Tag Archives: european

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

Inside The New Sovereign High Yield Bond ETF By Cambria

Disappointing macroeconomic data, global market turbulence and threats to the stability of the U.S. economy have been making headlines since the beginning of the year, leading to volatility across all asset classes. Meanwhile, Treasury yields are also showing a downtrend. Yields on Japan’s benchmark 10-year government bond slid to sub-zero for the first time in February. Following the European Central Bank, Bank of Japan introduced negative interest rates in late January. Denmark, Sweden and Switzerland adopted similar measures. Because of these factors, high-income bond ETFs have gained a lot of popularity of late as investors continue to search for attractive and stable yield in the ultra-low rate interest environment. This trend continues with Cambria, which has launched a fund with a global coverage, focusing on the high-income space. In fact, the global footprint made the fund more attractive given the ultra-low interest rate backdrop prevailing in most developed economies. Below, we have highlighted the newly launched fund – the Cambria Sovereign High Yield Bond ETF (Pending: SOVB ) – in greater detail. SOVB in Focus Listed on the NYSE Arca, the product is an actively managed ETF and does not track any specific index. It seeks income and capital appreciation by investing in securities and instruments that provide exposure to sovereign and quasi-sovereign bonds. Cambria uses a quantitative model, with yield as the largest determinant to select bond exposures for the fund. The fund has an expense ratio of 0.59% and will pay dividend on a quarterly basis. It invests in liquid debt securities across the globe. From a country perspective, India takes the top spot with about 10% of the basket, followed by Brazil (8%), Russia (6.2%), China (5.9%) and Peru (5%). As for maturity, the fund is well diversified between bonds maturing in less than 5 years (33.6%), in 5-10 years (39.8%) and 10-20 years (26.6%). Launched in the last week of February, the fund has already amassed $2.6 million in its asset base. It is up 2.1% in the last 10 days. How Could it Fit in a Portfolio? The ETF could be well suited for income-oriented investors seeking higher longer-term returns with low risk. With interest rates being low in most developed nations, the appeal of high-income bonds has increased as these offer strong yields. Meanwhile, sovereign bonds are generally issued by the government of a country and considered one of the safest options in the bond fund category, and are ideal for a risk-averse investor. However, investors looking for a high-growth vehicle may not be satisfied with this product. Additionally, changes in currency exchange rates may affect the value of the fund’s investment adversely. Competition The ETF does not have any direct competitor, as there is currently no other actively managed sovereign high yield bond ETF available to U.S. investors. The fund provides investors a new way to play the high yield bond market with liquid sovereign and quasi-sovereign bonds. The product charges moderately high fees from investors annually due to its unique strategy. However, there are quite a few international bond ETFs which specifically target particular regions. Of these, the popular fund, iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA: EMB ), has a total asset base of $5.1 billion. This fund tracks the JPMorgan EMBI Global Core Index, trades in heavy volume of 1.1 million shares per day and charges 40 bps in annual fees. Another fund targeting the emerging market bond space is the PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ) with AUM of nearly $2.7 billion and exchanging 919,000 shares a day. Apart from these, SOVB could also face competition from international high yield bond funds – the Market Vectors International High Yield Bond ETF (NYSEARCA: IHY ) with an asset base of $125.2 million, the iShares Global High Yield Corporate Bond ETF (BATS: GHYG ) with AUM of $87.6 million and the iShares Global ex-USD High Yield Corporate Bond ETF (BATS: HYXU ) with AUM of $160.8 million. Thus, SOVB has a good chance of making a name for itself if it manages to generate returns net of fees greater than the passively managed products in the international bond ETF space. The ETF’s plan of safer sovereign bond and its emphasis on liquidity are noteworthy, but its success is a huge factor of the returns it manages to generate. Original Post

Ride The Wave

So much has happened and so much to talk about. We could talk about the seemingly globally coordinated easing from central banks around the globe. Central banks easing policy in the last two weeks have included Norway, Sweden, the Bank Of Japan (BOJ), the European Central Bank (ECB), the Chinese central bank and of course our own recent dovish statement from the US Federal Reserve,. We could talk about how that has led to a weaker US Dollar which in turn has helped oil, precious metal and emerging markets stage a turnaround in fortunes. Or perhaps we should discuss how Central bank maneuvers have helped US markets regain all of the ground they had lost so far in 2016. We could talk about all this but here is what we think would be most useful right now. The key to making money in these markets lies in Investor Psychology. How we understand it and our own emotions when it comes to investing our money is the key to success. Here are two charts that can help you be more successful in understanding how emotions play a role in your investing process. Courtesy of CNBC, the first chart shows two 12% rallies in the last 7 months. The second is a chart of investor psychology. After our second 12% rally in 7 months you should ask yourself, where are you on this chart? Are you relieved? Optimistic? Thrilled? Sell risk when prices are rising and buy risk when prices are falling. Understanding and keeping your emotions in check is the key to making money in markets like these. Ride the wave. Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett If the Dow Jones holds its gains for the next two weeks we will have seen the biggest quarterly comeback in stock markets since 1933. We don’t have to remind you that the 1933 rally took place smack in the middle of the Great Depression. Risks are rising after our second 12% rally in months. It is going to be hard to move higher from here but don’t bet against continued central bank largess. The stock market is up 12% in 26 trading days. Not bad. But it does remind us of a blog post from back in October of 2015. October 2015 will go down as the best performing month for the S&P 500 in four years. I think that we all enjoyed the ride back up in October. The S&P 500 rallied 8.3% and followed through with more gains today to get the S&P 500 into the plus column for 2015. Those gains would be nice gains for an entire year – never mind a month! Whenever we get to thinking how much we have gained we cannot help but to contemplate the downside. We must always be on guard to temper our greed/ego just as much as we would concentrate on opportunity when fear strikes. As a reminder the S&P 500 closed October of 2015 at 2080. It would be 10% lower by January of 2016. Central bank policy in Europe and the US is having the same effect. Earnings estimates are heading lower while stocks ride higher. Not a great recipe for success. Risk is rising. We cannot predict with 100% accuracy every move in the market but what we can do is try and profit by tactically allocating and hedging our portfolio in times of market stress to take advantage of market volatility. Investing is not a game of perfection but of managing the risk inside one’s portfolio. We do not jump in and jump out of the market wholesale. By divesting ourselves of overpriced assets and availing ourselves of opportunities when prices are low allows us to take advantage of the long term benefits that the math of compounding brings.