Dividend Growth of S&P 500 From 1972 To 2012

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The current yield on the S&P 500 Index is 2.08%. The yield has stayed around the 2% range for many years now. However the dividend amounts paid out components in the index has increased over the years especially in the long run. The following chart shows the dividends paid per share and the yield on cost from 1972 to 2012. The Yield On Cost simply denotes the yield on the cost of investment. So the Yield on Cost on a $100 investment in a stock paying $10.0 in year 1 would be 10%. The following year the Yield On Cost would be higher if the dividend paid was lets say $11.0. If the dividends paid out increases year after year then the Yield On Cost would also increase accordingly.

Click to enlarge

SP500-Dividend-Growth

Source:The Case for a High and Growing Dividend Stock Strategy in Retirement Portfolios, Thornburg Investments, June 2013

From the Thornburg research study:

Figure 1 assumes if you bought one share of the S&P 500 Index on December 31, 1969, it would have cost you $92.06. In each subsequent year you chose to spend the dividends rather than reinvest them. In 1970, you would have received dividends totaling $3.14, for a 3.41 percent yield on cost; by 1980, your annual dividend would have increased to $6.16,
for a 6.69 percent yield on cost; in 1990 you would have received $12.09, for a 13.13 percent yield on cost; and in 2012 you would have received $31.25, for an attractive 33.95 percent yield on cost. In fact, the average annual increase of the dividends over the entire 43-year period was 5.89 percent. (emphasis added)

While the dividend yield is low on the S&P 500, the average annual increase in dividends is decent over the period shown above.

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No ETF

 

On The Correlation Between Economic Growth And Stock Returns

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The correlation between a country’s economic growth and equity market returns is very low especially in the long-run. Many studies have confirmed that high economic growth does not translate into high equity returns for investors. For example, developed equities have yielded higher returns than emerging equities in the past few years despite the lower economic growth in the developed world than emerging countries.

A recent research report published by Vanguard showed that there is a weak correaltion between long-run equity market returns to their economic growth (as measured by real GDP growth) across 46 countries.

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Econmic-Growth-vs-Stock-Returns

 

Source: The outlook for emerging market stocks in a lower-growth world, September, 2013 Vanguard Group

From the report:

At 4.0% per year, the average real equity market return for the countries with the three highest GDP growth rates was slightly below the 4.2% average return for the countries with the three lowest GDP growth rates, despite the considerable difference in those rates (8.0% a year versus 1.6%, on average). It is clear that the correlation between these two variables is weak.

China is a classic case validating the above theory. Though China has the highest Real GDP Growth for the period shown above, the real equity market return has been lower. On the other hand, Germany has had a Real GDP Growth of about 2% but German stocks performed much better yielding over 5%.

Similar to Germany, equity returns are higher than economic growth for the U.S. also. In general it can be argued that developed countries can never have the same type of economic growth as emerging countries since they are already developed. For instance, basic infrastructure such as roads, bridges, ports, railroads, etc. already exist in the developed world while in many emerging countries they are being built only now. However developed countries offer many advantages like political stability, currency stability, transparency, lack of corruption, strong legal system, etc. Most emerging markets do not have these features. Hence investors are willing to pay a premium for developed equities even with a lower economic growth than emerging countries.

China’s Central bank projects the GDP growth to exceed 7.5% this year. The Federal Reserve forecasts the U.S. economic growth between only 2% and 2.3% this year. But in terms of  stock market returns the S&P 500 is up over 19% year-to-date as of Oct 15th compared to -1.6% for the Shanghai Composite Index.

The main point that investors should remember  is simply investing in equities because of high economic growth in a country would not necessarily mean higher returns.

Related ETFs:

  • iShares MSCI Emerging Markets Indx (EEM) 
  • Vanguard Emerging Markets ETF (VWO)
  • SPDR S&P 500 ETF (SPY)
  • iShares MSCI Brazil Index (EWZ)
  • iShares FTSE/Xinhua China 25 Index Fund (FXI)

Disclosure: No Positions

Tire Maker Bridgestone Corp’s Stock Split

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Japan-based Bridgestone Corp is the world’s largest tire maker in terms of sales revenues from tires only. The company’s annual tire sales revenue exceeds $28.6 billion.

