Let's continue with the theme of the previous posts where we discussed the impact of re-investing a growing dividend over the long-run. Recall that we found not only above average returns in consumer staples and health care, but we also found low volatility. For this article I'd like to take a closer look at the financials and show that we have some of the same total return characteristics as staples and health care. Despite higher volatility in the financials, long-run total returns in this sector make a compelling case for either continuing or initiating a position.
From the table below, have a look at the 25 year total returns for the following: JP Morgan (JPM) 11.3%, US Bancorp (USB) 11.2%, and Wells Fargo (WFC) 16.2%. Corresponding betas are, respectively, 1.66 for JP Morgan, 0.89 for US Bancorp, and 1.17 for Wells Fargo.
| Company | Ticker | Recent | Dividend($) | Yield(%) | 3 Months(%) | 12 Months(%) | 3 Year(%) | 5 Year(%) | 10 Year(%) | 20 Year(%) | 25 Year(%) | Beta |
| JP Morgan | JPM | 45 | 1.20 | 2.6 | 8.1 | 29.6 | 2.7 | 2.8 | 8.5 | 9.5 | 11.3 | 1.66 |
| US Bancorp | USB | 32 | 0.78 | 2.3 | -5.8 | 18.7 | 13.7 | 2.9 | 7.6 | 11.1 | 11.2 | 0.89 |
| Wells Fargo | WFC | 34 | 0.88 | 2.5 | -0.9 | 23.5 | 9.6 | 5.6 | 6.3 | 12.5 | 16.2 | 1.17 |
Let's contrast this with the 25 year total returns of some selected staples stocks:
| Company | Ticker | Recent | Dividend($) | Yield(%) | 3 Months(%) | 12 Months(%) | 3 Year(%) | 5 Year(%) | 10 Year(%) | 20 Year(%) | 25 Year(%) | Beta |
| Colgate Palmolive | CL | 106 | 2.48 | 2.3 | -2.5 | 17.7 | 10.8 | 8.8 | 9.2 | 13.8 | 16.8 | 0.33 |
| Kimberly Clark | KMB | 84 | 2.96 | 3.4 | -1.4 | 19.7 | 14.1 | 8.4 | 9.8 | 9.5 | 13.1 | 0.07 |
| Coca Cola | KO | 37 | 1.02 | 2.7 | -4.9 | 6.3 | 11.5 | 6.6 | 7.8 | 8.5 | 13.5 | 0.39 |
| Proctor & Gamble | PG | 68 | 2.25 | 3.3 | -1.4 | 5.0 | 6.9 | 1.7 | 7.1 | 10.9 | 13.2 | 0.23 |
| Philip Morris | PM | 86 | 3.40 | 3.9 | -6.8 | 10.6 | 24.3 | N/A | N/A | N/A | N/A | 0.90 |
And some selected health care stocks:
| Company | Ticker | Recent | Dividend($) | Yield(%) | 3 Months(%) | 12 Months(%) | 3 Year(%) | 5 Year(%) | 10 Year(%) | 20 Year(%) | 25 Year(%) | Beta |
| Abbot Labs | ABT | 33 | 0.56 | 1.7 | -4.2 | 19.4 | 10.1 | 6.6 | 8.7 | 10.5 | 12.9 | 0.44 |
| Johnson & Johnson | JNJ | 71 | 2.44 | 3.4 | 2.3 | 10.4 | 6.4 | 4.7 | 5.2 | 11.4 | 13.6 | 0.44 |
| Merck | MRK | 41 | 1.72 | 4.1 | -7.5 | 11.4 | 8.1 | -2.2 | 1.1 | 6.8 | 9.6 | 0.29 |
| Novartis | NVS | 64 | 2.48 | 3.9 | 2.6 | 13.7 | 10.8 | 7.1 | 8.3 | N/A | N/A | 0.47 |
| Pfizer | PFE | 25 | 0.96 | 3.7 | 1.0 | 18.7 | 14.3 | 6.7 | 1.6 | 10.3 | 13.7 | 0.66 |
Long-run returns for the financials haven't exactly been what they were for staples and health care over the last several years. As difficult as the last four and half years have been, however, we may be finally seeing some daylight. A number of recent events and data are pointing towards positive fundamentals that are either here already or soon to be. Consider some of the following:
1) A consensus is developing around the perceived end of the housing bust. A return to normalized housing starts, re-sales, and lending is more conceivable today than at any time since 2008.
