America’s third quarter earnings reporting season kicked off overnight with the results from Alcoa.
Alcoa’s figures are not an indicator of how results will go, if anything US analysts are now slowly accepting that there will be a slow down and that stocks to do well will be those with offshore revenues and profits and that banks and financials could be hard hit, along with some retailers.
And a trend to watch for is the emerging switch to income growth by way of higher dividends is with over a third of Standard & Poor’s 500 companies already boosting their payouts to shareholders so far.
More and more companies lifted dividends in the second quarter and US analysts expect this to be the dominant trend from now on with the US economy moribund and unemployment now forecast not to fall at all from around the current 9.6% over the next year.
Small investors have quit the market for bonds as they look for income. Many are facing retirement with diminished savings after the recession, others want the security of regular income after they have realised that you can’t eat capital gains.
That’s why more and more companies in the US are boosting dividend payments, it’s a trend that will become clearer as earnings growth slows.
According to Bloomberg, US non-financial stocks in the Standard & Poor’s 500 will lift earnings around 21% in the third quarter and just 12% in the current three months, which is down sharply from the 38% and 40% rates seen in the first and second quarters respectively.
Many companies will find it simply too tough to lift earnings significantly in coming quarters (and could go negative in the first two quarters of 2011) because comparisons will be with a year-earlier period that saw profits rebound after the recession ended.
But the big drag on US domestic earnings will be the impact of the 9.7% (IMF forecast) unemployment rate this year and 2011’s 9.6% level and the continuing impact of that on demand from consumers.
In April the IMF estimated US unemployment would be 8.3% in 2011, so there has been a significant worsening.
The IMF said the main reason the US recovery is so weak is that consumer spending is sluggish and suggests it is little wonder that is the case.
"Falling home prices have reduced household wealth, 9.6% of the workforce is unemployed, banks won’t lend and people are scared into saving," the Fund said in its outlook for the US this week.
It says the gap between actual and potential economic output (around 6.5%) will be a lingering drag on the pace of recovery and on earnings for many, many companies.
And unemployment could deepen before it gets better, as the Federal Reserve of San Francisco’s Economic Letter of September 27 said:
"The current economic recovery is proceeding at a tepid pace despite massive federal fiscal stimulus and extremely low interest rates.
"Forecasts derived from business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks predict that real U.S. GDP growth through the first half of 2011 will remain at or below potential growth.
"If these forecasts prove accurate, then the historical relationship between real GDP growth and the labour market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period."
Those companies with big offshore flows, such as Caterpillar, IBM, Cisco, GM (its Chinese car sales are now as big as its US domestic sales), Wal Mart (to an extent, but its US business still dominates), McDonald’s, and General Electric, will get benefits from the weakening US dollar boosting revenue growth and earnings.
But the impact of the weaker dollar doesn’t imply strong capital growth; despite what still bullish US analysts might tell US.
What it could mean is that more and more companies raise dividends (It helps that many CEOs and boards have largish holdings in their companies, so dividend income becomes a nice earner when capital gains are dead).
Bank of America said last week in a report that utilities and Telcos offer the highest dividend yields and still offer the chance of gains because big investors like mutual funds are relatively underweight.
Bloomberg quoted Bank of America analyst, Savita Subramanian as saying:
“We’re still in the early stages of building interest, given that dividend yield still remains a somewhat underutilized investment theme,” Subramanian said.
“When profits growth grows scarce, investors tend to seek out companies with stable earnings and avoid companies with volatile earnings growth. Companies with strong and stable dividends generally align with this theme.”
According to the report, US phone stocks and utility companies dividend yield averaged 5.36% and 4.3%, respectively at the end of last month.
Share prices for companies in these sectors are up 20% or more since the end of July as more and more US investors switch to income-growth orientated stocks (That’s those still in the market and not into bonds).
It is in fact a mirroring of the chase for income that has seen millions of US investors move out of the hunt for capital gains in the market and into bonds, even at these near record lows, or into higher yielding, more risky junk bonds and corporate debt.
"Companies with attractive and above-market dividend yield are still — and could continue to be — a scarce resource,” Subramanian wrote.
“Over the next decade, retiring Baby Boomers are shifting in preferenc
