THE POWER OF DIVIDENDS
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Timothy Pettee, chief investment strategist and lead portfolio manager at SunAmerica Asset Management, LLC, gives us a look at the rise and importance of dividends in U.S. markets.
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THE POWER OF DIVIDENDS
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- 3. THE POWER OF THE RIGHT ADVISOR The Calandro Group With over one hundred years of combined experience in the financial services industry The Calandro Group has made it our business to care deeply about the people we serve, deliver innovative ways of helping them, and respond to challenges resolutely and creatively. Seeking to eliminate financial jargon and to bring high-net-worth individuals a sophisticated level of attention and impeccable service we go to great lengths to build meaningful, respectful wealth management relationships that provide refreshing and rewarding experiences. The Calandro Group believes that the legacy of our firm, Merrill Lynch, – who we are, what we’ve accomplished and what we stand for – is nothing short of extraordinary. It is a company where every employee is willing to help others. You don’t see this at many firms. At Merrill Lynch it’s about doing the best for all of the firm’s clients and the company in its entirety. It is the challenge and opportunity that come from playing on the best team. John Calandro III, CFP Managing Director – Wealth Management (214 )969-2324 Kevin Calandro Vice President - Investments (214) 969-2679 Chris Calandro Financial Advisor (214) 969-2677 Max Markley Financial Advisor (214) 969-2299 Helen Kuperman Financial Services Associate (214) 969-2628 Molly Williams Registered Client Associate (214) 969-2380 Todd Wakefield Financial Advisor - Planning (214) 969-2602
- 4. Presenter: Timothy Pettee, Chief Investment Strategist, SunAmerica Asset Management Corporation Timothy is lead Portfolio Manager for rules-based funds including $10 billion, 5-star (Morningstar) SunAmerica Focused Dividend Strategy Fund (FDSAX). He is also lead portfolio manager for SunAmerica International Dividend Strategy Fund (SIEAX) and SunAmerica Strategic Value (SFVAX). Timothy has deep experience in the asset management industry including Chief Investment Officer for SunAmerica Asset Management 2003 - 2013. He oversaw growth of internally assets under management from < $5 billion to $30+ billion in mutual fund and annuity fund assets, including rules based equity, active equity, equity index, fixed income and asset allocation products. Monthly Market Update
- 5. 4 The Rise and Importance of Dividends in U. S. Markets Timothy Pettee Chief Investment Strategist Lead Portfolio Manager – Rules based Funds June 28, 2016 SunAmerica Asset Management is a member of American International Group, Inc. (AIG). Funds distributed by AIG Capital Services, Inc. (ACS), member FINRA. ACS is also a member of AIG. Version 4.2 Revised 052616
- 6. 5 Source: Bureau of Economic Analysis, data as of first quarter 2016. Factset U.S. Economic Growth Slowing but Economy Remains Healthy U. S. GDP Growth
- 7. 6 . Car Sales Barometer of a Healthy Economy Total Light Vehicle sales, seasonally adjusted, rolling three month average, as of April 2016 Source: Bureau of Economic Analysis, Factset. Car Sales as Measure of U. S. Economy
- 8. 7 S&P 500 Index 3-Year Performance Source: Standard & Poor’s, as of May 25, 2016; Factset S & P 500 Index (Short Term)
- 9. 8 10-Year Rolling Returns of the S&P 500 Rolling 10-year annual returns, as of May 25, 2016. Source: Standard & Poor’s, Factset. S & P 500 Index (Long Term)
- 10. 9 .FY-1 (Mean) Price-to-earnings ratio for S&P500; 1996 – Present. Source: Standard & Poor’s, Factset Stock Valuations Below Average Levels Stock Valuations
- 11. 10 Source: U.S. Dept. of the Treasury; Factset. Data as of May 25, 2016 10-Year Treasury Yields Since 1962 Historical Yield of the 10-Year Treasury
- 12. 11 Balance Sheets Improving: Net Long-Term Debt-to-Equity Ratio Source: Empirical Research Partners LP; Corporate reports. Data smoothed on 3-month basis. 10 15 20 25 30 35 40 45 50 55 60 % Balance Sheet Improvements
- 13. 12 Corporate Profits Increasing (Over Long Term) National Income, corporate profits before tax w IVA + CCAdj, SAAR, as of December 31, 2015. $Billions. Source: Factset Corporate Profits
- 14. 13 Cash and Liquid Assets at All-Time Highs Source: Federal Reserve Board, Z1 Statistical Release, L103 Nonfinancial corporate business; liquid assets (broad measure) , in billions of USD; March 2016. Cash and Liquid Assets on Balance Sheets
- 15. 14 Capital Expenditures Gross private domestic investment, fixed investment, nonresidential. Index, 2009 = 100. Source: US Bureau of Economic Analysis, Factset Where is the Cash Going?