Bridgestone’s stock trades as an unsponsored ADS on the OTC market under the ticker BRDCY. Today the stock closed at $71.60.

Until today, one ADS represented two ordinary shares. Due to a 300% stock distribution (4 for 1), the ratio changes to two ADS represented one ordinary shares. The ADR record date is Oct 15, 2013 and the Payable date is Oct 16, 2013.

From a corporate action notice issued the depository Deutsche Bank:

As a result of the ratio change, ADS holders of Bridgestone Corp will receive three (3) additional ADSs for every existing ADS held as of the ADR record date.

Here is the 5-year performance of Bridgestone ADS:

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BRDCY-LT-Returns

Source: Yahoo Finance

The company will announce the 3Q, 2013 earnings on Nov 7, 2013.

Some of the competitors of Bridgestone are Cooper Tire & Rubber Co. (CTB), Continental AG (CTTAY) and The Goodyear Tire & Rubber Company (GT).

Disclosure: No Positions

Are Under-Performing European Banks A Better Investment Than American Banks?

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European banks have lagged in performance relative to their American peers since the Global Financial Crisis for many reasons. For example unlike U.S. banks, most banks in Europe were reluctant to raise capital by issuing shares. This only made the situation worse as they were unable to recover quickly.

Five years after the crisis, the U.S. banking sector has recovered well and is growing again thanks to TARP and other actions taken by them. As a result U.S. banks stocks have taken off and many have reinstated the dividends or even increased dividends in the past few years. The SPDR® S&P® Bank ETF (KBE) which can be considered as a proxy for the sector has shot up by 27.60% as of the end of third quarter this year. On the other hand, the iShares MSCI Europe Financials ETF (EUFN) has risen by only 16.70%. Though bank stocks account for only about half of the fund and the rest are from the REIT, Insurance sector it can still be considered as proxy for the European banking industry. Another ETF that can be a proxy for European banks is the iShares STOXX Europe 600 Banks ETF trading on the Frankfurt Stock Exchange. This ETF is up by 20.99% year-to-date in Euro terms.

In a report published by Deutsche Bank Research Jan Schildbach notes three factors for the divergence between European and American banks. From the report:

Three main underlying causes: Macroeconomics, banks’ own decisions, insti-tutional differences. The US economy has been growing relatively steadily since 2010 already; output in Europe, by contrast, suffered a double-dip recession from which it is just about emerging. Furthermore, EU banks’ greater need to raise capital ratios to more prudent levels and their stronger deleveraging and shrinking has put them at a competitive disadvantage against their American competitors, not least in fast-growing emerging markets. Doubts by some market participants over the very survival of the European Monetary Union, weak domestic governments, an emerging patchwork of rules in the European financial market, and much more aggressive market interventions by the US Fed have also affected the Europeans and helped US banks to regain strength.

 
Outlook: Improvements ahead for both, but the “ocean” will turn into a “sea” only. With the US recovery now well established and Europe probably having turned the corner, banks may see this tailwind translate into better operating results, though much remains to do especially for European financial institutions. Given substantial catch-up potential, they may be able to narrow but probably will not close the gap to their US peers in the coming years. A gradual exit from the extremely loose monetary policy on both sides of the Atlantic does not seem to represent a major risk for the two banking systems.

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EU-vs-US-banks

Source: Bank performance in the US and Europe – An ocean apart, Sept 26, 2013  Deutsche Bank Research

I agree with Mr.Jan’s outlook for European banks. Though they will not close the gap with their U.S. peers in the coming years they may be able to narrow the gap between them and U.S. banks. Hence the “catch-up” potential presents some attractive investment opportunities in the European banking sector at current levels.

Five European banks trading on the U.S. markets are listed below for consideration:

1.Company: Barclays PLC (BCS)
Current Dividend Yield: 2.21%
Country: UK

2.Company: Credit Suisse Group AG (CS)
Current Dividend Yield: 0.34%
Country: Switzerland

3.Company: Banco Santander SA (SAN)
Current Dividend Yield: 7.24%
Country: Spain

4.Company:Deutsche Bank AG (DB)
Current Dividend Yield: 1.91%
Country: Germany

5.Company:ING Groep NV (ING)
Current Dividend Yield: No dividends paid
Country: The Netherlands

Note: Dividend yields noted are as of Oct 10, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long ING, SAN

Why German Electric Utilities Are Stuck In Neutral

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Two of the largest German electric utility stocks E.ON AG(EONGY) and RWE AG(RWEOY) were on a downtrend trend for a few years now and seemed to be stuck in neutral this year.The end of the Federal elections recently has also not yet brought changes to highly controversial German energy policies.

