Featured Image

S&P 500 dividend growth projected to slow as performance and valuation of dividend payers have lagged

Earnings

By FactSet Insight  |  March 26, 2014

Going forward, banks in the S&P 500 Financials sector are expected to spur growth rates. The Financials sector owns the second-largest DPS growth estimate for 2014 (+17.7%), and the only double-digit growth rate expected in 2015 (+15.1%).

But the projection for strong growth in the Financials sector is an anomaly in the S&P 500. The index’s forward twelve-month DPS growth estimate (+9.0%) for Q4 was the lowest projection since Q3 2010—a period when trailing DPS growth was negative. In addition, the estimate for DPS growth in 2015 is even lower at 7.5%.

Decelerating DPS projections are partially a reflection of a slowdown in trailing activity. The number of dividend payers (stocks that paid a dividend over the trailing twelve-month period) in the S&P 500 index dropped for the first time since Q2 2009. Though the primary reason for the drop was the addition of non-paying constituents, like Alliance Data Systems (for Abercrombie & Fitch) and Michael Kors (for NYSE Euronext), there are other signs that dividend growth is hitting a ceiling. The trailing twelve-month DPS growth rate (+11.8%) decelerated for the second consecutive quarter in Q4, and the number of constituents increasing trailing twelve-month DPS distributions dropped for the first time since Q3 2012.

This slowdown in dividend growth could be a reflection of a shift in investor sentiment. Coming out of the financial crisis, dividend stocks outperformed nonpayers from November 2009 to May 2012, and contributed to an unprecedented convergence of valuations between the two groups. By the end of 2011, dividend payers were trading at a price-to-earnings (“P/E”) premium of 0.2 points over nonpayers. Historically though, the P/E ratio of dividend payers has been at a median discount of 13.1 points to that of nonpayers.

But this “safety bubble” has reversed as nonpayer stocks have outperformed since mid-2012. Over this period, the monthly, equal-weighted performance of nonpayers averaged 2.7% compared to 2.0% for dividend stocks. Specific outperformers from the nonpayer group have included Netflix, Micron Technology, and TripAdvisor, while underperformers from the dividend group included Newmont Mining and Peabody Energy. Nonpayer outperformance, coupled with the recent addition of Facebook (a nonpayer with a trailing P/E ratio over 100), has lifted the P/E premium of the nonpayer group back above its historical median (to 13.5 points).

PE_Div_Paying_Stocks_vs_Non_-Mar_24_14.png

  

Comments

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.