- 16. 15 Source: Dealogic, M & A Review, Full Year 2015 Mergers and Acquisitions Where is the Cash Going?
- 17. 16 S&P 500 aggregate share repurchases, $Billions. Source: Factset Share Repurchases Where is the Cash Going?
- 18. 17 Dividends Where is the Cash Going? Source: Federal Reserve Board, Z1 Statistical Release, F3 Distribution of National Income, Corporate business net dividends paid, in billions of USD; December 2015.
- 19. 18 Source: Robert Shiller, Standard and Poor's, Corporate Reports, Empirical Research Partners Analysis. % Dividend Payout Ratios Below Historical Highs Where is the Cash Going?
- 20. 19 Source: Factset Long-Term Impact of Dividends Where is the Cash Going?
- 21. 20 Focused Dividend Strategy Portfolio 30 stocks Dogs of the Dow 10 highest yielding stocks (defined by dividend to price) Enhancement 20 highest ranking stocks based on valuation, profitability & dividend yield + = Dow Jones Industrial Average Russell 1000 (ex Financials and Utilities) Portfolio Construction SunAmerica Focused Dividend Strategy Portfolio
- 22. 21 Enhancement – Metrics Dividends Profitability Valuation High dividend payers High returns on capital employed Low valuations on cash flow metrics SunAmerica Focused Dividend Strategy Portfolio
- 23. 22 At the annual reconstitution, on or about November 1, all positions are resized to 3.33% The Portfolio may benefit from low-cost trading strategies There are no limits on sector or security weightings Turnover averages 12 names per year, but may be more or less Positions may be sold in between reconstitutions which do not meet dividend or liquidity hurdles The Portfolio adheres to the stated investment process regardless of market conditions Trading Discipline SunAmerica Focused Dividend Strategy Portfolio
- 24. 23 Consumer Discretionary Coach Gap, Inc Kohl’s Corporation Wal-Mart GameStop Staples Omnicom Viacom Inc. McDonald’s* Consumer Staples Altria Group Phillip Morris International Procter & Gamble* Energy Chevron* Exxon* Helmerich & Payne Industrials General Electric* Emerson Electric Caterpillar* Cummins Inc. Eaton Corp. Paychex Materials LyondellBasell Indus. Dow Chemical Corp. Telecommunications Verizon* OverweightUnderweight Information Technology HP Inc International Business* Symantec Western Digital Health Care Merck* Pfizer* Financials [None] Utilities [None] Source: Factset. As of 05/15/2016. Weights are relative to Russell 1000 Value. *Denotes Dog-of-the-Dow. The Portfolio’s equity holdings and sector weightings are subject to change every month. The Portfolio is actively managed and its holdings and composition will differ over time. The Portfolio holdings list does not constitute investment advice or an offer to purchase or sell any particular security. To review the complete Portfolio holdings, please visit www.safunds.com. SunAmerica Focused Dividend Strategy Portfolio
- 25. 24 Performance data quoted represents past performance and is not a guarantee of future results. The data assumes reinvestment of all distributions at net asset value (NAV). Class A gross operating expenses: 1.07%. Class A maximum sales charge: 5.75%. The Fund’s daily NAV is not guaranteed and shares are not insured by the FDIC, the Federal Reserve Board or any other agency. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be higher or lower than the original cost. Current performance may be higher or lower than that shown. Performance as of the most recent month end is available at www.safunds.com. For the periods ending March 31, 2015 the Focused Dividend Strategy Portfolio’s Morningstar Overall, 5-, and 10-year ratings are 5 stars and its 3-year rating is 3 stars. Overall Rating is based out of 1,125 funds in the Large Value category. The Fund ranked #53 out of 1,305 funds for 1 year, #53 out of 1,125 funds for 3 years, #6 out of 991 funds for 5 years and #4 out of 689 funds for 10 years. Morningstar is an independent investment research firm that rates the performance of mutual funds based on return and risk. For each fund with at least a 3-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variations in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year (if applicable) Morningstar Rating metrics. Morningstar Rating is for the A share class only; other classes may have different performance characteristics. Past performance is not a guarantee of future results. © 2015 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is not a guarantee of future results. Ranking and Returns (as of 03/31/2015) Focused Dividend Strategy * Ratings not calculated by Morningstar for this time period.
