Equity markets: US yields at three percent putting the „profit giants“ under pressure – wrongly

Global quality stocks seem to have fallen behind since yields on US Treasury bonds cracked the three-percent mark at the very latest. Our screening reveals that only 75 companies in Western Europe and North America succeeded in generating operating cash flow in excess of USD 10bn last fiscal year. Of these “profit giants”, 40 (!) are currently trading at a maximum 15% above their 52-week low. These include such well-known names as Pepsi, Cola, Procter & Gamble, IBM, Roche, Johnson & Johnson, Novartis, Exxon Mobile, Ford, Walt Disney, Oracle, Dt. Telekom, Pfizer, Anheuser Busch and Nestlé.

Even if this assessment says little about each of the companies’ market capitalisations, with some companies even reporting stagnating business development, the price discounts do indeed appear overstated. Many of the companies are having to cope with negative trends (e.g. Cola is lowering its sugar content, Nestlé is taking over Starbucks’ licensing operations), yet can still be expected to remain very profitable in the future.

The companies’ decelerating sales performance is being more than compensated at shareholder level by share buyback programmes and stable dividends so that shareholders’ nerves are only likely to be put to a limited test. Even if an economic recession does occur, experience shows that dividends are only reduced disproportionately. This was the case in 2008/09, for example, when the dividend payments of the Global Titans companies were only cut by around 18% at most.

Furthermore, value stocks show a better performance historically than growth stocks, although this has not been the case for several years. In a world of rising interest rates and fresh volatility, markets now seem to have arrived at an important crossroads in which the picture could well turn back in favour of defensive quality stocks / dividend stocks.

We therefore recently gave our DJ Global Titans in the virtual DZ BANK sample portfolio a weighting of 10%. The current P/E ratio of the index is 15.5 points, with profit growth expected to lie at twelve percent next year. An additional bonus for investors is that this index also currently includes popular companies such as Apple, Microsoft and Amazon.

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