks trade on foreign markets offering a diverse pool of stocks to choose from.