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S&P 500 Dividend Aristocrats Could Be a Bargain
Major U.S. equity benchmarks kept marching higher during the first eight months of 2021. However, traditional valuation metrics still appear to be at a level between near fully valued to mildly elevated, relative to norms. One area of the market that appears to be a potential bargain in terms of valuation, though, is the S&P 500® Dividend Aristocrats®. While there is no guarantee of future results, today’s levels for the Dividend Aristocrats have historically been opportune times to invest in the strategy.
Framing Current Market Valuations
Valuation is a multi-faceted concept that involves many variables. We won’t provide an exhaustive overview of valuation here, but instead we will focus on price-to-earnings or P/E ratio.
For earnings, we will use estimated forward earnings. According to FactSet, the consensus estimate for future 12-month S&P 500 earnings as of 8/31/21 was approximately $204/share. Using that and the S&P 500’s price of 4,405 on 8/20/21 produces 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 angle, the current market appears elevated.
Today’s P/E Ratio Appears Elevated Compared with Historical Valuations
(S&P 500 Forward 12-Month P/E Ratios)
Source: Bloomberg. Data from 6/30/11‒6/30/21. The P/E ratio shows how much investors are paying for a dollar of a company's earnings.
What About Interest Rates?
While not necessarily predictive, lower rates may provide some explanation for higher valuations. If the market is generally a discounting mechanism, then today’s lower interest rates make the present value of tomorrow’s earnings more valuable.
S&P 500 P/E Ratio versus Interest Rates
(1962-2021)
Source: Bloomberg. Data from 3/30/62‒6/30/21. Trendline established based on historical relationship between P/E ratios and 10-year Treasury yields measured on a quarterly basis.
The Market Is Growing into Valuations
For investors anxious about valuations, the S&P 500 gains during the first half of 2021 were not driven by valuations extending from the elevated levels at the end of 2020. In fact, P/E valuations for the S&P 500 have stabilized and begun trending downwards.
Indeed, earnings growth from corporate America has been robust since the depths of the pandemic. First quarter 2021 year-on-year earnings growth was 53%, and second quarter was over 89%. Companies are beating estimates and raising future guidance. For the full year, earnings are expected to grow almost 42%. If recent trends continue, better-than-expected earnings may be just the fuel to propel equity markets higher, while also bringing valuations back to more reasonable levels.
American Corporate Earnings Eclipsing Estimates
Source: FactSet. Calendar year 2021 estimate as of 8/13/2021.
S&P 500 Dividend Aristocrats Are a Relative Bargain
Today’s lofty earnings growth numbers will eventually moderate, but since that doesn’t seem to be the current situation, where can investors turn for a bargain?
A potential solution could be the S&P 500 Dividend Aristocrats. The companies of the Dividend Aristocrats have grown their dividends continuously for at least 25 consecutive years, historically demonstrating hallmarks of quality like stable earnings, solid fundamentals, and strong histories of profit and growth. So, they are arguably well positioned to continue consistently delivering the earnings growth “fuel” that could drive future market returns. The S&P 500 Dividend Aristocrats are also trading at the lowest valuation levels relative to the S&P 500 since 3/31/10—roughly 80% of the market’s P/E valuation as of 6/30/21.
S&P 500 Dividend Aristocrats Are a Potential Bargain
(Relative P/E Ratio of S&P 500 Dividend Aristocrats vs. S&P 500)
Source: Bloomberg. Data from 6/30/05‒6/30/21.
Current Dividend Aristocrats P/E Levels: A Potential Buy Signal?
Favorable valuations generally aren’t considered very useful to predict returns over shorter time horizons, but starting valuations tend to heavily influence returns over longer periods of time. The last time the S&P 500 Dividend Aristocrats Index traded at today’s valuation levels relative to the S&P 500, shortly after the 2007-2008 Financial Crisis, it outperformed the S&P 500 over the subsequent 1-, 3- and 5-year periods, indicating that today’s discounted valuations may be a potentially opportune entry point.
S&P 500 Dividend Aristocrats Index Historical Outperformance
(1-, 3- and 5-Year Forward Returns After the Financial Crisis)
Source: Morningstar. Data from 4/1/10‒3/31/11 for one-year period, 4/1/10‒3/31/13 for three-year period, and 4/1/10‒3/31/15 for five-year period.
Spotlight on Select Aristocrats
Combining long records of dividend growth with solid dividend growth rates has generally been a compelling strategy for investors seeking capital appreciation and the potential to outperform the S&P 500.
The table below shows select S&P 500 Dividend Aristocrats companies that have not just grown their dividends for at least 25 consecutive years, but produced double-digit dividend growth rates over the last 10 years, and that are currently trading at below-market valuations.
S&P 500 Dividend Aristocrats with Double-Digit Growth Rates and Below-Market Valuations
Source: FactSet, Bloomberg. Data from 8/1/99‒7/31/21.
The Takeaway
Continued market strength has resulted in the S&P 500 regularly setting record highs in 2021. However, it also has markets trading at elevated valuations. In this market, the S&P 500 Dividend Aristocrats are currently trading at their lowest relative valuations in over a decade and offer a potential bargain. Historically, similar valuation levels have been attractive entry points for Dividend Aristocrats investors seeking outperformance.
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Important Information
This is not intended to be investment advice. Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Investing is currently subject to additional risks and uncertainties related to COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world 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 licensed for use by S&P Dow Jones Indices LLC and its affiliates. ProShares have not been passed on by these entities and their affiliates as to their legality or suitability. 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 representation regarding the advisability of investing in ProShares. THESE ENTITIES AND THEIR AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES.
