Another Great Depression Comparison
ThoughtOfferings takes a unique angle on Great Depressions comparisons, and instead of focusing on earnings and multiples, demonstrates the similarities between corporate dividends which, like everything else, indicate an eerie comparison to the dark days of 1930. The chart and commentary below are sourced from TO:
- While Doug Short's charts have already shown the similar stock price trend now compared to the Great Depression, the recent trend in dividends and earnings is amazing similar to the Great Depression trend as well! (At least if one compares operating earnings today with reported earnings back then, since operating earnings did not yet exist).
- While anything could happen in future months, the current trajectory of dividends (down 11% from peak) is looking slightly steeper than the Great Depression decline. Since reported earnings have fallen so severely even relative to the Great Depression, and reported earnings are a closer representation of actual cash flow than operating earnings, the downward pressure on dividends seems like it should be much greater than during the Great Depression — unless reported earnings can stage a miraculous recovery. Is there a reason I'm not aware of why this conclusion is wrong? If correct, bonds may look increasingly attractive relative to stocks for income-seeking investors.
Dividends, along with CapEx and Taxes, are the key corporate cash outlay mechanisms. And if CapEx trends are any indication, and taxes will not be a concern for most companies due to massive accumulated NOL carryforwards during the last 2 years, it is increasingly likely that dividends will continue to suffer and decline, probably to GD corresponding levels. This is going to impact traditionally dividend-heavy issuing REITs most of all, which will likely continue to issue stock-based dividends for years, thus increasingly diluting existing shareholders, while preserving the much needed cash for the CRE crunch starting in 2012.
As for the historical comparison, ThoughtOfferings sums it up best:
To me, the clearest value in these charts is yet one more piece of evidence that this recession/depression is very comparable to the Great Depression, despite the claims of many people that this period is "nothing like the Great Depression." And I did check the data for the years since WWII and found no other dividend declines near as large as today's, so this is not a normal recession pattern. That said, these charts say nothing about the future and what will result from current government stimulus and any structural economic differences that may be relevant. Stock prices, earnings, and dividends could immediately start heading sustainably higher and break from the Great Depression trend, or they could keep heading down. My personal view is that the downside probabilities are much higher than the upside ones (with flat being another feasible path somewhere in between), but everyone needs to make their own determinations and none of this is investment advice.
So there you have it - another data set confirming that the similarities between today's situation and that of 80 years ago can be extended to yet another dimension, with the main sticking difference, of course, of free liquidity and tight bid-ask spreads compliments of those remaining computers who still trade this market.