The main reason for the poor performance of traditional electric utilities is the subsidies offered to renewable energy companies. From an article in The Wall Street Journal:

In the late 1990s and early 2000s, Germany, France, Italy and some other EU countries began subsidizing solar and wind power in an effort to minimize the region’s reliance on imported fossil fuels and to reduce power prices.

“We’ve failed on all accounts: Europe is threatened by a blackout like in New York few years ago, prices are shooting up higher, and our carbon emissions keep increasing,” said GDF Suez CEO Gérard Mestrallet ahead of the news conference.

The European Commission, the bloc’s executive body, is scheduled to discuss the issue next week.

Under the subsidy mechanisms, wind and solar power producers benefit from priority access to the grid and enjoy guaranteed prices. In France, for instance, even as wholesale prices hover around €40 ($54) a megawatt hour, windmill electricity goes at a minimum of €83 a megawatt hour, regardless of demand. The difference is charged to customers.

The system certainly lured investors into wind and solar power projects. Germany now has 60 gigawatts of wind and solar capacity—about 25% of the country’s total power-generation capacity. But the guarantees mean households now pay double than before—29 euro cents a kilowatt-hour, up from about 14 cents a kilowatt-hour in 2000.

Source:  EU Chiefs Knock Solar Aid, The Wall Street Journal, Oct 12-13, 2013

In 2000, Germany implemented the German Renewable Energies Law (EEG). Under this law, the country aims to generate 80% of total energy from renewable energy sources by 2050. So in order to achieve this goal, high subsidies were given to renewable energy providers with higher prices paid by consumers.This made traditional electric utilities in uncompetitive. Earlier this year a reform proposal put forth by Environment Minister Peter Altmaier to cap subsidies for renewable energy producers failed to pass in the Bundesrat according to an article in the Deutsche Welle. From that article:

Under an ambitious new energy policy, Germany seeks to boost renewables to make up 80 percent of total power generated by 2050. Along the way, nuclear power is to be completely phased out by 2022, and fossil-fuel based energy production sharply reduced.

However, since the EEG law was implemented in 2000, German electricity retail prices have risen from then 14 eurocents per kilowatt-hour to almost 29 cents today, according to data released by the Association of Energy and Water Industries (BDEW).

Much of the increase is the result of a surcharge on electricity bills paid by private households and businesses to finance state subsidies for renewable energies. Wind, solar and biomass energy producers are guaranteed fixed so-called feed-in tariffs above market price for 20 years. These subsidies have led to an investment boom propelling the amount of renewable energy from 15 percent of German power generation in 2008 to 23 percent in 2012.

Accordingly, the surcharge on electricity rose steeply, too, increasing by 47 percent just within the last year. In a recent estimate, the government has calculated that the surcharge will likely rise from currently 5.3 eurocents per kilowatt-hour to 6.2 eurocents in 2014.

Source:  German energy transition caught in subsidies’ trap, Deutsche Welle

Clearly German policies for the past decade or so has tilted way too far on the side of renewable energy companies. As consumers become increasingly angry for footing the bill for this ambitious but badly-implemented policies,the pendulum may finally swing to the other side. Investors may want to monitor the developments with respect to the energy sector in Europe particularly any regulatory changes in Germany. Capping subsidies to renewable energy companies should provide a big boost to the share prices of E.ON and RWE AG.

Currently EONGY and RWEOY have dividend yields of 5.68% and 7.16 respectively. The chart below shows the long-term performance of these stocks:

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EONGy-vs-RWEOY

Source: Yahoo Finance

Disclosure: Dividend yields noted are as of Oct 11, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long EONGY and RWEOY

Related:

German call to ‘undo’ energy privatisation amid Berlin vote (BBC)

Germany’s Energy Poverty: How Electricity Became a Luxury Good (Der Spiegel)

Travails of renewable power in Germany (The Hindu)