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Economy, Investing, S&P 500, Stock Markets

Stock Markets: Q3 Earnings Season Update

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Stock Markets: Q3 Earnings Season Update

Uncertainties concerning the US and China trade negotiations remain an issue affecting business performance in the US. Out of this concern, the Fed cut interest rate in October 2019 by 0.25 percent. In terms of growth, the US GDP grew at a rate of 1.9 percent against a market expectation of 1.6 percent. The growth is a slight decline from 2.0 percent realized in Q2 of 2019. However, consumption by households grew to 2.9 percent while government spending increased by 2 percent.

The US economy performed better in Q3 compared to the rest of the world, as both the fixed income and equities earning were positive. Below are two highlights from the US third-quarter earnings results.

Stock Market Earnings Were Better Than Expected

Many analysts had expressed reservations regarding the third-quarter performance due to the current global economic slowdown and the China-US trade wars. The actual results from the Q3 period indicate that the markets have appreciated. An Increase in consumer spending resulted in a better than expected GDP for the third quarter

The S& P 500 is considered a good indicator of US stocks and business performance. To date, 91 percent of companies in the S&P 500 have reported their earnings. Seventy-three percent of these companies have reported better than expected per share. Historically, an average of 56 percent of companies usually achieves better than expected EPS. In terms of sales, 60 percent of the companies have reported figures above estimates, which is above the five-year average. The S&P 500 is on an uptrend throughout the third quarter. It gained 1.7 percent in that period. The index is now up by 20.9 percent in 2019; it’s the best-run since 1997.

Despite the positive earning, some analysts viewed the earning as a mixed bag. The aggregate net income for the companies that have reported so far is lower than in the net income of the same companies in previous periods. However, revenue growth is in a range previously achieved by this group of companies. For these companies, net income is down by 0.6 percent, while revenues are up by 4.9 percent.

US Economy Resilience to Tariffs and Wage Inflation

Trade wars between china and the US have seen the two countries impose steep tariffs upon each other. The depreciation of the Chinese Yuan countered a recent decision by the US to apply tariffs on more Chinese imports. The twists and turns that have characterized trade negotiations with China have not impacted the Q3 earnings significantly as initially feared. Although manufacturing dipped in Q3 2019, businesses still reported increased revenues.

For several months, the average hourly rate has been increasing steadily. While unemployment at its lowest level in decades, the wage rate is rising at a faster pace than inflation. For Q3, the annualized weekly wage rate rose to 3.3 percent. The rise was an improvement of a 2 percent increase in the second quarter. The increase in wages has not affected profits and earning to warrant a freeze on employment or layoffs.

Conclusion

In Q3, the earnings in the US appreciated. A Majority of companies forming the S&P 500 have reported a higher than expected EPS, better sales than the forecasts, or both. Businesses have proved resilience to rising wages, and the uncertainty brought about China and US trade wars.

Dividend Stocks, Investing

How to Apply Financial Ratios When Buying or Selling Stock

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How to Apply Financial Ratios When Buying or Selling Stock

Buying shares of stocks for your financial security is a good start to suffice your future needs. However, doing so without ensuring the reliability of a particular corporation you want to capitalize on will only jeopardize your investment. It is true that there will be numerous risks to be encountered in investing in stocks. Though, we can still manage to minimize these risks to occur. 

Before venturing your money on stocks, it is absolutely necessary for investors to evaluate the financial performance of every possible corporation they have on their list.  To aid you with that, there are significant and beneficial details that must be considered for you to determine if a corporation is worth investing in. Here are the most helpful financial ratios in evaluating stocks: 

Return on Equity

ROE determines the profitability of exploiting the invested capital. It also verifies the efficiency of the company using the owner’s equity. The return on equity is computed as: 

ROE= Net Income less Preferred Stock Dividend Requirement / Issued and Subscribed Ordinary Shares plus Retained Earnings

This formula indicates how much of the net income will each dollar of shareholder’s equity can gain. To explain it further, let’s assume the following:

 

Ordinary shares, $20 par, 10,000 issued                  $ 200,000

6% Preference Shares, $10 par, 5,000 issued                 50,000

Subscribed Ordinary Shares, 3,275                                  131,000

Net Income – yearend                                                            72,000

Retained Earnings, Unrestricted                                        30,000

Preferred Stock Dividend Requirement                              3,000

 

In order to indicate the profitability using these data, return on equity has to be calculated this way:

ROE= $72,000-$3,000 / $200,000+$131,000+$30,000+ $72,000-$3,000

         =16%

 Take note that retained earnings include net income less preferred stock dividend requirement. From the example, we can say that the company is spending the invested capital successfully as 15-20% ROE is deemed excellent.  Longstanding low ROE denotes the failure of an enterprise to maximize profit. Exceedingly high ROE can be good sometimes since it reflects a successful performance. On the other hand, a high ROE may imply a large amount of debts. Additionally, comparing the ROE of a company to the average ROE of the industry is also a helpful way of evaluating its profitability. 

Earnings Per Share (EPS)

Out of all the information concerned with stocks assessment, this is the most vital profitability ratio that all investors should be focusing on as EPS determines the amount of profit which every single ordinary share can obtain. It is computed as:

EPS= Net Income less Preferred Stock Dividend Requirement / Number of Common Shares Outstanding

Using the foregoing example, here is an illustration on how to apply this formula:

EPS= $72,000-$3,000 / 10,000 shares

        =$6.9 per share

Some companies don’t have preferred shares. If a company has only one class of share capital, a different formula has to be used in order to get its EPS:

EPS= Net Income / Number of Shares Outstanding

A high EPS implies that a company is able to return more than the previous investment of its shareholders. Especially if it’s on a steady upward inclination, potential investors will surely be attracted to availing its shares. Usually, the EPS of a company is weighed against the other companies within the same industry. This would indicate if the company is performing well in comparison to its peers. However, some corporations have a low EPS not because its financial performance is terrible. Its profit might be allocated for reinvestments in order to keep the company progress. Therefore, EPS must not be the only basis in measuring profitability since there are a lot of related factors to be considered. 

