Tag Archives: nasdaq

International Business Machines Corp. in the Cradle of Strength

International Business Machines Corp. has been struggling as of late with a host of legacy products and services that are dying on the vine mainframes and overall systems hardware, to be specific. This decay

Should You Buy A Company After A Dividend Cut?

By Rupert Hargreaves Should you buy a company after it has cut its dividend? That’s the question Morgan Stanley’s analysts have tried to answer in a European Equity Strategy research note sent to clients today and reviewed by ValueWalk. Morgan’s research has been prompted by renewed investor interest in dividend cuts. Against a depressed earnings base, the market’s dividend payout level looks high in a historical context and the median stock’s payout ratio is close to a 20-year high. On a pan-European level, the payout ratio has exceeded 2009 levels. It’s also important to note that this is not an anomaly that is limited to a few key sectors, the percentage of stocks with a payout ratio in excess of 60% of earnings per share has reached the highest level in 20 years. Click to enlarge As European investors have seen over the past few months, even those companies that were considered dividend aristocrats aren’t in any way immune from payout cuts, with companies like Rolls Royce ( OTCPK:RYCEF ), BHP (NYSE: BHP ), EDF, RWE ( OTCPK:RWEOY ) and Repsol ( OTCQX:REPYY ) all cutting their dividends during the past six months. An updated study This isn’t the first time Morgan has investigated this question. Back in 2008, the bank conducted a similar research exercise and found that dividend cuts can indicate powerful inflection points in share prices. At the time, the research showed that investors could do well by buying stocks on dividend reductions, particularly those that are stressed. In the 2008 version, Morgan’s research showed that UK companies that cut their dividend tended to outperform thereafter, especially if the shares had previously been poor performers, the payout cut was large or the starting yield was high. Click to enlarge In this updated version, Morgan examines 372 instances of dividend cuts in Europe over the last ten years. The stocks are based on the current constituents of MSCI Europe IMI, with a current market cap bigger than $2 billion. To qualify as a dividend cut, the company’s dividend payout has to be reduced by 5% or more. Should you buy a company after a dividend cut? The results of this study are rather interesting. It appears that dividend cuts are indeed, often inflection points for stock performance. Morgan’s research on the 372 instances of dividend cuts in Europe over the last ten years shows that the median stock underperforms the market by 19% in the preceding 12 months but then outperforms by 11% in the subsequent 12 months, and by 19% by the end of year two. The probability of a stock beating the market in the following 12 months after a dividend cut is 65%, and 66% of the subsequent 24 months. Click to enlarge The research also showed that the strongest outperformance comes from stocks where the dividend yield ahead of the cut was 12% or higher with a hit ratio of 83% in the subsequent 12 months and 88% in the following 24 months. The weakest performance came from stocks trading on a dividend yield of 4% to 6% ahead of the announced cut. Stocks that underperformed the market ahead of the dividend cut announcement tended to outperform the most after a cut. Among the stocks that underperformed more than 60% prior to the cut, 74% outperformed on a 12m basis and 86% outperformed on a 24m basis. The weakest subsequent performance came from the group that underperformed less than 20%, with a hit ratio of 61%, even on a two-year basis. Click to enlarge And lastly, the size of the dividend cut has an effect on performance after the event. In the 372 cases studied by Morgan’s analysts, the average dividend cut is more than 80%. Stocks that cut their payouts by more than 60% outperformed the most post the cut. The weakest performing group is the one that cut the dividend by 20% to 40% – even on a 2-year view, only 56% of such companies outperformed the market. Click to enlarge Dividend Cut – The bottom line All in all, this analysis from Morgan presents a pretty compelling argument: investors should buy stocks on dividend cuts, particularly those that have underperformed significantly ahead of the announced dividend cut, that previously had a very high yield, and those that cut their dividend by 60% or more. This analysis is aimed at European investors and Morgan also provide some investment ideas in the form of stocks that cut their dividends in the last year and are ‘stressed’. Click to enlarge Disclosure: None

Despite The Mid-Week Attack In Belgium, Investors Are Net Purchasers Of Risk-On Assets

