Flight to Dividend as Blue-Chips Earnings Forecasts Downgraded

on Jul 26, 2012

Across corporate America, market analysts are paring back revenue growth forecasts amid growing concerns that the US economy – the world’s largest – is heading for recession before year’s end. The seemingly endless Eurozone crisis coupled with an increasingly bleak US prognosis have investors in flight to the relative safety of large corporates with the habit of paying dividends, increasingly a luxury adornment amongst blue-chips with growth expectations at their lowest since the latter part of 2008 and beginning of 2009.

Whereas at the beginning of 2012, analysts were forecasting growth for the top 30 Dow Jones Industrials in the four to six percent range, now the consenus is an average of just one to one and a half – less than the current rate of inflation.
Lamented Nicholas Colas, chief market strategist at ConvergEx Group, “We are fast approaching levels where these estimates are unambiguously pointing to the risk of a US, global recession later in 2012 and into 2013.”

!m[](/uploads/story/191/thumbs/pic1_inline.png)As majors have progressively released Q2 earnings figures, so the downslides in revenue forecasts have gathered. And those lower earnings make layoffs more likely, in turn weakening the wider economy and impacting adversely on annualised corporate profits.
Some, but by no means all, analysts remain optimistic for Q4 results – 3.9 percent year on year has been forecast – but this will be at the expense of a weaker dollar boosting export receipts. Meantime, the expectation of further quantitative easing by the Federal Reserve before September – it’s third in the current round – has given some impetus to stocks which fell sharply in June, especially those of cashed-up companies willing and able to make a dividend payment.

During the third week of July, some seven Dow Industrial leaders managed to hit 12-month highs. And Standard & Poors ‘Aristocrats’ index – comprising the 30 top dividend payers over the past 25 years – is currently at an historical high after a seven percent rise since the beginning of June.
Noted Linda Bakhshian, portfolio manager at Federated Investors, “In the current environment of ultra-low fixed-income yields and increased volatility in equity markets, dividend paying companies look very attractive.”

Of course, with sliding revenues, even a blue-chip play might leave investors vulnerable to sharp price declines. Unless they have a lot of cash that is.
A final word from Oliver Pursche, a portfolio manager at Gary Goldberg Financial Services: “Even as the pace of revenue growth slows, many of these companies still have tremendously good balance sheets and a lot of cash at hand.” Pursche observed: “Revenues have not been as strong as we would like to see them. But they haven’t been horrible.”

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