ProShares: Time to buy the aristocrats?


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S&P 500 dividend aristocrats could be a bargain

Major US equity benchmarks continued to advance in the first eight months of 2021. However, traditional valuation metrics still appear to be somewhere between almost fully valued and slightly high, by standards. The S&P 500® Dividend Aristocrats® is however a sector of the market which appears to be a potential boon in terms of valuation. While there is no guarantee of future results, today’s levels for Dividend Aristocrats have historically been a good time to invest in strategy.

Frame current stock market valuations

Valuation is a multi-faceted concept that involves many variables. We will not provide a comprehensive overview of valuation here, but rather focus on price / earnings or P / E ratio.

For the profits, we will use the estimated forecast profits. According to FactSet, the consensus estimate of future 12-month S&P 500 earnings as of 8/31/21 was around $ 204 / share. Using that and the S&P 500’s price of 4,405 on 8/20/21 results in a forward P / E ratio of just over 21.5 times earnings. The 10-year average was just over 17x as of 6/30/21. From this perspective, the current market appears high.

Today’s P / E ratio looks high compared to historical valuations
(S&P 500 12-month forward P / E ratios)

Source: Bloomberg. Data from 06/30/11 to 06/30/21. The P / E ratio shows how much investors pay per dollar of a company’s profits.

What about interest rates?

While not necessarily predictive, lower rates may partly explain the higher valuations. If the market is generally a discount mechanism, then today’s lower interest rates make the present value of tomorrow’s earnings more valuable.

S&P 500 P / E Ratio to Interest Rates


Source: Bloomberg. Data from 03/30/62 to 06/30/21. Trendline established based on the historical relationship between P / E ratios and 10-year Treasury yields measured on a quarterly basis.

The market turns into valuations

For valuation-conscious investors, the gains of the S&P 500 in the first half of 2021 were not motivated by valuations extending from the high levels of late 2020. In fact, the P / E valuations of the S&P 500 did. stabilized and began to decline.

Indeed, US corporate profit growth has been robust since the depths of the pandemic. The year-on-year profit growth for the first quarter of 2021 was 53% and the second quarter more than 89%. Companies are exceeding estimates and increasing their future forecasts. For the full year, profits are expected to grow by almost 42%. If recent trends continue, better-than-expected earnings may well be the fuel to propel equity markets higher, while pushing valuations down to more reasonable levels.

Eclipsing estimates of U.S. corporate earnings


Source: FactSet. Estimate of calendar year 2021 to 8/13/2021.

S&P 500 dividend aristocrats are a bargain

Today’s high earnings growth numbers will moderate eventually, but since that doesn’t seem like the current situation, who can investors turn to for a good deal?

One potential solution could be the S&P 500 Dividend Aristocrats. Dividend Aristocrats companies have continuously increased their dividends for at least 25 consecutive years, historically demonstrating quality characteristics such as stable earnings, strong fundamentals and a solid track record of profit and growth. Thus, they are arguably well positioned to continue to consistently provide the “fuel” for earnings growth that could drive future market returns. The S&P 500 Dividend Aristocrats is also trading at the lowest valuation levels compared to the S&P 500 since 3/31/10, or around 80% of the market’s P / E valuation as of 6/30/21.

S&P 500 dividend aristocrats are a bargain
(Relative P / E ratio of S&P 500 Dividend Aristocrats vs. S&P 500)


Source: Bloomberg. Data from 06/30/05 to 06/30/21.

Current P / E Levels of Dividend Aristocrats: A Potential Buy Signal?

Favorable valuations are generally not seen as very useful in predicting returns over shorter time horizons, but starting valuations tend to strongly influence returns over longer time periods. The last time the S&P 500 Dividend Aristocrats Index traded at today’s valuation levels versus the S&P 500, shortly after the financial crisis of 2007-2008, it outperformed the S&P 500 during the periods following 1, 3 and 5 years, indicating that today’s updated valuations may be a potentially timely entry point.

Historic outperformance of the S&P 500 Dividend Aristocrats index
(forward yields over 1, 3 and 5 years after the financial crisis)

Graphic 1_rv2.png

Source: Morningstar. Data from 04/01/2010 to 03/31/11 for a period of one year, from 04/01/2010 to 04/31/2013 for a period of three years, and from 04/01/2010 to 31 / 03/15 for five one year period.

Spotlight on Certain Aristocrats

Combining long dividend growth records with strong dividend growth rates has generally been a compelling strategy for investors looking for capital appreciation and the potential to outperform the S&P 500.

The table below shows some companies in the S&P 500 Dividend Aristocrats that have not only increased their dividends for at least 25 consecutive years, but have produced double-digit dividend growth rates over the past 10 years, and who are currently trading at below market valuations.

S&P 500 dividend aristocrats with double-digit growth rates and below-market valuations

Graphic 2_rv2.png

Source: FactSet, Bloomberg. Data from 08/01/99 to 07/31/21.

Takeaway meals

The continued strength of the market has allowed the S&P 500 to consistently reach record highs in 2021. However, it also has markets that are trading at high valuations. In this market, the S&P 500 Dividend Aristocrats is currently trading at its lowest relative valuations in over a decade and is offering a potential bargain. Historically, similar valuation levels have been attractive entry points for Dividend Aristocrats investors looking to outperform.


Important information
This is not investment advice. All forward-looking statements contained in this document are based on the expectations of ProShare Advisors LLC at this time. ProShare Advisors LLC assumes no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

Investment is currently subject to additional risks and uncertainties associated with COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions taken by government authorities or regulatory bodies; and global economic and political developments.

The “S&P 500® Dividend Aristocrats® Index” is a product of S&P Dow Jones Indices LLC and its affiliates, and has been licensed for use by ProShares. “S & P®” is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”) and “Dow Jones®” is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been used under license by S&P Dow Jones Indices LLC and its affiliates. The ProShares have not been transmitted by these entities and their affiliates as to their legality or relevance. ProShares based on the S&P 500 Dividend Aristocrats Index are not sponsored, endorsed, sold or promoted by these entities and their affiliates, and they make no representations regarding the advisability of investing in ProShares. THESE ENTITIES AND THEIR AFFILIATES MAKE NO WARRANTIES OR RESPONSIBILITY WITH RESPECT TO THE PROSHARES.

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