Posted: October 25, 2011
And now—the good news
Here are some biz stats to brighten your dayBy Charles Farrell
You might be wondering what good news is out there in the markets. Well, there's actually a lot of good business news out there, but investors and the media are choosing to ignore it. Here are some statistics that might make you feel better about the future:
Record Earnings. This year, the companies that make up the S&P 500 will have record earnings, meaning they're making more money than they've ever made. And they've produced these record earnings in the midst of one of the worst economic crisis since the Great Depression. That's impressive and should give you confidence in the American business model. As an investor, you should also feel good about those record earnings because you are an owner of those earnings.
Growing Dividends Companies are paying out more money to shareholders in the form of dividends, and many have been paying out more cash all throughout this crisis. Firms like Johnson & Johnson, and Wal-Mart have all been quietly giving their shareholders a raise each year. If you exclude the banking sector, many companies are producing more dividend income for their investors than they've produced in 25 years. In fact, because of the strong earnings, the dividend payouts are actually well below the historical average, which means companies have plenty of room to increase dividends going forward. Those are real dollars that you're being paid as an investor.
Low Debt. Although our governments are awash in debt, large, publicly traded companies have been reducing their debts and are in terrific financial shape. In fact, the numbers (their balance sheets) haven't been this good in 50 years.
Expanding Markets. While the U.S. economy is stuck in molasses, other developing countries are growing faster, and large U.S. companies are in those markets. It's important to remember that the companies you invest in aren't bound by just our borders. They have been seeking and developing business all over the world. Many large companies generate between 30% and 50 percent of their revenues from foreign markets. If there's growth out there, they're going after it.
So if all you knew about the stock market was that companies were producing record earnings, were paying out more in dividends, have the cash to increase dividends, have reduced their debt and have the ability to reach all the areas of the world that are growing, you'd think you'd found a pretty fair investment opportunity.
Yet, in spite of this good business news, the price of the stock market continues to fall. Why? Because the short-term news about government debts and defaults isn't good, so that news has dominated the financial markets. If you believed things would never get better, then of course it would make sense to ignore the good business news and just focus on the bad news. But does that really make sense as a long-term investor?
Times like these are when investors are really tested. Why? Because investors feel like things should be going up by now, but they aren't, so they're getting frustrated. But that frustration and abandonment of the market is what is creating the more compelling numbers for stock valuations, particularly on the dividend side.
Our markets have been tested before, and have experienced long and frustrating periods of low returns or declines. But those who abandoned them ended up selling at the lows only to buy in after America demonstrated once again how resilient, creative and powerful it is as an economic engine. Now, we are more than realistic about how long this might take. But we continue to believe that the numbers are showing a lot of value out there in the stock market, especially the income capacity from stocks compared to the other alternatives, and it makes sense to continue to seek that value as an investor.
Charles Farrell is the author of the book Your Money Ratios: 8 Simple Tools for Financial Security, published in December 2009 and called "one of the best financial books to cross our desks this year" by the Wall Street Journal. The book was released in paperback in January 2011. Farrell is a principal with Denver-based Northstar Investment Advisors, LLC, an independent, registered investment advisor. His services include portfolio investment management, retirement income management, wealth transfer and portfolio tax planning. Prior to working as an investment advisor, Mr. Farrell was a tax attorney representing privately held businesses on tax, retirement and estate planning matters.