By Tom Roseen Soaring commodity prices, a weakening dollar, and dovish Federal Reserve comments helped push the Dow Jones Industrial Average into positive territory for the first time this year. The energy, materials, and industrials sectors got a boost early in the flows week after crude oil futures rose above $40/barrel for the first time since December 3, 2015. The major indices continued to rally after the Fed’s decision to leave interest rates unchanged and reducing the number of slated increases from four to two for 2016. On Friday, March 18, on the heels of a strong run-up in healthcare and financial stocks, the Dow and S&P 500 booked their longest winning streaks since early October, staying on the plus side for the fifth consecutive week. Investors appeared to have been cheered by the Fed’s positive outlook on interest rate hikes at a slower pace. M&A news in the middle of the flows week overshadowed a disappointing existing home sales report for February. However, the Dow snapped its seven-session winning streak when investors learned of the deadly terrorist attacks in Belgium that left 34 dead and numerous injured. Safe haven plays such as U.S. Treasuries and gold rallied on Tuesday as the news unnerved global equity markets. Financial stocks took the brunt of the decline as investors also began to reevaluate the impact negative interest rates will have on banks’ earnings. Crude oil prices dropped below $40/barrel, closing the flows week out at $39.79, after weekly oil supplies jumped by 9.4 million barrels, weighing heavily on the markets and erasing the S&P 500’s year-to-date plus-side return. For the flows week ended March 23, 2016, the year-to-date return for the S&P 500 Composite Price Only Index was minus 0.35%. Most pundits don’t expect a lot of movement in the last day of trading of this Easter holiday-shortened week. For the week, fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), pulling out a net $10.0 billion for the fund-flows week ended March 23. However, the headline number was misleading. Investors padded the coffers of taxable bond funds (+$5.9 billion), equity funds (+$2.0 billion), and municipal bond funds (+$0.9 billion), while being net redeemers of money market funds (-$18.7 billion). For the fourth week in a row, equity ETFs witnessed net inflows, taking in $3.5 billion. As a result of rises in oil prices and good economic news during the week, authorized participants (APs) were net purchasers of domestic equity ETFs (+$0.6 billion), injecting money into the group for the fourth consecutive week. Despite global markets’ concerns about the attacks in Belgium and perhaps as a result of Chinese authorities considering loosening margin-trading requirements, APs – for the second week in three – were also net purchasers of non-domestic equity ETFs (+$2.9 billion). APs bid up some out-of-favor names, with the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) (+$2.8 billion), the iShares Russell 2000 ETF (NYSEARCA: IWM ) (+$1.2 billion), and the SPDR Gold Trust ETF (NYSEARCA: GLD ) (+$1.0 billion) attracting the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum the SPDR S&P 500 ETF (NYSEARCA: SPY ) (-$1.1 billion) experienced the largest net redemptions, while PowerShares QQQ Trust 1 (-$0.8 billion) suffered the second largest redemptions for the week. For the second week running conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $1.5 billion from the group. Domestic equity funds, handing back $2.2 billion, witnessed their seventh consecutive week of net outflows, while posting a weekly gain of 0.28%. Meanwhile, their non-domestic equity fund counterparts, posting a 0.24% return for the week, witnessed net inflows (although just +$668 million) for the seventh week in eight. On the domestic side investors lightened up on large-cap funds and mid-cap funds, redeeming a net $2.0 billion and $135 million, respectively. On the non-domestic side, international equity funds witnessed $222 million of net outflows, while global equity funds took in some $890 million net. For the fifth week in a row, bond funds (ex-ETFs) witnessed net inflows, taking in a little under $2.8 billion. Balanced funds witnessed the largest net inflows, taking in $1.1 billion (for their fourth week of net inflows in five), while corporate high-yield funds witnessed the second largest net inflows (+$0.6 billion). Despite the late-week flight to safety, government-Treasury funds witnessed the only net redemptions of the group, handing back $124 million for the week. For the twenty-fifth week in a row, municipal bond funds (ex-ETFs) witnessed net inflows, taking in $0.8 billion this past week.