Wednesday, 8 March 2017

Investors must weigh the yield opportunities ...

In, in ... uh, in shorter duration stocks against the maturity of the current economic cycle. Apparently. That's what Rebecca says, anyway. 'Rebecca? Rebecca, who, boss? What's this all about?' Ha! It's the Wednesday morning PR email, my little invisible friend. Back by popular demand and all that. 'But it's the middle of the bloody night!' Oh dear. Oh dear oh dear. Did I wake you up? 'Why can't you keep regular hours, Mikey?' Because I want to do this ... NOW! Okay?

Right. Rebecca Chesworth is an equity strategist at State Street Global Advisors SPDR ETF business UK. 'Oh, them again.' Well, they keep sending me this stuff, man. / Let's see what she says -

The equity market rally witnessed over the past few years has been characterized by an unusual pattern of sector leadership. Stocks traditionally considered low-beta, and hence more defensive have, thus far, led the rally.

Okay. And - 'Hang on, boss!' What? 'You haven't put any music on.' Christ! Wait a minute, dear reader(s). [A minute passes. Or a very long pause, as Harold Pinter would have written it.] Music! 'Brian Eno's Apollo again?' Yeah. So?

This is particularly true of long-duration sectors where cash flows are more bankable, dividend yield pay-outs high, and the risk of a cyclical drawdown in earnings low. The Consumer Staples, Utilities, and Health Care sectors very much fit this profile.

I missed that. Rebecca, love, I wasn't ready! 'Ha!' Oh, here she goes again -

Valuations in these sectors have, consequently, become extended. On the other hand, more economically sensitive sectors have registered less emphatic shareholder returns and market ratings.

Okay. Okay. Okay. I can't say it means a lot in my life. However, please continue.

Thank you, Mikey. There has also been a significant shift in the dividend payout profile across global sectors in recent years. The dividend contributions from traditionally more defensive sectors such as Telecoms and Consumer Staples have been on the wane, whilst more cyclical sectors such as Information Technology, Consumer Discretionary, and Energy have seen their contribution to total market yield rise.

'She likes you, boss.' How do you know that, Voice? 'She called you Mikey.' That's my name. 'Yeah, but in a situation like this Mr Fowke would be normal. Or Michael.' I suppose. What's she going on about now?

The appearance of high dividends is not, however, necessarily indicative of actual delivery of yield, or indeed of dividend yield growth.

A bundle of laughs, this one. I wish she would let her hair down a bit, you know? Is there much more of this?

Scrutiny of the sustainability of yield is important. For example, the high dividend yield seen in the Energy sector in the Global Sector Dividend Yield chart opposite is partly a result of depressed valuations.

Depressed valuations? Let me tell you, I'm depressed, myself. But that's another story.

Sustainability is very much in question given the moribund nature of energy markets in the short term. Investors need to zero-in on earnings-to-dividend coverage ratios to assess sustainability of yield.

Okay. Fine. Can we talk about music now?

Excessively cyclical sectors will carry some risk of a weakening in earnings power as the economic cycle progresses, with the attendant risk of a cut to dividend pay-out ratios.

Reader(s), you know that new tune I told you about yesterday? I've decided to scrap it. I've got enough on my plate just trying to record the songs I've already written. 'Boss, don't upset her.' FFS! Go on, Rebecca.

We see more sustainable dividend yields in the Resources, Industrials, and Information Technology sectors, whilst more heterogeneous sectors currently present interesting opportunities. Ultimately, investors must weigh the yield opportunities in shorter duration stocks against the maturity of the current economic cycle.




'She's gone, boss!' Well, that was a bit sudden. 'You upset her.' No I didn't! 'I think you did.' Shut up! We were getting on like a house on fire. 'Whatever.' She called me Mikey. 'Yeah.'

Anyway ...

Ah, that's it. Time for bed!