The Dividend Story Plus China's Gold Fever

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Wednesday, June 12, 2013
Gregory Dorsey

It’s now been 16 quarters since the U.S. economy emerged from recession. And while the expansion is now one of the longest on record, it has also been one of the weakest. One characteristic of the recovery has been companies’ reluctance to invest their cash. Typically, indications of improving economic conditions would have corporate financial officers eager to put money to work to grow their business. But that hasn’t been the case in this expansion.

Instead, companies have used a good chunk of their discretionary cash flow to boost dividends and to buy back stock on the open market. For instance, since the Great Recession’s end in mid 2009, the dividends paid by the S&P 500 have risen more than 60 percent. That puts us in rarefied territory.

Looking at the more than 60 years for which we have data, there have been only three other occasions in which dividend growth reached such lofty heights – in 1952, 1980 and 2006. In each of those cases, stocks continued to advance by a healthy margin before topping out. The subsequent gains in 2006 and 1980 were impressive: 20 percent and 18 percent, respectively. The increase in 1952 was a more subdued but nevertheless still favorable 8 percent.

There’s no guarantee that this time around stocks will perform as well. But keep in mind that in each of those previous occasions, like today, the economy was expanding at a slow to moderate pace and not in danger of overheating. At the very least, the past instances of strong dividend hikes suggest that stocks aren’t likely to suffer a big setback anytime soon.

The amount of money being committed to corporate share buybacks lately has likewise been impressive. Apple (AAPL) is in the midst of a $60 billion buyback. Wal-Mart (WMT) just announced plans for open market purchase totaling $15 billion, replacing a similar-sized buyback program it initiated in 2011. American International Group (AIG) and Seagate Technology (STX) have each repurchased more than 20 percent of their stock in the last few years. In fact, more than 100 companies in the S&P have bought back more than 4 percent of their shares in the past year alone. The buying hasn’t been limited to just one or two industry groups either; it stretches across most sectors, with the highest concentrations having been in Technology, Telecom and Consumer Discretionary.

Like dividends, share buybacks are a vote of confidence in a company’s prospects. A buyback reduces the share count, and assuming it’s conducted when the stock is cheap it has the effect of boosting a company’s per-share figures, increasing shareholder value.

These buybacks have undoubtedly been an important driver for stocks in the last few years. And with nearly $260 billion in buybacks announced so far in 2013 and likely more to come, they should not only keep a floor under share prices going forward, but also contribute further to the market’s advance.

In the last couple of years, as with so many other commodities, China has displayed an insatiable appetite for gold. The county is the world’s largest gold producer and it has rapidly become the largest consumer of the metal as well.

It’s hard to tell exactly how much gold is flowing into China, although it is safe to say the country is currently sopping up nearly a third of global mine output. In the absence of official government statistics, one widely watched gauge of the country’s demand are the monthly statistics on Chinese imports of gold through Hong Kong. These imports (net of exports) set an all-time record in March, topping 136 tonnes, and on an annualized basis represented approximately 60 percent of global annual gold production.

So naturally the gold bears were quick to point to the sharp “slide” in Chinese gold demand in April when the data was released last week, as imports dropped to “just” 80 tonnes. Of course what those bears neglected to mention was the fact that even at that reduced rate, China’s April gold imports were nearly 20 percent higher than they were in the same period a year ago.

Moreover, it turns out that China’s gold demand may not have weakened at all. Several approved Chinese banks expended their entire annual import quotas in the first three months of the year. Regulatory restrictions therefore impeded their ability to import gold in April. Now assuming those quotas have been or will be lifted, and we think they will, we should see a strong rebound when May’s data becomes available. Moreover, the banks that were in the market buying gold had to contend with sharp increases in gold premiums over the metal’s melt value in April, suggesting a lack of adequate available supply.

And now China’s gold buying frenzy can truly begin. After months of anticipation, China securities regulators have finally approved trading in two exchange traded funds that are backed by gold. This will make gold accessibility that much easier for China’s citizens, a nation of savers who already can walk into any one of a number of banks and buy and store the Midas metal there, something that’s not available for Americans.

The ETFs, which will soon start trading, will likely hasten the shift of gold from Western vaults to those in the East. Their creation will help to boost prices for the metal as well, which is a long-term positive for people in this country who invest at least a modest portion of the assets in the metal. We hope you count yourself in this group.

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