A few remarkable things have happened over the past number of months. One was much reported on and the other was barely mentioned.
The first was the decline of the S&P TSX market index by about 8% largely due to the inevitable Greek default, rising interest rates in China and the end of the US printing of money in the name of QE2 (Quantitative Easing round 2) as well as the pending August 1st deadline for the US to raise their debt ceiling so as to prevent default on outstanding bonds.
The other is that the rise of corporate revenues, cash flows, earnings, dividends, stock buybacks, cash positions, merger and acquisition activity continued unabated.
The result of these two occurrences is that the great businesses of the world have become even cheaper while the prospects for future growth have increased dramatically.
Consider, for a moment, what’s happening to a few of the largest multinational companies in the world. (Note that this is not a recommendation to purchase these businesses, rather just an illustration of what is happening in this equity market to some of the great companies of the world.)
Looking first at Walmart which is the world’s largest company. With the increase in gasoline prices, lower consumer spending due to high debt and increased food inflation and high unemployment you would think Walmart would be suffering. Walmart has purchased $28 Billion of its own shares since June of 2010. It’s notable first, that they had the cash and second, that this decreases the available shares on the market by about 8% which reduces supply and increases the future potential for demand. Walmart also increased its dividend last March by 21% – capping another year of annual dividend increases since 1974. Walmart executives obviously feel good about their future as they feel the best use of their cash is to purchase their own shares and increase dividends setting up strong growth for the stock in future.
Let’s consider another multinational business – Microsoft. Microsoft shares recently traded for less than half what they peaked at in 1999 – even though their earnings grew compounded at 11% for the last 10 years. Microsoft earns a 44% return on its equity and generates almost $2 Billion in free cash every month, raised its dividend recently by 23% and bought back 2 Billion shares in the last five years.
Lastly, consider Exxon Mobil. Its stock is still less expensive than it was in 2008 when oil was $140 a barrel. Its return on capital is above the market and it has grown it’s dividend by over 9% for the past five years. It also uses its significant cash flow to continue to make discoveries and to buy back 300-400 million of its shares per year.
Recent earnings announcements by Apple and IBM are higher than analyst estimates confirming many large companies are still making money.
My purpose in describing these stocks is to illustrate that while governments are suffering from the poor decisions they have made over the past decades, many of the large, multinational businesses on this plant are in the best shape they have ever been. In my own practice I have been recommending a 20-30% allocation to a large cap multinational fund because in my opinion it and must be one of the most attractively valued asset classes on earth.