Credit Suisse: US Firms May Not Be Able To Increase Dividends Further

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Over the past few years investors hungry for yield have piled onto dividend paying US stocks. While companies have increased dividends in recent years the party may not continue. According to an article by Credit Suisse, the scope for further dividend increases by US companies is getting narrow.

From the article:

Flush with cash and lacking exciting growth opportunities, many American companies have been about as “shareholder friendly” as they come over the past five years. Since 2010, dividends per share at S&P 500 companies have grown twice as fast as revenues. Alas, Credit Suisse believes the scope for further increases is narrowing. Dividend payments as a percentage of earnings are high compared to historical levels, particularly for the companies that pay the highest yields.

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dividend-fixed-charge-coverage

What’s more, the HOLT Fixed Charge Coverage ratio, a proprietary Credit Suisse measure that compares cash flow to fixed charges such as dividends, interest payments, and rent, is at a 20-year low. That suggests that even though companies have high cash balances – S&P 500 companies held $1.43 trillion on their books in the second quarter, the second-highest amount ever – they may not have the financial flexibility to increase their dividends in the future. Besides, much of that cash is concentrated in two sectors, tech and information technology, and a number of companies have cash parked overseas that they cannot use to increase dividends without paying a hefty repatriation tax.

Source: One Chart: Is the Golden Age of Dividends Over?, The Financialist by Credit Suisse, December 21, 2015

In general, here are some key points to consider when picking dividend stocks:

  • Stocks with High dividend yields do not necessarily mean better. Its important to check how they are able to pay such dividends and if it is sustainable in the future.
  • Sometimes firms borrow money by issuing debt to pay dividends when earnings sink. Investors can avoid companies repeatedly using this strategy.
  • Increasing dividends with rising earnings is good.
  • Dividends are not guaranteed no matter what the yield is or what a company earns. They can always be suspended or cancelled at any time. However large-cap established firms are unlikely to do so.
  • It is always better to select consistent dividend payers that have maintained or increased dividend payments over many years.

Why iShares UK ETF is the Wrong Way To Gain Exposure to the UK Economic Recovery

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The iShares UK ETF(EWU) is the wrong way to gain exposure to the UK economic recovery because of the unique structure of the British equity market.For most countries, the single country ETF such as the EWS for Singapore is the best way to gain exposure to that market. However that logic should not be be applied for UK.

EWU aims to track the performance of the MSCI United Kingdom Index. This index is similar to the benchmark FTSE 100 index. The MSCI index  is designed to measure the performance of the large and mid cap sectors of the UK equity market.

The Top 10 constituents of the MSCI UK Index are shown below:

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MSCI UK-Top 10 Components

Source: MSCI

The Top 10 holdings account for about 38% of the index.

The Top 10 holdings of the iShares UK ETF(EWU) are shown below:

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EWU-Top 10 Holdings

Source: iShares

The ETF’s top 10 holdings account for 37% of the fund which is almost the same percentage as the MSCI Index.

It will well know that most large-cap British companies derive most of their revenues from outside of the UK. Or put to another way, investing in large-cap UK firms will not give exposure to the UK ecconomic recovery. The performance of the large firms depends on the global economy and not the British economy. For instance, a FTSE-100 mining company has most it operations in emerging countries and not in UK. So the best way to profit from UK economic recovery is not to invest in the large-cap firms but small and mid-cap firms. The chart below shows the percentage of revenues sourced from UK for four UK indices:

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British Firms Foreign Revenues

Source: A fresh take on UK equities,  JP Morgan

The chart shows FTSE 100 firms generate only 20% of the revenues from domestic economy.

The Top 5 of the FTSE-100 Index are listed below:

FTSE 100-Top 5 Components

These firms – HSBC Holdings(HBC), British American Tobacco(BTI), BP(BP), GlaxoSmithKline(GSK) and Royal Dutch Shell A(RDS-A) – exactly match the top five of the top 10 holdings in the iShares ETF.

So by investing in EWU an investor is getting only 63% exposure of the British economy or a bit more due to the 20% revenues from large-cap firms from the UK. In addition, out of the total of 112 components in EWU many others are also large-cap firms such as Imperial Tobacco, Standard Chartered Bank, Unilever, etc. which generate a high portion of their revenues from markets outside of the UK.

Disclosure: No Positions

High Sugar Consumption: What is the Impact on Consumers And Food and Beverage Companies?

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Consuming high quantities of sugar is not good for health. For example, obesity is a major disease affecting millions of people especially in developed countries. Obesity is one type of metabolic syndrome. Metabolic syndrome is caused by excessive sugar intake. Some of the other diseases classified under metabolic syndrome are type 2 diabetes, hypertension, coronary heart disease, lipid abnormalities, cardiovascular disease, non-alcoholic fatty liver disease, polycystic ovarian disease, cancer and dementia.

