Read Tim’s comments on CNBC.
Check out Tim’s comments on the Twitter IPO.
Listen to Tim’s comments on Apple.
With the 2012 Presidential election cycle now in full swing, there is no shortage of news reports that trumpet America’s economic, political, and social woes. Some stories now compare America to Europe, implying that our economic decline will soon mirror theirs; some claim both of us are saddled with expensive social programs and bloated public employee benefit and pension obligations combined with anemic economic growth and burgeoning government debt.
But amid this barrage of negative news and quick fix prescriptions from candidates, we see some underlying strengths in America that make us enthusiastic investors in some of its most successful companies. We would contend that too often the focus from our politicians, our economists, and our media is too short term in nature.
You have heard us preach about the importance of looking past the sometimes contradictory daily noise generated by news reports of European contagion and double dip recession fears and extolling the virtues of the fundamentals of the companies that represented value in the past six months (see our September 2011 Insights, “We Invest in Companies, Not Economies”).
You have also heard us acknowledge that, despite what look like compelling valuations of many US equities, the market has remained focused on the macro picture for the better part of the last six months: Greece and the European financial system; the Chinese economy and its impact on global trade; and the Middle East and North Africa social and political revolts. All these factors, given the interconnectedness of today’s global economy, are concerns that circle back and affect our markets.
As of the close of business on September 2, the S&P 500 was down 5.38% since the beginning of the year. It feels much worse, doesn’t it? To feel better, compare that decline of 5.38% to those of the stock markets in China and Switzerland which are both down over 15% or Germany, France, the Netherlands, and Brazil which are all down over 20%.
Page one headlines are almost uniformly negative. Europe’s sovereign debt and bank solvency crisis. The US deficit, debt, and entitlement brouhaha. US economic weakness. Middle East and North Africa political, economic, and military revolts. These crises make most investors feel even worse.
The markets now trade on these macro news stories, ignoring the continued strength in US multinational company balance sheets and the record earnings and margins most have achieved over the past two to three years.
As far back as last summer (see our Insights “Searching for Return” in July 2010) we argued that “investors [should buy] large capitalization multinational companies with dominant market share and stable, predictable businesses” many of which pay dividends that are more attractive than yields available in the bond market. That is still our position. In fact, if you look at Exhibit 1 below you can see that dividend yields alone are as competitive with interest rates as they have been in thirty years.
Today we make the case that many of those same companies should be more proactive in increasing both dividend payouts and share buybacks. Quite frankly, many of them can afford it. Dividends make up a significant portion of’ total return, provide some cushion to stock price volatility and, unlike most bond interest payments, may increase over time and thereby act as a hedge against inflation.
Tired of earning next to nothing on your money market accounts? Wondering where those 4-5% CD rates went? Concerned that bond yields might stay low for a long period of time? If you are like us, you probably answered each of these questions with a frustrated “yes.”
Let’s examine the yield landscape we find today:
|Security||6 Months||1 Year||3 Year||5 Year||10 Year|
|US Treasury Notes/Bonds||0.17%||0.27%||0.93%||1.68%||3.05%|
|Corporate Bonds (Aa rated)||1.53%||2.11%||3.48%|
Clearly the market is not rewarding you for being a saver. Fixed income investments, to quote Jeremy Grantham, are “desperately unappealing”. Nominal yields are currently close to all time lows. And importantly, for investors who need income from their portfolios, this rate environment has made generating that income increasingly difficult.