Times have rarely been better for investors.
We’re going on a full decade of a rising market. Wages have been abnormally flat while a larger percentage of wealth gains are going to those who can afford to boost their portfolios.
And right as the Fed started to rain on the parade with looming rate hikes, the new tax bill came in and breathed new life into the largest corporations in the country.
Between a lower maximum tax rate and reduced penalties for repatriating foreign earnings, a massive wave of what is effectively cash is being added back to cash flows and profits.
At the same time, lower effective tax rates for middle-to-upper-class income earners means more money can be plowed into the market.
All of this is good, but what the companies are choosing to do with the cash is making it that much better, especially for income investors.
Easiest Path Forward
I will admit, I have been a critic of share buyback programs for years now.
I still am, and quite frankly, I have no doubt that a lot of the C-Suite crowd is right there with me.
Capital expenditures and long-term reinvestment into companies will always be better than short-term measures that boost share prices without supporting future revenue.
But that is on an “all things being equal” basis. That is hardly the case.
Relatively anemic economic growth and demand growth in recent years have made it hard to justify committing today’s cash reserves to capture market segment expansion that may never materialize.
Bond holders keep piling into top-rated corporate bonds and driving down borrowing costs. While the Fed will keep increasing the Fed Funds rate and that will, in turn, trickle down across the debt markets, we’re still a long way off from truly calling debt expensive for those top-rated companies.
So its hard to justify long-term investment through capital expenditures, but cash left sitting on the sidelines is about the least useful form of asset a company can have.
And thus, in the wake of the tax cuts, we’re seeing share buybacks and dividend hikes the likes of which we haven’t seen in a generation.
Follow The Money
We’re on pace to see second quarter share buybacks meet or beat the record first quarter of this year.
That, in turn, will put buybacks roughly on pace to surpass $1 trillion for the year.
That would mark a whopping 46% year-over-year increase. And while share buybacks have fallen a bit over the last couple years, 2017 still far outpaced the average.
Goldman Sachs is reporting that buyback authorizations are already up to $754 billion.
Then there is the other easy and very popular way to return cash to shareholders — dividend payments.
More than 40% of the S&P 500 constituent companies raised their dividends in the first half of 2018.
The average increase was 14%, marking an acceleration from last year’s 12% in the second quarter.
It doesn’t matter if you agree with the politics of the tax cut or the actions of executives when you look at metrics like this.
Objectively, it is a fantastic time to be investing in companies that are returning money to shareholders.
The Outsider Club’s Jimmy Mengel has been calling for readers of The Crow’s Nest to keep a focus on dividend companies that are steadily returning more and more cash to shareholders while maintaining healthy growth.
It has paid off handsomely. The current portfolio is up roughly 60%, effectively doubling the S&P 500’s roughly 30% year-to-date.
This is no fluke. The 2018 closed portfolio averages 27% per position. 2017’s averaged closed positions came out to 64%.
Jimmy just collected 27 of the best income plays in the market today into one report for his readers. I suggest you check it out while you can.
