Valuations

The S&P 500 index dividend yield (sum of the dividends of all components divided by the price of the index) just touched new all time lows. Companies prefer buybacks to dividends, since they are tax efficient for investors and push the stock prices higher. Dividend payouts are no match for the incredible run up in price, stocks have had. In times of turbulence, dividends can be a meaningful share of total return for an equity investor. Not today. Additionally, the Earnings yield for the S&P 500, the inverse of the Price/Earnings ratio is currently 3.5% aprox. When you try to make relative valuation decisions, a 3.5% earnings yield and a 1.08% dividend yield, compared to a 4% treasury yield might make the bond market look cheap. But they’re both expensive and they’re both positively correlated. It’s getting increasingly difficult to find value in financial assets. And everything is referred back to the 10 year Treasury yield, used as a basis to discount future cash flows to find the “true” value of a company today. You discount very low dividend yields and average earnings yields with an expensive treasury yield. Beware of valuations calculated this way.

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