Dividend Payout Ratio

Aside from determining the profitability of a company, shareholders are interested in knowing how much dividend they obtained from the earnings. Using this ratio, the percentage of earnings that have been distributed as dividend and the percentage of reinvestment will be revealed. If you are going to rely on the amount per share, it will be calculated as: 

Dividend Payout Ratio= Dividend per Share / Earnings per Share

On the other hand, apply this formula if the only given data is the retention ratio which indicates the portion of the earnings to be plowed back to the company:

Dividend Payout Ratio=1-Retention Ratio

The average S&P 500 dividend payout ratio is approximately 35%. An extremely high dividend payout ratio is considered good as the company is willing to pay out high-priced dividends. But some risks are linked with a high percentage because the company might not be thinking about expanding its operations or not even allocating its profit for future needs. A dividend payout ratio with more than 100% means that the company is distributing more dividends than it is earning. This will possibly result in the postponement of paying out dividends in the upcoming years. These factors have to be considered if investors are planning to acquire a long-term investment.

Small-scale companies that are still starting out normally have a low or 0% dividend payout ratio since their earnings are directly appropriated to a specific purpose such as strengthening financial growth and supporting expansion.

Price-Earnings Ratio (PE Ratio)

Potential investors must not only be interested in how much the company earns. They must also be aware of how willing investors are in obtaining shares. P/E ratio measures the association between the market price and the earnings per share. At times, the P/E ratio is called price multiple because it reveals the extent of how much investors are expected to pay for every dollar of earnings. It must be computed as:

Price-Earnings Ratio= Market Price per Share / Earnings per Share

Even though a high P/E ratio shows how attracted investors are in acquiring shares just because price escalation is anticipated to occur in the future, it could also mean that the market price is overvalued. Companies that acquired losses will result in having a negative P/E ratio and will be expressed as N/A. 

Financial ratios are calculations using numerical figures that originated from financial statements. Being equipped with these fundamental tools is an advantage in indicating if a company performs well. If these are interpreted and utilized correctly, you will be able to derive decisions in avoiding investment risks. 

 

Dividend Stocks

5 Reasons Some Companies Don’t Pay Cash Dividends To Their Shareholders

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5 Reasons Some Companies Don’t Pay Cash Dividends To Their Shareholders

As an investor, your goal in capitalizing on a trusted corporation is either to earn income from your dividends or to receive an amount of capital gains that exceed your investment. The corporation that you may have chosen has previously presented impressive performance and has been regularly paying dividends to its shareholders.

Despite the positive operation of the corporation, a time will come that it will suddenly take a break in distributing dividends. But there is nothing to worry about because it does not automatically indicate bankruptcy as there are explanations behind this occurrence. Dividend policies have a great impact on the management’s decision regarding the payment of dividends.  Investors should remember these general considerations influencing dividend market strategies:

1. Legal Limitations

Although there is no specific law that obligates firms to disseminate dividends to its shareholders, circumstances must be met concerning the dividends allocation system as imposed by law. Firms’ decisions regarding dividends are affected by these statutory restrictions:

  • Insolvency rule

If the company’s total liability has surpassed its total assets, then it signifies incapacity to pay dividends from the fact that it reflects financial insolvency.

  • Net Profit rule

Companies are allowed to distribute dividends if it earns a net profit. On the other hand, if companies incurred losses, shareholders have to wait for the companies to recover from their losses in order to receive their dividends. 

  • Dividend surpasses profit

Companies may not distribute payments if their dividend is greater than retained earnings.  If the amount of dividend exceeds its profit, it only indicates that the company is paying out too much of its dividends but does not earn or retain profit to power its growth.

  • Capital Impairment rule

The creditors’ rights must also be protected. Therefore, companies are forbidden to pay out dividends if it is taken from its capital invested in the firm.  Aside from the limitations provided by law, certain restrictions are urged by investors to the companies in order to take precautions such as requiring them to preserve a certain amount of working capital and to declare dividends subsequent in repaying debts.

2. Firm’s liquidity position

There is a misconception that a firm’s outstanding amount of profits implies its sufficiency in disbursing cash dividends to shareholders. We have to take note that cash adequacy is unconnected to retained earnings. Firms can earn profits well but can also be lacking with cash from the fact that it might be prioritizing the settlement of its debts or recapitalized its cash in the company. Dividends may not be paid if not held in cash that is why dividend payout is influenced by the company’s liquidity position. 

3. Certainty of earnings

If companies have volatile earnings, they cannot depend on internally generated funds in order to support their financial stability.  This occurrence will definitely affect the administration’s decision on whether to focus on satisfying the necessities of the company or paying dividends.

4. Deficiency in alternative financial sources

Small-scale companies tend to have a lower dividend payout ratio due to their inability to get access to capital markets. These companies that are still starting out prefer saving their generated profit as an investment rather than paying dividends. 

5. Tax in dividend income

Shareholders have a personal preference when it comes to receiving cash dividends due to the tax bracket. The tax to be incurred in receiving capital gains is much more inexpensive than in dividend income. Therefore, shareholders who have a high personal tax bracket would rather have capital gains. In addition to that, the higher cash dividend is subject to a higher tax to be paid which also affects shareholders’ decisions.

These are just the common factors that greatly affect the management in settling decisions concerning the distribution of dividends. As you devote yourself further to exploring your chosen corporation, you can also uncover the other details about its dividend policy.  

 

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