Dividends not being paid out of earnings
The FTSE is at 6,000, a level it was at five years ago and indeed in 2007/8 and in 2000. So far, we have only lost 16 years. However, the level isn't the cause of interest: it's what earnings have done between 2011 and today. In 2011, the earnings of the market were around £500, putting the index on 12x earnings. Today, the current earnings for the FTSE are £133.42 or 45.1x earnings. That puts the FTSE on an earnings yield of 2.21%, with a dividend yield of 4.2%, highlighting that dividends are not being paid out of earnings or at least only 50% of the dividend is paid out of earnings.
Luckily the market is forecasting a strong recovery in profits over the next 12 months. Profits are expected to rise up to £387. However, this is difficult to square.
The paradox is that central banks are always talking about the risk premium for equities being the earnings yield less the 10-year bond yield and that this should no longer be great because they have banished the business cycle –the risk that profits could fall – by controlling the credit cycle.
Now, with many central banks admitting that with interest rates at zero, they can no longer control the credit cycle, the business cycle should come back with all the uncertainty it brings. And yet, the stock market needs a business up-cycle to meet its forecast earnings growth, just when the central banks believe their inability to keep the credit cycle going presages a down cycle.
Who is going to be proved right?
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