Can the Good News Continue?
08/22/2012 10:30 am EST
Usually we're in the midst of the summer doldrums, but there are some encouraging signs from the economy and some bellwether stocks as well, writes Genia Turanova of Leeb Income Performance.
They say good things come to those who wait. This has certainly become true for investors in Cisco Systems (CSCO), whose shares soared late last week.
The company reported earnings that were mostly in line with Street expectations. Furthermore, the company offered only modest guidance, and warned that Europe would continue to deteriorate before sales improved.
Yet in spite of all this, the shares are up 10%. Why? Cisco surprised the Street by increasing its dividend by 75% to a 14-cent quarterly payout.
Cisco only began paying a dividend in the first quarter of 2011. Since then, the company has raised its dividend rate and continues to be aggressive with stock repurchases. In fact, during the company’s earnings call, it committed to allocating half of its free cash flow to shareholders via dividends and buybacks.
It has already bought back $1.8 billion worth of shares during the quarter, putting more of its free cash flow to good use. Therefore, while Cisco might outwardly claim that the current macroeconomic environment will remain challenging, their actions suggest that management is confident in the company’s performance going forward.
Cisco is a good example of patience paying off, and we expect more good things from the stock down the road. As the company builds on its dominance, further dividend increases are possible. With a current yield of nearly 3%, we recommend Cisco to growth and income investors alike.
In the meantime, the market as a whole is in a good mood, with many other stocks also rising today. A set of economic news that was rather neutral in tone, such as initial unemployment claims that have moved higher only by 2,000 this week, or the Philly Fed survey that, while showing improvement, remained negative, does not really explain the market’s better mood.
One news item was encouraging, though—building permits in July increased to a four-year high, reviving hopes for the continuation of a tepid housing recovery. The low-rate policies of the Fed are clearly helping the housing market, although this beleaguered sector of the economy needs to show much more spunk before we can call it a true recovery.
But as recent data indicates, with permits rising in both the single family and multi-family segments (an increase of 4.5% in the former compared to the month-ago period, and an even larger 11.2% increase in the latter) there are signs of life in the housing market. And that is good news.
Plus, recent developments in China and Europe have been encouraging market participants, with the net result of higher yields on the benchmark ten-year Treasuries and higher prices for stocks. The ten-year Treasury yield ended the day at 1.83%; at the beginning of August it stood at 1.56%.
And the appetite for risky assets has been showing itself via higher stock prices, with the S&P 500 up more than 12.5% for the year. Add dividends, and the total return will look more like 14%. The Dow is up 8.5%, also a great showing.
Stocks further perked up on news from China, where earlier easing policies are showing encouraging results. And the market expects further easing there, as Chinese Premier Wen Jiabao indicated that current inflation levels are leaving room to adjust monetary policy.
Of course, in the US, expectations of further easing by the Fed are still very much out there and helping to improve the market’s mood. But that’s not a given; an improving economy—or even an economy that’s marching in place—isn’t likely to generate a significant policy change.
The next big event for Fed-watchers is the annual economic policy symposium in Jackson Hole in two weeks, and the next significant piece of data that would help us assess the health of the economy will be the August jobs report. With core inflation remaining tame, this will be the report to watch. Stay tuned.