Barrons on Defensive Dividends

On 23-Ju;-2012, Barrons reports the headline: “Defensive Dividends Getting Offensively Rich”. What’s interesting is their quote from WSJ about the defensive sectors:

Since mid-April, telecommunications, utilities, healthcare and consumer staples have been the only sectors of the 10 Standard & Poor’s 500-stock index to rise. Telecom stocks are up 14% and utilities are up 7.5%. In contrast, the S&P 500 has fallen 1.2% and the Dow Jones Industrial Average has lost 1.6%.

Defensive stocks are trading near a decade high relative to their more economically sensitive peers, judged by their price-to-earnings ratios, according to Adam Parker, chief U.S. equity strategist for Morgan Stanley . Defensive stocks are trading at about 15 times projected earnings for 2012, compared with 12 times for cyclical stocks like industrial giant Caterpillar (CAT), says David Bianco, chief U.S. stock strategist at Deutsche Bank . Usually they trade at roughly the same P/E ratio, he says.

Vadim Zlotnikov, chief market strategist at AllianceBernstein, says investors are paying 25% more for dividend-paying stocks than for those that pay no dividends—usually labeled “growth” companies. He says that is the widest gap on record, and that the pricing of defensive stocks is reminiscent of the technology-stock bubble of the late 1990s. “Investors are willing to pay an enormous premium for dividends,” Mr. Zlotnikov says. While he says he is somewhat concerned, the trend could continue for some time as investor fears remain high. “It’s a pretty crowded trade, but even a pretty crowded trade can work as long as money continues to flow in.”

About mcturra2000

Computer programmer living in Scotland.
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2 Responses to Barrons on Defensive Dividends

  1. Wexboy says:

    Any market setback would hit these stocks too…but ironically the scare would then probably drive renewed (re-) allocation (esp. by PIs) into dividend/income stocks – because they’re rather bizarrely considered by many investors to be safer than the average bear – sorry, stock!

    Much as I think many of these type of stocks are over-valued already, particularly in the US, I wouldn’t be at all surprised to see this continue for the next 2-3 years… Which, of course, implies it will then have mutated into probably the largest (income/dividend) bubble ever!

    Even now, it’s amusing to read up on certain sectors/stocks on Seeking Alpha: So many of these income investors are actually amazingly knowledgeable…about the tiniest/most obscure details of their dividend babies. Trouble is they’re now sitting on a branch 30 feet up, and have already lost track of the forest…in another year, they’ll be 60 feet up, and will have forgotten the trees even..! This will likely start to feel more & more like the Nasdaq bubble, with a twist.

  2. Pingback: More on defensives | mcturra2000

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