Maira Thompson, Senior Portfolio Manager
If we look in the proverbial rear-view mirror, the market low on February 11th was a good buying opportunity. A myriad of factors, including negative corporate earnings and renewed pressure on the Chinese yuan, prompted a volatile start to the year with a sharp market sell-off in January. When the Federal Reserve assumed a more dovish tone, financial conditions eased, allowing risk assets including equities, corporate bonds and commodities to rally. Despite the sharp rebound in the first quarter, the S&P 500 Index returned only +1.35%, extending the muted returns from 2015 when the index was up +1.38% for the year. A low return environment for U.S. stocks may persist until corporate earnings improve later this year. This scenario continues to be positive for quality dividend-paying stocks providing above-average cash flow.
Growth Vs. Value Stocks
For nearly a decade, growth stocks have outperformed value including throughout the most recent bull market starting in 2009. Over the last five years, many value stocks declined to "recession like" pricing in several sectors. As a result, low-tech cyclical companies viewed as undervalued relative to their peers had big upward momentum in the first quarter. Beaten-down sectors such as Materials +2.99%, Energy + 3.12% and Industrials +4.43% outperformed their growth counterparts. Despite the recent momentum, a sustained shift from growth to value at this point in the market cycle would require more leadership from Financial and Energy stocks, which may be premature based on lack of sustained earnings growth. Dividend stocks are found in both growth and value styles. We continue to favor companies with consistent earnings and revenue and dividend growth at a reasonable price over the long term.
Over the last several quarters, S&P 500 Index dividends per share continued to rise while corporate earnings declined increasing the dividend payout ratio to 37.9% in the fourth quarter. For the first time since 2011, dividend per share growth has slowed to single digits - to a rate of 9.5%. Year over year, sectors with the highest dividend growth rate were Healthcare and Financials while dividend growth lagged in the beleaguered Energy and Materials sectors. The Materials sector was the only sector to see a year-over-year decline in dividends per share, but it could stage a recovery in late 2016-2017 as earnings growth improves. The Energy sector dividend growth slowed dramatically as several large companies, including Kinder Morgan (NYSE:KMI), cut or eliminated their dividends. A "lower for longer" commodity price scenario for oil prices may translate into additional dividend cuts within the sector. Overall, we expect dividend growth rates to continue to decelerate as long as earnings growth remains sluggish with a possible rebound in the second half of 2016.
Amid the market volatility, the sectors with the highest returns for the quarter were Utilities + 14.51%, Telecom +15.10% and Staples +4.85% versus the weakest sectors Financials -5.60%, Healthcare -5.93% and Consumer Discretionary +1.20%.
Portfolio Winners & Laggards
Winners included Cummins (NYSE:CMI) +26.16, Cracker Barrel (NASDAQ:CBRL) +21.46% and Hasbro (NASDAQ:HAS) +19.64%, and laggards PNC Bank (NYSE:PNC) -10.74, Wells Fargo (NYSE:WFC) -10.33% and JPMorgan (NYSE:JPM) -9.6%.
Sources: FactSet, Ned Davis Research
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