Inflation and rate hikes have driven risk-free and corporate yields higher this year. With core PCE still too high for the Fed, and growth slowing but NOT crashing, risk-free and high-quality corporate yields will remain high. That has important implications. 1) Rising risk-free yields mean fewer stocks have total yields (buyback + dividend) greater than Treasuries.
2) The level of buyback spending, which has been slowing, is a key metric to follow. As earnings risk increases, companies pull back on buyback spending before dividends get cut. Gross buybacks fell -12% in 3Q, while dividend spending was down less than -5%. The percentage of spending companies dedicate to cash return will remain under pressure, further narrowing the yield spread between stocks and bonds.
At the industry group level, some of the highest cash return yield groups are driven by buybacks. Media, Insurance, Durable. Names like Telecom, Food, Utilities, and REITs have high dividend yields. Some of those groups are macro-sensitive and have MAJOR headwinds. But when thinking about yield plays it is important to consider how much buybacks play a role in cash return. Energy yields are high, and that is attractive, AS LONG AS earnings remain strong.
At the end of this report, we list the stocks that have 1) trailing cash return yields greater than the 10yr, 2) in the top 25% of earnings sentiment readings, that also have 3) positive buyback sentiment. These are stocks where management has expressed strong earnings sentiment are should be less likely to cut cash returns as the economy continues to slow.
Cash Yield as Earnings Continue to Slow: Inflation and rate hikes have driven risk-free and corporate yields higher this year. With core PCE still too high for the Fed, and growth slowing but NOT crashing, risk-free and high-quality corporate yields will remain high. That has important implications. 1) Rising risk-free yields mean fewer stocks have total yields (buyback + dividend) greater than Treasuries.
2) The level of buyback spending, which has been slowing, is a key metric to follow. As earnings risk increases, companies pull back on buyback spending before dividends get cut. Gross buybacks fell -12% in 3Q while dividend spending was down less than -5%. The percentage of spending companies dedicate to cash return will remain under pressure, further narrowing the yield spread between stocks and bonds.
At the industry group level, some of the highest cash return yield groups are driven by buybacks. Media, Insurance, Durable. Names like Telecom, Food, Utilities, and REITs have high dividend yields. Some of those groups are macro-sensitive and have MAJOR headwinds. But when thinking about yield plays it is important to consider how much buybacks play a role in cash return. Energy yields are high and attractive AS LONG AS earnings remain strong.
Below are the stocks with 1) trailing cash return yields greater than the 10yr, 2) in the top 25% of earnings sentiment readings, that also have 3) positive buyback sentiment. These are stocks where management has expressed strong earnings sentiment are should be less likely to cut cash returns as the economy continues to slow. Not all companies have Buyback sentiment so, the list is narrow. We are happy to work on a broader list with you. Just let us or your 22V salesperson know what parameters you would like to use.
