For all the attention paid to the massive snap-back in riskier stocks in the last two months, a somewhat less glamorous group has quietly been reaching record valuations.
They’re the companies that peddle soap, diapers and ready-to-eat food that also happen to be the market’s biggest payers of dividends. Prized as ports in the storm, their run-up is now neck-and-neck with virtually any equity category you can name in the Standard & Poor’s 500 Index, amid one of its biggest rebounds in cyclical equities on record.
Measured from the Feb. 11 bottom, dividend-paying shares have had more appreciation relative to the benchmark than any other comparable period following a correction during the seven year bull market. As with many market anomalies, ex-hippies are playing a role, this time an aging generation of workers looking to lock in payouts for old age.
“It’s the retirement of the baby boomers becoming a reality,” said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6 billion. “It’s definitely valuation insensitive buyers. They either don’t know or just don’t care what they’re buying — they’re just buying dividend yield.”
Weird things are happening as a result. An exchange-traded fund stuffed with defensive shares and designed for calm, the PowerShares S&P 500 Low Volatility ETF, has been more volatile than the S&P 500 over the past month, according to data from Macro Risk Advisors. The fund has seen its market capitalization soar by more than 50% since September.
Whatever’s happening, it’s pushed dividend paying stocks to a record price-earnings ratio, 9.4% above the four-year average. The 20.4 P/E of these otherwise slow-growing companies make them look more like technology stocks, which at 19.1 times earnings are now trading at a lower valuation.
The demand for yield stocks has been enhanced by a dovish Federal Reserve. The S&P 500 Dividends Aristocrats index has gained 7.1% this year and reached a record on Tuesday. The S&P 500 has posted a 2.3% gain over the same period. The iShares High Dividend ETF also reached its highest net asset value on Tuesday.
Stocks that people buy for safety are seeing valuations balloon far past historical averages. Kimberly-Clark Corp., which makes paper products like diapers and surgical gowns, trades at a P/E of 21.5. That’s 35% above its 10-year average, and nearly the same valuation as Microsoft Corp. Spam-maker Hormel Food Corp. reached a near-record 31.3 at the end of March, 65% above its 10-year average and 62% above technology stocks in the S&P 500.