This month, Jason Weaver discusses late cycle, market capitalization and dividends.
Late cycle breaks down into four phases: early cycle, late cycle, mid cycle and recession. Generally speaking, the wall street consensus is that the U.S. Economy is in late cycle. Characteristics are economic growth, profit margins, sales and high stock market multiples. As we look cycles of the U.S. economy and in the world, you can see that no country is early cycle. However, we do have Spain in mid cycle. Most developed markets are currently in late cycle. Growth is moderating and credit is tightening. Earnings are under pressure and policies can be contractionary. The central bank may be raising interest rates. Additionally, inventories are growing and sales growth is falling. Therefore, the U.S. is in the beginning of the late cycle. Australia, Germany and UK again in even later parts of the cycle. China is currently in deceleration (contraction) or a recessionary type of environment.
Generally, market capitalization is a way to compute the value of a company. To get the value of a company, take the amount of outstanding shares and multiply that by the share price. Large-cap companies are those over $10 billion. Mid-Cap companies are those between $2 billion and $10 billion. Small-Cap companies are those under $2 billion.
As you look at the top U.S. Market capitalization in billions, Microsoft is the largest because they have a market cap of almost $1 trillion. Companies above $600 billion are Apple, Google and Amazon. Additionally, there is Facebook, Berkshire Hathaway, JP Morgan, Johnson&Johnson, Exxon and Bank of America. These are some of the largest corporations in the world.
Dividends are a distribution of earnings from a company. It is part of your return. If you think about when you are investing, there are two ways to make money. They are the appreciation of a stock and and the dividend. Historically, dividends play a more important role in certain aspects. In the 1950’s, dividends represented 5.1% of return and the appreciation was 13.6%.
During times with less appreciation, dividends become more important. From 1950 to 2019 dividends represented a 3.4% return and appreciation has been at 7.5%. In our current environment, dividends may be a more important to your returns. Look for those dividend growers as you look at your investment portfolio.