Unexpectedly Intriguing!
July 16, 2008

Once again, we've updated our signature tool The S&P 500 at Your Fingertips, with all the latest available data through June 2008. The chart below, which we've tweaked a bit from the version we showed late last week, shows where we're at and where things sit here at the midpoint of July:

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, January 2008 through Present [15 July 2008]

Elsewhere, Tigerhawk has asked if the recent market action is a reaction by investors discounting the possibility of a likely Obama presidency (HT: Instapundit). The answer to that question is no, at least not yet. The trigger behind sharp market declines is, almost invariably, the risk of financially-distressed companies cutting their dividends to improve their balance sheets. Since changes in expected dividend payments in the future directly drive stock prices, when investors can reasonably expect that this will happen, stock prices anticipate this action by sinking lower.

How important are dividends to establishing the value of stocks? Consider this: even though the stock market initially rallied when the price of oil unexpectedly dropped by $6.44 per barrel to close at $138.74 on the news that President Bush rescinded an executive order prohibiting drilling on the U.S. portion of the North American outer continental shelf yesterday, stocks still managed to sink as investors are still uncertain as to when and how much a number of companies (see below) will be taking actions to cut their dividends.

The Action Through June 2008

In moving from May to June 2008, stock prices declined sharply with respect to their underlying dividends per share, suggesting a period of increased distress was approaching. Standard and Poor's Howard Silverblatt, writing in the June 2008 S&P 500 MarketAttributes Snapshot (generic link here - we're not aware of a permanent link), noted the developing situation:

As concern over earnings reemerged, so did concern over dividends. June’s dividend increases picked up, but the month also included decreases by FITB and DividendAristocrat KEY. Year-to-date, there have been 20 dividend decreases with 17 being in the Financials. For the month, 16 issues increased, none initiated, 2 decreased and 0 suspensions, versus 12 increases, 0 initiations, 1 decrease, 0 suspensions for the same period in 2007 and 17 increases, 0 initiations, 0 decreases, 0 suspensions for May 2006. Year-to-date, increases are down 161 versus 167 for 2007, with decreases up 20 versus 4 in 2007.

Still S&P has not altered their forecast for the S&P 500's trailing year dividends per share for 2008, which they still anticipate will be $30.30. We would however anticipate the level of dividends for 2008 will come in below this figure, as a number of large companies in the financial sector will likely be cutting their dividends to help improve their balance sheets in the very near future, much as General Motors did yesterday.

The following table illustrates the ten most likely candidates for the dividend chopping block (with GM included for reference), ranked according to their dividend yield given the values of their individual stocks and their estimated dividend payments per share for the next year as of 15 July 2008:

S&P 500 Highest Dividend Yield Stocks on 15 July 2008
Company Ticker Sector - Industry Price
[15 July 2008]
Estimated Dividend
[For the next year]
Dividend Yield [%]
American Capital Strategies ACAS Financial - Closed-End Fund/Debt 17.80 4.39 24.66
Regions Financial RF Financial - Banking 6.88 1.52 22.09
Wachovia WB Financial - Banking 9.08 1.50 16.52
Comerica CMA Financial - Banking 20.89 2.98 14.27
Fannie Mae FNM Financial - Mortgage Investment 7.07 1.00 14.14
Bank of America BAC Financial - Banking 18.52 2.60 14.04
SunTrust Banks STI Financial - Banking 26.98 3.12 11.56
Huntington Bancshares HBAN Financial - Banking 4.64 0.53 11.42
Marshall & Ilsley MI Financial - Banking 11.59 1.30 11.22
General Motors GM Consumer Goods - Auto Manufacturer 9.84 1.00 10.16
Gannett GCI Services - Newspaper Publishing 17.35 1.76 10.14

Until the erosion in dividends ends, we're afraid that the S&P 500 and other major stock indices will not be going up anytime soon. We would anticipate that the carnage in the market will continue until the powerhouse financials dragging the indices down get serious about building up their balance sheets and pull the trigger on dividend cuts. Then, and only then, will investors regain confidence in these companies.

Labels: , ,

About Political Calculations



blog advertising
is good for you

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.