To Buy or Not to Buy
To buy or not to buy is the question. On the one hand, investors must invest for the long term. To quote Warren Buffett, “Do not take yearly results too seriously. Instead, focus on four or five-year averages.” It makes sense, and the S&P 500 Index’s 5-year returns are still positive at ~42.32%. Stock prices tend to increase with time in aggregate. However, we are in a bear market, and volatility is high. The bottom line is high inflation is causing the US Federal Reserve to raise interest rates, and investors are responding by selling stocks. Persistent drought and the War in Ukraine are making things worse.
An argument exists to buy because valuations are down and dividend yields are up, but at the same time, an argument exists not to buy because of fears of further declines. So on a personal basis, I am leaning towards buying.
Stock Market Overview
Data from Stock Rover* continues to show a downward trend. The Nasdaq and S&P 500 Index is in a bear market. The Dow Jones Industrial Average (DJIA) was performing relatively well but has declined considerably in the past month. The only sector in positive territory is Energy. All other sectors are in negative territory, with Consumer Cyclical, Technology, and Communication Services performing the worst.
Inflation continues to run hot at nearly the highest level in four decades. Of course, some of the problems were because of excessive liquidity and stimulus. But China’s COVID-19 lockdowns, drought, and the War in Ukraine have played a large part too.
The just released consumer price index (CPI) reading was 8.2% for all items and 6.6% without food and energy. The CPI indicator peaked in June at 9.1%, so inflation is trending down, but not fast enough.
Valuations have dropped significantly, as seen in the weekly tracking charts below, despite downwards revisions of earnings estimates. This points to how steep the market decline has become. The S&P 500 Index is trading at a P/E ratio of ~18.10X, the lowest level since early 2014 or late 2013. Similarly, the Shiller PE ratio has fallen but not as much. However, valuations are not yet screaming buy. That said, there are many deals in the market today, the most since the pandemic bear market.
As valuations have declined, dividend yields have simultaneously risen. If you recall, to calculate dividend yield, one takes the dividend rate and divides it by the stock price. Dividend increases are relatively normal; thus, we can conclude stock prices have dropped dramatically. For example, the average yield of the Dividend Kings was approximately 2.62% a week ago. Turn back the clock to the end of 2021; the average yield was only about 2.32%.
Final Thoughts on To Buy or Not to Buy
The question remains whether to buy or not to buy. Valuations are down, and yields are up, but inflation is still high. The stock market is trending down, punctuated with positive days. That said, investors can find deals and should be selective in this market. One place to look for low volatility stocks with decent dividends are water stocks.
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The Stock of the Week
Today we highlight Lockheed Martin (LMT), the world’s largest aerospace and defense giant by revenue. According to Stock Rover*, the stock price is up about +11.7%, this year and +10.7% in the trailing 1-year, making it one of the better-performing stocks. Geopolitical issues related to Ukraine and Taiwan are probably bolstering the stock price. However, the valuation is reasonable, and the yield is up.
The forward dividend yield is about 3.1%, and the dividend is covered by a conservative payout ratio of ~41%. The price-to-earnings ratio is modest at 14.6X, within the 5-year and 10-year ranges.
Dividend Increases and Reinstatements
Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.
Dividend Cuts and Suspensions List
The dividend cuts and suspensions list was most recently updated at the end of September 2022. As a result, the number of companies on the list has risen to 573. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.
Six new additions indicate companies are experiencing solid profits and cash flow in August.
The new additions were Invesco Mortgage Capital (IVR), Steelcase (SCS), Sturm, Ruger & Company (RGR), and TPG (TPG).
Dow Jones Industrial Averages (DJIA): 29,644 (+1.18%)
NASDAQ: 10,321 (-3.11%)
S&P 500: 3,584 (-1.53%)
The S&P 500 Index is trading at a price-to-earnings ratio of 18.10X, and the Schiller P/E Ratio is about 26.82X. These multiples are based on trailing twelve months (TTM) earnings.
Note that the long-term means of these two ratios are approximately 16X and 17X, respectively.
The market is still overvalued despite the recent market correction and a bear market. However, we are nearing the long-term averages. Earnings multiples of more than 30X are overvalued based on historical data.
S&P 500 PE Ratio History
Shiller PE Ratio History
Stock Market Volatility – CBOE VIX
This past week, the CBOE VIX measuring volatility was up about 0.5 points at 32.02. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.
The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month USUS Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year USUS Treasury Bond from the St. Louis Fed.
The Labor Department reported that the producer price index for final demand increased by a seasonally adjusted 0.4%in September after declining 0.2% in August and 0,4% in July. On an unadjusted basis, the PPI, a measure of prices that US businesses get for the goods and services they produce, is up 8.5% on a year-over-year basis showing a slight deceleration from August’s 8.7% reading. Removing the volatile energy and food categories, the PPI index increased by 0.3% on a monthly basis and 7.2% on a yearly basis.
The US Bureau of Labor Statistics reported the consumer price index rose 0.4% in September. Over the last 12 months, the all-items index is up 8.2% before seasonal adjustment compared to 8.3% in August. It has remained above the 8% level for seven consecutive months. Increases in the medical care (+1.0%), food (+0.8%), and shelter (+0.7%) indexes were the largest contributors to the seasonally adjusted all items increase. Offsetting the increase was a (-4.9%) decline in the gasoline index. The energy index declined (-2.1%) for the month, but natural gas (+2.9%) and electricity (+0.4%) both saw increases. Contributing to the increase were indexes for shelter (+0.7%), rent (+0.8%), medical care (+0.8%), motor vehicle insurance (+1.6%), household furnishings (+0.5%), personal care (+0.4%), education (+0.4%), airline fares (+0.8%), and recreation (+0.1%). Indexes that saw declines included used cars and trucks (-1.1%), apparel (-0.3%), and communication (-0.1%).
The Commerce Department reported advance US retail and food services sales were little changed at $684.0B in September following an upwardly revised 0.4% increase in August. Retail sales are up 8.2% year over year. Total sales for July 2022 through September 2022 were up 9.2% year over year. Increased in sales were reported at department stores (+1.3%), general merchandise (+0.7%), restaurants (+0.5%), clothing stores (+0.5%), personal care (+0.5%), internet (+0,5%) and grocery stores (+0.4%). Offsetting the increases were decreases in miscellaneous retailers (-2.5%), gas stations (-1.4%), electronics (-0.8%), home furnishings (-0.7%), auto dealerships (-0.4%), and home and garden (-0.4%).
Thanks for reading To Invest, or Not to Invest – Week in Review!
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.