S&P 500 Leaves Sick Bed – Healthy Earnings and Dividends in 2010

Friday, January 29, 2010

The current fourth quarter reports are putting 2009 into the history books. At the same time the focus on 2010 is making the broad-based Standard & Poor’s 500 Stock Index (S&P 500) look ever better. Importantly, the numbers are indicating a real return to normality. The improvement can be seen in the S&P 500 analysis below

Recently, someone asked me how many of the 500 companies would have negative earnings this year. I said, “A lot less than last year,” but I didn’t know the number. So, here is the data, and the picture looks good.

Note:

  • This analysis is “bottom up,” using the individual numbers for each of the 500 companies in the S&P 500.
  • Market capitalization, P/E ratios and dividend yields are calculated using the closing price for yesterday – January 28.
  • Even if a company has positive earnings, they can be abnormally low. So, I have broken that group in two for 2009: those with price/earnings (P/E) ratios above 20  and those with P/E ratios of 20 and below. (By using the same price, the earnings comparison between 2009 and 2010 becomes obvious. Many companies selling at above-20 times 2009 earnings are significantly below that for 2010 forecast earnings.)

Taking a look at 2009, below, we can see what a challenging year it was for many companies. Not only did 120 companies have negative earnings, but also 156 fall into the above-20 P/E group. The last line shows that the combination of these two groups amounts to 55% of the companies – 43% based on current market capitalization.

Now we turn to 2010, and here the picture is a dramatic turnabout. Only 18 companies are projected to have negative earnings – 4% of the 500 and only 1% based on market capitalization. Adding in the 77 companies with P/Es over 20 brings the total to 95 – 19% of the 500 and 10% of market capitalization. Unlike 2009, though, there are a number of over-20 companies that are there for a normal reason: growth – mainly in technology. So, this measure isn’t as appropriate for 2010.

A final look underlines how normality is returning to both the companies and the stock market. Here is a breakdown of earnings yield and P/E along with dividend yield and payout ratio. The first column shows the numbers for the 380 companies that had positive earnings last year. The second shows the 120 with negative 2009 earnings. Note the closeness of the two groups. The latter group necessarily carries some greater uncertainty, so the valuations are a bit lower.

Finally, note that the stock valuations continue to look very attractive. As I’ve discussed before, many investors, institutional and individual, are avoiding and underweighting stocks, so the sale sign is still up.

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