The first quarter earnings reporting season has been a virtual bloodbath for the S&P 500, with most of the index having reported and a massive year over year decline being recorded. For the most part, investors have been less interested in earnings per share than they have been in other metrics, with dividend per share being the sleeper hit among investors, according to strategists at one firm.
Dividend per share boosted performance in 2015
In a report dated May 23, Chief Global Equity Strategist Sean Darby and team found that dividend per share was the key to success for stocks last year. They note that last year the S&P 500 held up fairly well despite the “growth recession,” and they credit strong dividend per share growth for this. Dividends grew 10.6% year over year last year, compared to the much smaller 1.5% increase in earnings per share.
They also report that looking out over a long period of time, U.S. indices with a strong concentration of constituents that have been increasing their dividends gradually over time have sharply outperformed since the beginning of the year. They believe investors are favoring “dividend growth stocks” in U.S. indices because of a lack of growth in dividends globally, plus flattening G7 yield curves. They add that U.S. real bond yields have also been declining since November.
Dividend per share to decline this year
Unfortunately, this year doesn’t look so great for dividend per share growth in the S&P 500 as they expect the growth rate to decelerate to 4.2% year over year.
The Jefferies team sees Energy and Financials as being the biggest drag on this metric in 2016, while Industrials should surprise positively. On the other hand, they say it’s good that forward dividend expectations have stabilized, when looking at the futures markets.
Darby and team also note that this is a particularly interesting time for investors to be seeking U.S. income because it’s looking more and more likely that the Federal Reserve will hike interest rates in June. At the beginning of last week, they said the Fed Fund futures market only had a 4% probability of an increase next month priced in, but by the end of the week, the probability had surged to 30%.
They add that the two-year bill has been increasing since the beginning of this month, which also suggests that an increase in rates next month was discounted previously.
2009 strikes again
The first quarter earnings period has brought the biggest decline in earnings since 2009, and the Jefferies team notes that this year we’re also seeing the largest number of corporate borrowers defaulting since then. So far around the globe, more than 70 of them have defaulted.
However, investor appetite for bonds hasn’t cooled. Standard & Poor’s said that in April, the number of U.S. speculative-grade bonds with a more than 10% spread over Treasuries declined for the second month in a row. The Jefferies team adds that investors also continue to gobble up corporate issues as U.S. funds recorded net buying of $1.1 billion in investment-grade debt for the eleventh week in a row. They also say that over $900 billion in corporate bonds have been sold globally this year, of which $411 billion were in the U.S.
Darby and team conclude that in the U.S., dividend per share growth is just as important for stocks as earnings per share because of the reach for yield.
All graphs in this article are courtesy Jefferies.