2) Litigation against the banks appears to be nearing an end-game. Recent settlements by Bank of America and others portend well for this trend.
3) The reserve guidelines for Basel III will not be as stringent as initially thought. Apparently, some of the intense lobbying that the big lenders have been doing has paid off. As a result, we can expect higher earnings sooner.
4) Dividend growth and buybacks are on their way back. There's been more public talk of late about the Fed lightening its opposition to returning profits to owners. In a recent research note, UBS expects Wells Fargo to both boost their dividend and announce larger buybacks. We can expect more to come from other banks as well.
If we believe (or at least try to believe) that the last five years have been an aberration or a black swan event, then we can expect financials to start to deliver what have historically been outstanding total returns - the type of returns that staples and health care have shown us. Given improving fundamentals of late, this wouldn't be an unreasonable expectation.
For information and comparison purposes, I've also included below the complete table for the longrundata.com Model Portfolio. The source for all data here is longrundata.com.
| End of Quarter Report, December 31, 2012 | ||||||||||||
| Longrundata Model Portfolio, Total Returns as of December 31, 2012 | ||||||||||||
| Company | Ticker | Recent | Dividend($) | Yield(%) | 3 Months(%) | 12 Months(%) | 3 Year(%) | 5 Year(%) | 10 Year(%) | 20 Year(%) | 25 Year(%) | Beta |
| Colgate Palmolive | CL | 106 | 2.48 | 2.3 | -2.5 | 17.7 | 10.8 | 8.8 | 9.2 | 13.8 | 16.8 | 0.33 |
| Kimberly Clark | KMB | 84 | 2.96 | 3.4 | -1.4 | 19.7 | 14.1 | 8.4 | 9.8 | 9.5 | 13.1 | 0.07 |
| Coca Cola | KO | 37 | 1.02 | 2.7 | -4.9 | 6.3 | 11.5 | 6.6 | 7.8 | 8.5 | 13.5 | 0.39 |
| Proctor & Gamble | PG | 68 | 2.25 | 3.3 | -1.4 | 5.0 | 6.9 | 1.7 | 7.1 | 10.9 | 13.2 | 0.23 |
| Philip Morris | PM | 86 | 3.40 | 3.9 | -6.8 | 10.6 | 24.3 | N/A | N/A | N/A | N/A | 0.90 |
| Staples Portfolio Average | N/A | N/A | N/A | 3.1 | -3.4 | 11.9 | 13.5 | 6.4 | 8.5 | 10.7 | 14.2 | 0.38 |
| Staples SPDR | XLP | 35 | N/A | 2.7 | -2.1 | 10.9 | 12.4 | 6.9 | 7.8 | N/A | N/A | N/A |
| S & P 500 SPDR | SPY | 145 | N/A | 2.0 | -0.6 | 14.2 | 10.2 | 1.8 | 6.6 | 8.1 | N/A | N/A |
| Abbot Labs | ABT | 33 | 0.56 | 1.7 | -4.2 | 19.4 | 10.1 | 6.6 | 8.7 | 10.5 | 12.9 | 0.44 |
| Johnson & Johnson | JNJ | 71 | 2.44 | 3.4 | 2.3 | 10.4 | 6.4 | 4.7 | 5.2 | 11.4 | 13.6 | 0.44 |
| Merck | MRK | 41 | 1.72 | 4.1 | -7.5 | 11.4 | 8.1 | -2.2 | 1.1 | 6.8 | 9.6 | 0.29 |