The following chart shows the growth rate of obesity in select countries:

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Obesity Trends Over Time

Source: Is sugar turning Big Food into the next Big Tobacco? by Elly Irving, Schroders

Sadly the US tops the chart as obesity has grown steadily since the 1970s. Countries like Canada were at the same level as the US at that time. However Canadians have maintained a healthy lifestyle and the obesity growth rate is nearly half of Americans. Some of the reasons for lower obese rate in Canada can be attributed to strict government regulations that are visible to anyone that traveled north of the US border. In a fast food restaurant for example, pop fountains are kept behind the counter to prevent consumer from drinking unlimited quantities of sugary drinks and straws for drinks are thin in size to prevent consumer from guzzling drinks like an SUV does with gasoline. In the US on the other hand, straws tend to be thicker so that one drinks more in a single sip. In addition, drink fountains are kept outside of the counters so that consumers can drink as much as they want. There are thousands of other factors that one can identify that indirectly contribute to Americans being obese such as lack of footpaths in neighborhoods, food portion sizes in restaurants, etc.

The economic impact of metabolic syndromes such as obesity are huge with Lower productivity, more sick days, high absenteeism, etc. Billions of dollars are wasted in healthcare spending as well.

Seeing the negative impacts of obesity American consumers are changing their eating habits. More and more consumers are choosing healthier options than sugary and fatty foods. As a result, companies that offer healthier foods are growing their market shares grow while companies that offer sugary drinks and fatty foods are seeing red. Companies such as Coca Cola(KO) and Pepsi(PEP) are victims of the growing consumer preference for healthier foods.

The table below shows the growth rate of food and beverage companies over a four-year period:

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Obesity Impact on Food and Beverage Firms

US-based The WhiteWave Foods Company (WWAV), is the fastest growing company in the US food and beverage sector over the four-year period. Here is a brief description of WhiteWave:

The WhiteWave Foods Company, a consumer packaged food and beverage company, manufactures, markets, distributes, and sells branded plant-based foods and beverages, salads, fruits and vegetables, coffee creamers and beverages, and dairy products and organic produce in North America and Europe. It operates in three segments: Americas Foods & Beverages, Americas Fresh Foods, and Europe Foods & Beverages. The Americas Foods & Beverages segment offers plant-based foods and beverages, such as soymilk, almond milk, and coconut milk under the Silk and So Delicious brands; dairy products, including Horizon Organic milk, yogurt, cheese, and other dairy products, as well as Horizon branded macaroni and cheese, and snack foods; and coffee creamers and ready-to-drink beverages under the International Delight and LAND O LAKES brands. The Americas Fresh Foods segment provides packaged salad greens, fresh and frozen fruits and vegetables, dried fruits, and produce-based snacks under the Earthbound Farm brand. The Europe Foods & Beverages segment offers beverages using soy, almond, coconut, hazelnut, rice, and oat based ingredients under the Alpro and Provamel brands.

Source: Yahoo Finance

Whitewave has a $7.0 billion market capitalization and the stock is up 138% in a five year period as of Dec 25, 2015.

According to Elly Irving, the author of the research report, chocolate company Hershey(HSY) is the 2nd rank due to the acquisition of Krave, the the meat and high-protein snacks business.

Disclosure; Long General Mills

Updates:

The Global Retirement Landscape 2015

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Pension systems around in the around are going through tremendous changes. In more and more countries, employers are moving towards Defined Contribution (DC) plans from Defined Benefit (DB) plans. DC plans are advantageous to employers are it transfers more risk in payments to employees. For example, in DC plans employees save a portion of their wages in employer run retirement accounts and invest it in the equity market. So if the stock markets tank employees have to take the losses. In DB plans, companies pay their workers a defined amount in retirement such as a $1,000 per month. This amount is fixed and the employer is on the hook to pay this amount until the employee dies. In this scenario, the employer is liable for the payment regardless of what happens to the company like whether it earns a profit, its stock collapses, etc.

A new tool from Allianz called the Global Pension Atlas shows the various pension systems globally and helps readers compare and contrast countries and time periods:

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Global Retirement Landscape 2015

Source: An interactive journey around the world of pension systems, Allianz

The above chart shows that countries France, Greece mostly have DB pension plans while DC plans are more prelevant in countries like the US, Chile, etc.

Download: The Global Retirement Landscape 2015 chart (in pdf)

Sources of Federal Tax Revenues in 2014

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The chart below shows the various sources of taxes for the Federal government in 2014:

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Federal Tax Revenue Sources

Source: Where Taxes Came From In 2014, Peter G.Peterson Foundation

The majority of the Federal taxes come from individuals and not from corporations. Individuals paid 80% of the total Federal taxes collected. Individual income taxes are progressive in the US. As the income goes higher the tax rate goes higher. Payroll taxes on the other hand is fixed at a flat percentage of wages earned. Payroll taxes are used to fund Social Security and part of Medicare.

Compared to individuals, companies’ paid only 11% of total Federal tax revenues in corporate income taxes.

The Federal government collected about $3.0 Trillion in tax revenue last year according to the Congressional Budget Office.