To The Moon

Keynotes: Please find out those companies have the ability to continue to make attractive distributions, pay dividends, grow dividends, use excess cash to buy back stock, and/or pay down debt.

"The PE expansion surge that has been driving equities is likely over, Instead, companies with a history of generating growing cash flows and dividends are likely to drive the majority of returns over the coming decade," said John Tobin, portfolio manager of Epoch’s Equity Shareholder Yield Strategies.

1. Dividend stocks with solid cash flows are likely to provide "salvation" for investors over the next decade.

Source: Epoch

John Tobin: " We are currently seeing above-trend economic growth around the world, with Bloomberg consensus figures showing that global GDP growth is set to lift by 4.3% for 2022 and 3.6% for 2023. In the US, growth is predicted to lift by 3.7% and 2.5%, respectively.

"While inflation was initially thought to be all but a transitory concern, now the consensus is far less optimistic, Tobin added.

2. We are in a rate Hike Environment now:

• The Bank of England raised interest rates twice,
• The FED of the United States expects to start raising rates in March, with at least three interest rate increases in March. And the market is contemplating five, six, or maybe even seven rate increases in the US in 2022, The Bank of Canada is likely to start raising rates in March,
• The European Central Bank has recently become less dovish and is even talking about the possibility of raising rates sometime this year.

The interest rates are likely to be moving up from here, The bond market is responding accordingly: US Treasuries have been on the rise since September, German Treasuries are now above zero for the first time in over two years.

Source: Epoch

Bank of America's valuation model suggests that the next 10 year period yields will be one where price return is likely to be slightly negative,Tobin said.

3. So What Does This Mean For Stocks?

It's all about the understanding of cash flows.

"Our argument is long-duration stocks are going to face stronger headwinds when rates rise.

The math is straightforward and irrefutable. It says that for a given increase in interest rates, the impact on present value is greater for cash flows in the distant future. And that's foundational as we think about duration as a concept and the application that it has to equities in the current environment.

Investors need to be thinking about the risk in their portfolios from holding long-duration equities in a rising rate environment, especially long-duration equities that have experienced significant price appreciation and multiple expansion in the past year or two."

4. Why Value and Quality Investors May Finally be Rewarded

While investing in companies with growing cash flows and sound capital allocation practices may not have been fashionable in 2020 and 2021, the market environment is finally changing. 

"Investing in companies that have a history of growing cash flow, investing in companies that have demonstrated behaviour around sound capital allocation practices and policies... It's been out of favour," said Tobin.

Source: Epoch

In this way, shorter duration equities, or companies generating cash flow and paying dividends are likely to be less impacted by an increase in the interest rate than those companies with high PE multiples, Tobin said.

As we shift towards this new market environment, the stocks that are likely to generate the majority of returns are likely to revert back to the norm, he said.

Over a long period of time, dividends have contributed about 40% of the total return historically for equity investors, as opposed to price return. They are suggesting that over the next 10 year period, dividends could be even more important as a driver of return for equity investors."

Source: Epoch

Generally, the characteristics of high-quality equities are as follow:

• Have a history of generating growing cash flows.
• Have a history of allocating capital appropriately: paying shareholders an attractive growing dividend and demonstrating the ability to invest to earn a return above a company's cost of capital.
• For companies that have publically raised debt, this credit should have an investment-grade debt rating.
• Have the confidence to use cash flow to buy back stocks in a depressed market.

While PE multiples are likely to wax and wane over time, leaving the long-term drivers of returns to earnings and dividends, We see significant opportunities to harvest shareholder yield - companies are very liquid, they have a tremendous amount of cash. US companies have $7 trillion in corporate liquid assets, cash and short-term investments.

As Interest rates have hit an inflection point, FED is going to HAWKISHfor sure. The high-interest rate will damage the revenue of many sensitive companies.Please find out those companies have the ability to continue to make attractive distributions, pay dividends, grow dividends, use excess cash to buy back stock, and/or pay down debt.