| Novartis | NVS | 64 | 2.48 | 3.9 | 2.6 | 13.7 | 10.8 | 7.1 | 8.3 | N/A | N/A | 0.47 |
| Pfizer | PFE | 25 | 0.96 | 3.7 | 1.0 | 18.7 | 14.3 | 6.7 | 1.6 | 10.3 | 13.7 | 0.66 |
| Health Care Portfolio Average | N/A | N/A | N/A | 3.4 | -1.2 | 14.7 | 9.9 | 4.6 | 5.0 | 9.8 | 12.5 | 0.46 |
| Health Care SPDR | XLV | 40 | N/A | 1.9 | -0.6 | 15.9 | 10.1 | 4.5 | 5.4 | N/A | N/A | N/A |
| S & P 500 SPDR | SPY | 145 | N/A | 2.0 | -0.6 | 14.2 | 10.2 | 1.8 | 6.6 | 8.1 | N/A | N/A |
| General Electric | GE | 21 | 0.76 | 3.6 | -6.4 | 18.3 | 14.4 | -6.9 | 1.4 | 8.4 | 9.9 | 1.38 |
| Illinois Tool Works | ITW | 62 | 1.52 | 2.4 | 2.8 | 30.1 | 10.7 | 6.1 | 8.3 | 12.8 | 13.8 | 1.31 |
| 3M | MMM | 95 | 2.36 | 2.5 | 0.1 | 14.2 | 6.5 | 5.2 | 6.4 | 9.7 | 10.2 | 1.03 |
| United Technologies | UTX | 84 | 2.14 | 2.5 | 5.3 | 12.8 | 7.2 | 4.2 | 12.2 | 16.4 | 15.1 | 1.12 |
| Exxon Mobil | XOM | 87 | 2.28 | 2.6 | -4.8 | 3.21 | 10.5 | 0.8 | 11.8 | 12.1 | 12.4 | 0.87 |
| Industrial Portfolio Average | N/A | N/A | N/A | 2.7 | -0.6 | 15.7 | 9.9 | 1.9 | 8.0 | 11.9 | 12.3 | 1.14 |
| Industrial SPDR | XLI | 38 | N/A | 2.2 | 4.0 | 12.5 | 12.4 | 1.7 | 7.8 | N/A | N/A | N/A |
| S & P 500 SPDR | SPY | 145 | N/A | 2.0 | -0.6 | 14.2 | 10.2 | 1.8 | 6.6 | 8.1 | N/A | N/A |
| Bank of America | BAC | 12 | 0.04 | 0.3 | 29.7 | 101.9 | -9.1 | -20.6 | -7.7 | 2.7 | 7.2 | 1.78 |
| Citigroup | C | 42 | 0.04 | 0.1 | 20.8 | 40.1 | 5.2 | -32.1 | -17.9 | 2.1 | 4.8 | 1.88 |
| JP Morgan | JPM | 45 | 1.20 | 2.6 | 8.1 | 29.6 | 2.7 | 2.8 | 8.5 | 9.5 | 11.3 | 1.66 |
| US Bancorp | USB | 32 | 0.78 | 2.3 | -5.8 | 18.7 | 13.7 | 2.9 | 7.6 | 11.1 | 11.2 | 0.89 |
| Wells Fargo | WFC | 34 | 0.88 | 2.5 | -0.9 | 23.5 | 9.6 | 5.6 | 6.3 | 12.5 | 16.2 | 1.17 |
| Financial Portfolio Average | N/A | N/A | N/A | 1.6 | 10.4 | 42.8 | 4.4 | -8.3 | -0.6 | 7.6 | 10.1 | 1.48 |
| Financial SPDR | XLF | 17 | N/A | 1.7 | 5.3 | 25.2 | 5.2 | -8.4 | -1.1 | N/A | N/A | N/A |
| S & P 500 SPDR | SPY | 145 | N/A | 2.0 | -0.6 | 14.2 | 10.2 | 1.8 | 6.6 | 8.1 | N/A | N/A |
| Model Portfolio Average | N/A | N/A | N/A | 2.6 | 1.3 | 21.2 | 9.4 | 1.2 | 5.2 | 10.1 | 12.3 | 0.87 |
| S & P 500 SPDR | SPY | 145 | N/A | 2.0 | -0.6 | 14.2 | 10.2 | 1.8 | 6.6 | 8.1 | N/A | N/A |
| Notes: | The author is a direct owner of each company mentioned here. | |||||||||||
| The author is not an owner of SPDR's mentioned here. | ||||||||||||
| Three month returns are 90 days, not annualized. | ||||||||||||
| Yield' and 'Recent' data may not reflect end of quarter date. | ||||||||||||
| Source: | www.longrundata.com | |||||||||||
