“Cash is a Fact: Profit is an Opinion”
Cash – even in a credit card, Venmo, PayPal, Apple Pay, or cryptocurrency world – remains king. In fact, despite the everpresent calls for the pending demise of cash money, there are more dollars in circulation today than ever, about $2.3 trillion worth, according to the US Federal Reserve. And what got us thinking about cash, at least as it concerns corporate America and the stock market, was the news last week that companies in the S&P 500 paid out a record $141 billion in dividends in the second quarter, according to S&P Dow Jones Indices. Dividend payments by those companies for 2022 are expected to jump 10%+ from last year’s record $511 billion, which would mark the first double-digit increase in payouts since 2014. And those dividends are so important, from an investing perspective, because companies can’t pay out what they don’t have; or to lean on the classic quote from noted economist Alfred Rappaport, “cash is a fact; profit is an opinion.”
To think about that just a bit differently, even with all the economic uncertainty of late, the companies that make up the S&P 500 just paid out more in quarterly dividends than ever before, a dynamic that should speak to strong profits, strong balance sheets, and an at least somewhat – optimistic world view.
As investors think about the markets and companies and how to value both, they often come back to another cash-driven metric, which is free cash flow yield – which is how much cash the market or a company throws off relative to the total market capitalization of the market or company. On a go-forward, twelve-month basis, the free cash flow yield of the S&P 500 is back to about 5.5% (see chart; blue line), a level that, at least over the past 10 years or so, has lined up with near-term market bottoms, and – knock on wood – better future returns.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1259-BCI-7/18/2022