Read the quarterly report:
2022 Q4 Embracing Uncertainty
Greg Powell: At Miller/Howard, we view the current economic situation as the most uncertain in memory. In our recent Quarterly Report, we review the cases both for and against a recession being imminent. There are good arguments on both sides. In our view, given the high level of uncertainty, you should strive to hold equities that you are paid to own. This is easier said than done.
For example, the S&P 500 Index started 2022 with a dividend yield of 1.4% and saw earnings grow an estimated 7% over the course of the year. Both of these factors normally contribute to positive returns, but in reality, the price/earnings (P/E) multiple for the S&P 500 fell significantly, leading to a total return of negative 18%.
Price/earnings multiples are fickle and are almost always the cause of negative returns. Dividends are the one source of stock market returns that are always positive. Dividends, admittedly, do not have the drama of fluctuating P/E multiples or even earnings growth, yet they are the one element that is consistently additive to returns, year after year.
We have long argued that higher dividend yields and lower valuations should make stocks less vulnerable to fluctuations in P/E multiples. The past year was a good test of this proposition.
With interest rates up significantly over the course of the year, it makes sense that price/earnings ratios were down for the vast majority of stocks. As you can see from the chart, however, stocks with good dividends proved be much more resilient to contractions in P/E multiples. This led to better total returns for stocks with higher dividend yields.
Stocks starting the year with lower price/earnings multiples also proved to be less vulnerable, significantly outperforming stocks that entered 2022 with higher valuations. The difference was primarily driven by more expensive stocks suffering much larger valuation contractions.
Given the risk of higher long-term interest rates, we do not see P/E expansion as a reliable source of returns going forward. Adding the high uncertainty in the economic environment only strengthens the argument to avoid expensive stocks. We continue to advise investors to focus on dividends, reasonable valuations, and strong balance sheets—characteristics that, in our view, maximize the chance of getting paid to own stocks.
For more information, please see our website at mhinvest.com.