September 13, 2011

PIMCO’s Kashkari: Buy Equities on Dividends and Earnings

Says stocks beckon on three types of returns

The new head of global equities for PIMCO said Monday that investors should turn to equities as an attractive asset class, and three factors made the class a winner: multiples, earnings, and dividends.

According to a Bloomberg report, the between the price-to-earnings (P/E) ratio of equities hit a 28-month low of 12.2 in August and then recovered to 12.5. The current gap between the P/E and its inverse, the earnings yield, at 8% of the measure’s price, is the biggest it has been since 2009, when it was the highest in Bloomberg data since 1962. It is also 6.1 percentage points higher than the rate on 10-year Treasuries. Dividend payout, the report also said, has passed that of bonds for the second time since the 1950s.

Neel Kashkari, who was named to his new position last week, said that the rewards in store for investors are substantial. In a television interview, he was quoted saying, “Equities offer returns in three different ways: multiples can expand, earnings can grow and through dividends. On all three factors, equities look very attractive.” Companies in the S&P 500 have beat earnings projections for 10 quarters in a row, and analysts have increased their forecast from $98.73 per share to $99.88 per share.

Kashkari also warned that “[v]olatility is here to stay,” adding that investors “need to be able to stomach that volatility—but if they do and they can, we think they’ll be rewarded.” Large corporations, he said, particularly ones with substantial business in emerging markets, have the potential for good earnings growth.

While PIMCO has more than 90% of its holdings in bonds, since Kashkari joined the firm in December 2009, it has added approximately $4 billion in stock funds.

Reprints Discuss this story
This is where the comments go.