Dividend Growth Equities
Finding Quality at a Reasonable Price: The S&P 500 Dividend Aristocrats
July 2020
The Takeaway
The recent stock market rally has pushed valuations to levels well above their historical averages. And with an uncertain outlook for corporate earnings on the horizon, investors may face increased volatility.
The S&P 500® Dividend Aristocrats® include companies that have consistently grown their dividends for at least 25 consecutive years. These quality companies tend to have stable earnings, strong balance sheets and durable business models—attributes arguably more important than ever. Furthering their appeal, these companies are now available at price-to-book valuation levels consistent with their long-term averages.
Dividend Aristocrats Are on Sale
Valuation Levels Consistent with Their Long-Term Averages
Source: Bloomberg, 9/30/08 to 6/30/20. The price-to-book ratio is a measure of valuation that compares a company’s stock price per share by its book value per share, which is tangible assets minus liabilities. The S&P 500 represents the broad market, and the S&P 500 Growth Index is made up of constituents from the S&P 500 that have growth characteristics based on sales growth, the ratio of earnings change to price, and momentum.
Are Valuations Rising Too Quickly?
The S&P 500’s rally from its March 23, 2020 low has been nothing short of spectacular. However, investors may wonder if valuations are getting ahead of the market: While prices have recovered to within shouting distance of the February all-time highs, earnings have deteriorated due to the economic shutdown brought about by COVID-related shelter-in-place orders. According to FactSet as of July 10, 2020, analysts are estimating S&P 500 broad company earnings for 2020 to come in at approximately $127 per share, a decrease of over 20% from 2019 levels. That leaves the forward price-to-earnings multiple for the market at a fairly lofty 25x, well ahead of the long term and more recent 5- and 10-year averages.
Further complicating matters is the fact that many companies are withdrawing near-term earnings guidance. While analysts are projecting a substantial recovery in earnings by 2021, it could be a bumpy ride in the interim. Among other variables, investors will have to grapple with the upcoming election season and a potential spike in COVID-19 infections, which could weigh on consumers’ ability and willingness to spend.
Another View on Valuation
In our chart, we used price-to-book value to measure valuations for a good reason: Valuation is, of course, a multifaceted concept, with several metrics having their own distinct advantages and trade-offs. Given the likely volatility in earnings, price-to-book value can be viewed as a more stable valuation measure. When looking at valuation through this lens, the S&P 500 Dividend Aristocrats Index has been consistently performing at its average. Conversely, we can see that at 3.5 times current book value (as shown in the chart), the S&P 500 is trading at levels well above recent averages of 2.7 times and seems to confirm the notion of an expensive market. Growth stocks, the market’s darlings of recent times, are sporting a price-to-book of 7.4x, the most expensive levels since the halcyon days of the tech bubble.
Dividend Growers Are Reasonably Priced
But a look at price-to-book also reveals there are potential opportunities in this market—namely quality. A quality dividend growth strategy like the S&P 500 Dividend Aristocrats typically trades at a premium relative to the market. This is fairly intuitive: Over time, investors have been willing to pay a premium for quality companies that have had attributes like more stable earnings, better returns on equity, and a growing dividend of at least 25 consecutive years. However, today’s valuation indicates that not only is quality dividend growth on sale relative to the broad market—a relatively rare phenomenon—but it is also trading at exactly spot on the average level dating back to 2008.
Learn More. Explore NOBL.
A dividend growth strategy like the S&P 500 Dividend Aristocrats provides access to quality companies with stable earnings, stronger balance sheets and durable business models—currently with reasonable valuations.
NOBL, the ProShares S&P 500 Dividend Aristocrats ETF, is the only ETF that invests exclusively in the high-quality names of the S&P 500 Dividend Aristocrats Index, companies that have not just paid dividends but grown them for at least 25 consecutive years, with many doing so for 50 years or more. NOBL is the crown jewel in ProShares’ royal family of dividend growth ETFs, which enable diverse dividend growth allocations across an array of geographies and market segments.
The forward P/E multiple estimates the relative value of the earnings and is the current price of a share divided by expected earnings.