- 26. 25 Focused Dividend Strategy FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH PUBLIC. Performance data quoted represents past performance and is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the active management of an actual portfolio. The data assumes reinvestment of all distributions at net asset value (NAV). Class A gross operating expenses: 1.13%. Class A maximum sales charge: 5.75%. The Fund’s daily NAV is not guaranteed and shares are not insured by the FDIC, the Federal Reserve Board or any other agency. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be higher or lower than the original cost. Current performance may be higher or lower than that shown. Performance as of the most recent month end is available at www.safunds.com.
- 27. 26 SunAmerica Focused Dividend Strategy Portfolio Rules Based Portfolio Management Team Timothy Pettee – Lead Portfolio Manager SunAmerica Asset Management 2003 - Present Schroeder Investment Management 2000 to 2002 U.S. Trust 1998 to 2000 Alliance Capital Management 1990 to 1998 Andrew Sheridan – Co-Portfolio Manager SunAmerica Asset Management 2003 - Present U.S. Trust 1999 to 2003 Timothy Campion – Co-Portfolio Manager SunAmerica Asset Management 2012 - Present Pinebridge Asset Mangement 2010 to 2012 AIG Global Investment 1998 to 2010
- 28. 27 Focused funds are less diversified than typical mutual funds, therefore the performance of each holding in a focused fund has a greater impact upon the overall portfolio, which increases risk. Stocks of small-cap and mid-cap companies are generally more volatile than, and not as readily marketable as those of larger companies, and may have less resources and a greater risk of business failure than do large companies. The Fund employs a Disciplined Strategy and will not deviate from its strategy (except to the extent necessary to comply with federal tax laws or other applicable laws). If the Fund is committed to a strategy that is unsuccessful, the Fund will not meet its investment goal. Because the Fund will not use certain techniques available to other mutual funds to reduce stock market exposure, the Fund may be more susceptible to general market declines than other mutual funds. Tax laws are subject to legislative modification, and while many such modification. Clients should seek the advice of an independent tax advisor or attorney for more complete information concerning their particular circumstances and any tax statements made in this material. Investors should carefully consider a Fund’s investment objectives, risks, charges and expenses before investing. The prospectus, containing this and other important information, can be obtained from your financial advisor, the SunAmerica Sales Desk at 800-858-8850, ext. 6003, or at www.safunds.com. Read the prospectus carefully before investing. Funds distributed by AIG Capital Services, Inc., member FINRA Harborside Financial Center, 3200 Plaza 5, Jersey City, NJ 07311-4992 PPTTPFDS.1– 9/15 SunAmerica Focused Dividend Strategy Portfolio
- 29. Thank you for joining us! Generously Sponsored By:
Editor's Notes
- A look at how the American corporate landscape has changed with the build up US corporate cash and liquidity and the deployment of such cash to dividends among other uses.
- Where is the economy now? The U.S. Economy grew 2% in 3Q 2015. Average historical growth has been 2-3% in recent years. Note GDP definition: GDP (gross domestic product) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis.
- What do other market indicators tell us? We believe car sales are still one of the best economic indicators. Current car sales rates of over 17 million units indicate a healthy U.S. economy, which is above the long term average of 14.8 million units.
- What has the market done recently? The market as measured by the S&P 500 Index is up in recent years but has corrected by as much as 10% in 2016. Past performance is no guarantee of future results.
- We look at returns over long periods of time and over the long term, market returns are still below historical averages of approximately 7%. ‘Rolling Returns' are the annualized average return for a specific time period, ending with the listed year. Rolling returns are useful for examining the behavior of returns for holding periods similar to those actually experienced by investors. Also known as 'rolling period returns' or 'rolling time periods'. The S&P500 Index is an unmanaged, broad-based, market-cap weighted index of 500 U.S. Stocks.
- Market valuations: Broadly, market valuations have increased in recent years, but stock valuations have remained at or below their long term averages. Yes, valuations for stocks have climbed recently, but placed in the context of long-term stock valuations/prices, we are still within a historical average/norm - well below the dotcom period, for example. Please note the definition of market/stock valuations: Valuation ratios compare the company's market value with some financial aspect of its performance -- earnings, sales, book value, cash flow, and so on.
- Where have interest rates been and where are they now: Interest rates, as measured by the 10-year Treasury bill peaked at 16% Today, the 10-year is approximately 2.2%. Interest rates have come down steadily since 1981, making the cost of servicing debt or borrowing less for companies and institutions.
