The TINA phenomenon – There is No Alternative to equities – is in full effect with inflation-adjusted 10-year bond yields mired deeply in negative territory near -1.0 per cent. Investors may, however, have to re-think their dependence on this positive driver for stocks in 2022.
Faced with losing money annually in inflation-adjusted terms, assets have steadily moved towards equities, driving valuations higher. According to Morgan Stanley Wealth Management chief investment officer Lisa Shalett, the real yield-related increase in the S&P 500 price to earnings ratio from 15 times in 2009 to the current 22.5 per cent now has accounted for about half of equity market gains.
Alarmingly, BofA Securities U.S. quantitative strategist Savita Subramanian recently found that the S&P 500 is now also a negative yielding asset in real terms. The earnings yield – simply the past 12 months of total corporate profits divided by the level of the index – is now below zero once inflation is taken into account. Based on the most recent earnings and inflation data, the real earnings yield on the S&P 500 is now -2.9 per cent.
The last time the earnings yield was this low was 1947. “There were only four historical instances of negative real earnings yield,” Ms. Subramanian wrote, “all of which resulted in bear markets: the post-WWII bear market, the 70s stagflation era, the 80s Volcker shock, and the 2000 Tech Bubble.”
The benchmark’s real yield will, of course, look better if U.S. inflation drops from the current 6.2 per cent to the consensus estimate of 2.5 per cent in the next year, but the strategist feels this forecast is too optimistic.
Ms. Subramanian recommends what she calls “inflation protected yield”: dividend-paying stocks in sectors like energy, financial and real estate that have historically outperformed during inflationary periods. BofA is particularly bullish on energy stocks with high free cash flow yields.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Credit Suisse (CS-N) Philip MacKellar of The Contra Guys believes the Swiss banking giant is a solid pick for value and contrarian investors. The company has a solid turnaround strategy, while valuations are low and insiders are loading up on the stock. Give it time, and the dividend is likely to grow as well, he argues.
The Rundown
Crypto company, electric bus maker join Canada’s biggest stock index
The manager of Canada’s biggest stock index will add a dozen new members just before Christmas, including a cryptocurrency miner, electric bus maker, funeral services provider and nine companies from the rebounding energy sector. David Milstead reports.
‘I have all my investments in mutual funds – is that the wrong choice?’
There’s about $2-trillion sitting in mutual funds in Canada, which is to say they’re a popular and foundational way to invest. But not a lot of people have a good word to say about mutual funds these days. What we tend to hear about funds is how their fees are high and they too often underperform benchmark stock and bond indexes that you can buy into with minimal fees using exchange-traded funds. A reader question to Rob Carrick gets right to the point: “Are mutual funds bad?” Here’s his response.
Wall Street hits reset after market ‘froth’ but Fed fears loom
Some investors believe the recent pullback in stocks may have tempered a market that had grown frothy after weeks of steady upward movement, potentially setting the stage for more gains going into the end of December - typically a strong month for stocks. Lewis Krauskopf of Reuters reports.
Others (for subscribers)
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Tuesday’s Insider Report: Director invests almost US$1.5-million in this stock as it enters into oversold territory
Number Cruncher: 10 companies trading at a discount in the energy sector
Ask Globe Investor
Question: I see AT&T Inc. (T-NYSE) has a generous yield of more than 9 per cent. It seems like a good company, providing a service everyone needs, but the stock has been dropping. Why is the yield so high, and is this a red flag?
Answer: You are smart to ask questions when a yield climbs into the high single digits. In AT&T’s case, had you purchased the shares you would have been in for an unpleasant surprise.
In May, AT&T announced an agreement to spin out its WarnerMedia division and merge it with Discovery Inc. (DISCA) to create a standalone entertainment and streaming company. The deal, which is expected to close in mid-2022, represents a dramatic reversal for AT&T, coming just three years after it acquired the WarnerMedia assets then known as Time Warner.
Here’s the worst part for dividend investors: As part of the spinoff, AT&T said its dividend will be “resized to account for the distribution of WarnerMedia to AT&T shareholders.” The telecom company hasn’t specified how large the cut will be, but most predictions I’ve seen are in the neighbourhood of a 50-per-cent reduction.
The looming cut will end AT&T’s 36-year streak of dividend increases and remove the company from the S&P 500 Dividend Aristocrats club, whose members have at least 25 consecutive years of annual dividend increases.
Why did AT&T’s yield get so high? The simple answer is that the stock price has been in a long-term downtrend, reflecting soaring levels of debt to pay for acquisitions including WarnerMedia and DirecTV that have not panned out as hoped. Earlier this year, AT&T sold a 30-per-cent stake in DirecTV, which has been losing subscribers to streaming services such as Netflix and Disney+.
--John Heinzl
What’s up in the days ahead
Shares of The Very Good Food Company are trading at a fraction of year-ago levels. Is it an opportunity for investors to start nibbling - or a signal that it’s the end of the meat-alternative craze? Brenda Bouw will take a look.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff