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S&P500 valuation based upon cash returns


Guest cherzeca
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Guest cherzeca

from Barrons:  " Based on price to cash spent on dividends and stock buybacks, he notes that the S&P 500’s valuation is in the bottom quartile of its history. “If nothing changes—low inflation, stable rates, growing cash returns—the market will be biased higher,” he says."  https://www.barrons.com/articles/the-dow-jones-industrial-average-is-headed-for-30-000-51579311984?mod=hp_HERO

 

also from article:  80% of the S&P500 have higher cash returns [divdends plus stock buybacks] than the 10 year treasury.

 

I you think about it, cash yield is a sensible metric for valuation.

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I had similar thoughts last night when looking at MSFT, which I posted in another thread. The only flaw I'd say is that some companies do fund these things with debt.

 

Maybe valuations have permanently moved higher. Its the supermarket sale dilemma. Just last week your box of cereal was $2.49 on sale. Now its back to $4.99. Do you wait to buy it? More often than not, you get sale prices again, but theres no guarantee and sometimes the price ends up staying higher permanently. You can always just stop eating cereal I suppose.

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Guest cherzeca

the barrons article did not drill down to sources of funds for cash equity returns, but it seems to me some of the egregious stuff like large borrowings to fund dividends is done by PE companies while still private (so that the PE sponsor benefits from the distribution).  there should be at least some market discipline to spank issuers who raise excessive leverage for equity returns.  I just found this metric worth noting and I had not seen it discussed before.

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The record non-financial US corporate debt is where the buybacks and dividends came from.

 

Most recent example is CSX: reported 8% fall in Q4 revenue this week, 8% fall in operating income, said 2020 revenue will be less than 2019. But increased net debt by about $1.4 billion and bought back stock.

 

Barrons writes in all directions just to hedge their reputation. Whether the market goes up or down, they have something to point to. One Barrons roundtable member said this weekend TSLA can go up 10x.

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https://www.yardeni.com/pub/buybackdiv.pdf

 

Buybacks + dividends are just below 100% of operating earnings for S&P 500, which is about the most it’s been excepting brief period in 2015/16 and in the crisis when earnings collapsed.

 

Cash yield is about the same as earnings yield; stocks aren’t in bottom quartile valuation; corporations are just paying out more than normal.

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Guest cherzeca

https://www.yardeni.com/pub/buybackdiv.pdf

 

Buybacks + dividends are just below 100% of operating earnings for S&P 500, which is about the most it’s been excepting brief period in 2015/16 and in the crisis when earnings collapsed.

 

Cash yield is about the same as earnings yield; stocks aren’t in bottom quartile valuation; corporations are just paying out more than normal.

 

another way to look at it is that the big issue re capital allocation has been won...managements now are keen to return money to shareholders. this is a return to shareholders metric as opposed to corporate earnings, which is a return to the corporation metric.  I still think this metric is worth considering...forget about how much cash management is generating to be able to play around with, focus on how much cash management is putting into shareholders' pockets.  and by that metric, valuations are not stretched.

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I agree with you in that it's a good metric and agree that it is helpful to contextualize valuations.

 

I would temper anyone using it as "bullish" evidence with that it is covered by earnings, but only barely.

 

I would temper anyone using it as "bearish" with the other stuff I've posted about a lack of leverage in the S&P 500 and that large corporations are not taking an undue amount of leverage to buy back stock. I've posted a bunch of that stuff in the "wilshire 5000 market cap to GDP thread.

 

CSX's debt to EBITDA has been between 2.0 and 2.6 for the last decade. It is at the higher end of the range.

 

Should we be bearish because CSX is now 2.6x levered?

 

In my view, considering they just raised 10 year and 30 year money at t+97 and t+145 (2.4% and 3.4%, pretax), we should be okay with them raising that money. 

 

https://www.bamsec.com/filing/119312519236655?cik=277948

 

https://www.gurufocus.com/term/debt2ebitda/NAS:CSX/Debt-to-EBITDA/CSX-Corp

 

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Guest cherzeca

compare to BRK, no dividends, very little stock buybacks, huge cash accumulation at corporate level, underperformance vs SPY last year.  maybe warren needs to add a new filter to his process...

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compare to BRK, no dividends, very little stock buybacks, huge cash accumulation at corporate level, underperformance vs SPY last year.  maybe warren needs to add a new filter to his process...

 

 

Given the divergence BRK has actually starting creeping up my list of "attractive" investments the last few weeks/months. I hate the inaction and cash build, but given the circumstance, if anything, I would adjust the lens I look through and perhaps see it as a way to maintaining a modest, but impactful access point to investing if reasonably priced equities. Even if they hold AAPL to eternity, the huge cash surplus balances out the volatility in the portfolio, should there be any.

 

I do think the above conversation reveals one thing; it may be great that companies are paying out more. Definitely! But at around 100% payout for the average company, the things RuleNumberOne has been harping on, like earnings and revenue growth, will really start to matter. Given that the future valuations will be dependent upon this...it is hard not to argue that we arent getting very much if any margin of safety at these prices.

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The more relevant ratio is EV/EBITDA rather than Debt/EBITDA because people here are buying the stock. I don't have a Gurufocus membership but i bet the EV/EBITDA is at an all-time high outside of recessions. Their EBITDA is only trending down.

 

But more importantly, the big picture is that the 2000 and 2008 blowups happened when the inflation rate (at least in the growing areas such as the West Coast) was similar to what we have now. Over the last two years, the CPI-U for the 13 Western states has hovered around 2.5-3.5%, not different from the times when Greenspan and Bernanke raised rates to 6% and 5.25% to pop asset bubbles. They popped bubbles at higher-unemployment levels and lower stockmarket-to-GDP and debt-to-GDP levels.

 

The one big difference between the last two times the Fed popped bubbles is that they were in the second Presidential terms. Other than that excuse, we have record valuations for corporate-debt-to-GDP, stockmarket-to-GDP, lowest unemployment since the 1960s for the last two years.

 

 

I agree with you in that it's a good metric and agree that it is helpful to contextualize valuations.

 

I would temper anyone using it as "bullish" evidence with that it is covered by earnings, but only barely.

 

I would temper anyone using it as "bearish" with the other stuff I've posted about a lack of leverage in the S&P 500 and that large corporations are not taking an undue amount of leverage to buy back stock. I've posted a bunch of that stuff in the "wilshire 5000 market cap to GDP thread.

 

CSX's debt to EBITDA has been between 2.0 and 2.6 for the last decade. It is at the higher end of the range.

 

Should we be bearish because CSX is now 2.6x levered?

 

In my view, considering they just raised 10 year and 30 year money at t+97 and t+145 (2.4% and 3.4%, pretax), we should be okay with them raising that money. 

 

https://www.bamsec.com/filing/119312519236655?cik=277948

 

https://www.gurufocus.com/term/debt2ebitda/NAS:CSX/Debt-to-EBITDA/CSX-Corp

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Guest cherzeca

comparisons to 2000 and 2008 are worth making...but when you make them you see that the massive excesses of those years are not here now.  I understand and that hedge funds are massively leveraging to get a few bps on arb trades and that is never a good sign, but in terms of the mortgage/corp debt markets and equity/IPO markets, not a lot of excess.  WE would have taken off in 2000, and PLSs with no docs mortgages are nowhere to be seen now.  and shareholders are getting real cash returns.  sometimes you have to smell the roses if they are on offer

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compare to BRK, no dividends, very little stock buybacks, huge cash accumulation at corporate level, underperformance vs SPY last year.  maybe warren needs to add a new filter to his process...

 

 

Given the divergence BRK has actually starting creeping up my list of "attractive" investments the last few weeks/months. I hate the inaction and cash build, but given the circumstance, if anything, I would adjust the lens I look through and perhaps see it as a way to maintaining a modest, but impactful access point to investing if reasonably priced equities. Even if they hold AAPL to eternity, the huge cash surplus balances out the volatility in the portfolio, should there be any.

 

I do think the above conversation reveals one thing; it may be great that companies are paying out more. Definitely! But at around 100% payout for the average company, the things RuleNumberOne has been harping on, like earnings and revenue growth, will really start to matter. Given that the future valuations will be dependent upon this...it is hard not to argue that we arent getting very much if any margin of safety at these prices.

 

 

Koompaya! [ ;-) ] You'll never get a cash dividend from BRK as long as Mr. Buffett is [still] around.

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