- Please note the definition: Debt-to-equity ratio is a measure of a company’s financial leverage, calculated by dividing its total liabilities by total shareholders’ equity. The cost of borrowing has fallen with falling interest rates, leaving corporations with more cash on their balance sheets: CFOs have taken advantage of the record (or near record) low rates in the last few years by refinancing or borrowing at lower historical rates, which has improved their corporate balance sheets. As rates have come down, corporations in the U.S. have improved balance sheets’ debt-to-equity ratio and reduced costs of capital.
- Meanwhile, as rates have generally come down, corporate profits have increased as the cost of servicing debt has dropped, thus freeing capital to be re-invested back into the company in various forms - such as share buy-back programs, capital expenditures, dividends payments and increased mergers & acquisitions (M&A) activity.
- Corporate cash build up: The general effect of falling rates and the access to cheaper financing has caused cash on the balance sheet to grow. The largest non-financial companies in America now have $2 trillion in cash on their balance sheets.
- Where is the cash build up being used? Generally, one part of the cash on balance sheets is going toward Capital Expenditures as companies look to become more efficient and look to spend monies on building out their businesses. Please note the definition of capital expenditures: Capital expenditures (CAPEX or capex) are expenditures altering the future of the business. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.
- Where is the cash going? Mergers and Acquisitions reached all time highs in 2015. Generally one part of the cash on balance sheets is going toward increased mergers and acquisitions. In the marketplace, we have seen a number of high profile deals in which companies have used their cash-strengthened balance sheet to invest in other businesses. Please note the definition of M&A: Mergers and acquisitions (M&A) is the area of corporate finances, management and strategy dealing with purchasing and/or joining with other companies. In a merger, two organizations join forces to become a new business, usually with a new name.
- Where is the cash going? Some of the cash on balance sheets is going to record levels of share repurchases. Please note the definition of Share repurchases: Share repurchase is usually an indication that the company's management thinks the shares are undervalued. The company can buy shares directly from the market or offer its shareholders the option to tender their shares directly to the company at a fixed price.
- The cash on corporate balance sheets is also going toward dividends, which have grown in excess of 10% in recent years. The data presented in the graph is for the largest 750 publicly-traded U.S. companies. The dividends represented include regular (quarterly) and special dividends paid by this “largest 750” population.
- However, the dividend payout ratio is still below historical averages and significantly below the high levels of the mid 1950s and 1960s. Please note the definition of dividend payout ratio: The fraction of net income a firm pays to its stockholders in dividends: this can be measured for all time periods in which income is paid. The part of the earnings not paid to investors is left for investment to provide for future earnings growth.
- DEFINITION of 'Total Return‘ - When measuring performance, the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. This backdrop in corporate America points to the “dividend trade” today. We have always taken a long-term perspective on dividends. The difference on the graph shows us that dividends matter - approximately 50% of the total return of the S&P500 over the long-term has been in the form of dividends (and dividend reinvestment). Past performance is not a guarantee of future results.
- With the impact of dividends in mind, we now want to talk about the construction process of the SunAmerica Focused Dividend Strategy Portfolio. The Focused Dividend Strategy Portfolio uses a combination of high dividends, profitability and valuation metrics to construct the portfolio. The fund seeks total return (including capital appreciation and current income) by employing a “buy and hold” strategy involving the annual selection of up to 30 high dividend yielding common stocks from the Dow Jones Industrial Average (DJIA) and broader market. Read text on slide.
- The selection criteria used to select stocks for the Portfolio will generally include dividend yield as well as a combination of factors that relate to profitability and valuation. The value-oriented philosophy to which the Portfolio subscribes is that of investing in securities believed to be undervalued in the market. The selection criteria is usually calculated to identify stocks of companies with solid financial strength that have attractive valuations (e.g., as measured by low price/earnings ratios) and a strong dividend component.
- The fund employs an annual reconstitution trading discipline. -At the annual reconstitution, on or about November 1, all positions are resized to 3.33% -The Portfolio may benefit from low-cost trading strategies -There are no limits on sector or security weightings -Turnover averages 12 names per year -- but may be more or less -Positions may be sold in between reconstitutions which do not meet dividend or liquidity hurdles -The Portfolio adheres to the stated investment process regardless of market conditions
- The fund employs a “buy and hold” strategy leading to a number of positions that have been held for the long term. Please note that the holdings listed are for informational purposes only and do not represent a recommendation to buy or sell any security.
- The rules based portfolio management team.