Friday, July 31, 2009
Wednesday, July 29, 2009
Friday, July 24, 2009
Stocks got another lift this week from second quarter earnings surprises. In our June 29, blog we said that earnings for the second quarter would be better than expected. In that blog, we said that cost controls would be the driving force behind the better-than-expected earnings. It is now clear that cost controls at all levels and in all sizes of companies are winning the day and producing earnings surprise after earnings surprise. Here's the scorecard so far with 179 of the S&P's 500 companies reporting:
- The average surprise or beat rate is 11%, higher than the normal 3%-5% surprise.
- Thus far, there have been 136 companies that have beaten their Wall Street estimates versus 43 that have missed. This 75% beat rate compares favorably with the 62% beat rate from last quarter.
- The most important earnings surprises continue to be in the Consumer Discretionary sector, where 22 companies have reported positive surprises versus 2 negative surprises. In the Finance sector, there have been 26 positive surprises compared with 14 negative surprises. The Health-care sector has also registered impressive results with 21 earnings beats and only four earnings misses.
These better-than-expected earnings have driven stock prices through the 9,000 on the Dow, a level not seen since January. We believe the earnings surprises will continue, although we continue to think it will get progressively tougher to impress the market. This could lead to a flattening of the markets for a few weeks, as investors digest the new data.
Another key ingredient in this quarter's earnings is how they stack up with last years earnings. At the beginning of the quarter, the analysts were predicting that earnings this quarter would be about 30% lower than a year ago. Thus, far earnings are about 26% lower than a year ago. The Energy and Basic Materials sectors are weighing down the average earnings results, with both showing more than 50% declines in earnings.
We'll give you another report the end of next week.
Friday, July 17, 2009
- The average surprise or beat rate is 16%, much higher than the normal 3%-5%.
- Thus far, there have been 30 companies that have beaten their Wall Street estimates versus 8 that have missed.
- This 80% beat rate compares favorably to the 62% beat rate from last quarter.
The most important earnings surprises have come in the Consumer Discretionary sector, where 7 companies have reported positive surprises versus 0 negative surprises. Importantly, in the Finance sector, there have been 7 positive surprises compared with 4 negative surprises. The Health-care sector has registered 4 earnings beats and no earnings misses.
Only about 10% of the companies have reported in this earnings season, so early success does not assure the whole season will continue at this rate. However, we do believe there is a good argument that can be made that earnings for the whole season will now come in much better than expected, as our portfolio managers had predicted.
There is no question that these better-than-expected earnings have driven stock prices higher this week. We believe the earnings surprises will continue, although we think it will get progressively tougher to impress the market. This could lead to a flattening of the markets for a few weeks, as investors digest the new data.
Another key element in this quarter's earnings is how they stack up with last years earnings. The analysts were predicting that earnings this quarter would be approximately 30% lower than a year ago. For stock markets to continue their recent upward climb, we believe the total earnings for the quarter need to finish down closer to 20%.
We give you another report the end of next week.
Tuesday, July 14, 2009
Saturday, July 11, 2009
Thursday, July 02, 2009
Many people forward on to me articles on dividend investing. These articles cover the waterfront from writers opposed to dividends completely to those who believe companies should pay a stated amount of their earnings in dividends. I find that I agree with very few of the articles I see. In most cases, I find it is not a theoretical objection but a practical objection: I have tried it their way and found it didn't work for me.
Elsewhere in earlier blogs I explained how I first learned of the merits of dividend investing in the 1980s and how those early ideas have evolved over time. The following is a short list of the principles of dividend investing as practiced by Donaldson Capital Management.
- Consistent Dividend Growth is the most important element of dividend investing.
- Beware of high dividend yields where dividend payouts are in excess of 60% for industrial companies, 70% for utilities, and 90% for REITs.
- Beware of any company that pays out more in dividends than their free cash flows.
- Look for companies where there is at least a 70% correlation between price growth and dividend growth over the long run.
- Companies with consistent dividend growth permit valuation using regression models. These regression models can offer an investor an educated guess at the expected total return of a stock over a future period of time.
- It is remarkable that many so-called cyclical companies with volatile earnings will have a much lower price volatility if they employ a normalized dividend approach, instead of a lumpy approach.
- We are always on the prowl for dividend-paying companies that the market has rewarded with a high correlation between their dividend growth and their price growth and who have temporarily fallen out of favor.
- For almost all companies, even the most highly predictable companies in our universe, changes in interest rates will affect relative valuation.
- Consistent dividend growing stocks seldom get highly over or undervalued. They get overvalued when the band is playing, the birds are singing, and stocks are flying high. They get undervalued when the media is shouting duck and cover.
- Watch carefully at dividend actions in good times and in bad. In good times, dividend growth should be less than earnings growth. In bad times dividend growth should be higher than earnings growth.
We are now enduring a time when the media is doing what they do best: broadcasting duck and cover stories. Save a copy of the most pessimistic article on the economy and stocks you can find. Set a note on your calendar to look at it in three years.
In three years, as the birds sing softly in the background, re-read today's duck and cover article. As you hear the band warming up in the background and the media are cautiously suggesting that things are looking up call me. Surprise me and ask me the following question: How much is Procter and Gamble overvalued?We own Procter and Gamble.