Risk and Reward in Large US Banks
The continuing collapse in global yield does not appear to auger well for large global banks. German banks have not returned anything at all in the past 10 years following the Global Financial Crash. The German Yield curve is now completely negative, certainly not a harbinger of better days ahead. Similarly, Japanese banks have fared poorly, unable to earn satisfactory returns with yields approaching zero for 10 years. US 10-year yields have recently collapsed to 1.72%. Can US banks continue to extract reasonable profits from such yields? We suspect short term yields must soon drop, or long-term yields increase, either way, steepening the yield curve and offering some relief to the banks business model of borrowing short and lending long. We also note, perhaps in sympathy to the plight of their foreign counterparts, US banks entered the year with what might be considered a bit of a cushion. This cushion being, the rather generous total yield, the yield from the combined dividends and planned share buybacks. For a number of large US banks, this figure is well in excess of 12%. A value stock for many investors in recent years has been Wells Fargo. Wells Fargo now has difficulty not only in finding anyone willing to run the bank, but seemingly also has trouble in finding enthusiastic buyers for its stock. Perhaps a buyback yield of 16% is enough reward for the risk involved.
Source: John Huber at Saber Capital
Relative Value in Dividend Paying Stocks
The dividend yield on stocks in the S&P 500 now exceeds the yield on 10-year Treasuries by about 25 basis points. This spread, and its recent expansion might be providing additional support to US stocks during the recent turbulence and the flight to quality, or what qualifies as quality in todays markets. In addition to the USD currency, the recent flight to quality has also included Gold, and even Bit Coin. Dividend paying stocks in America might end up being the real repository of value. The 40% of stocks, within the S&P 500, yielding more than the 10-year Treasury Note, probably deserve some consideration for those in search of quality.
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