Zacks Earnings Trends Highlights: Johnson & Johnson, Chevron and DuPont

CHICAGO--(BUSINESS WIRE)--Zacks Research Equity Strategist, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.

Very Few Changes

The S&P 500 is selling for 18.9x 2009 earnings, but just 13.4x 2010 and 11.6x 2011 earnings. By historical standards, that is quite cheap. Normally, when interest rates and inflation are low, P/E ratios are higher than average. Well we currently have some of the lowest rates of inflation in decades, and interest rates are at near record lows.

It only costs the government 2.46% to borrow for 10 years. (These numbers are based on Thursday 9/2; stocks moved higher on 9/2 as did t-note yields.) It is not hard to find good, solid blue-chip companies that are providing dividend yields of more than that, and not just a bunch of electric utilities either.

One thing is certain, the coupon on a 10 year t-note will not increase over the next 10 years. The odds of the likes of Johnson & Johnson (NYSE: JNJ) 3.70%, Chevron (NYSE: CVX) 3.70% or DuPont (NYSE: DD) 3.90% increasing their dividend in the next 10 years is pretty high. Currently 132 S&P 500 stocks yield over 2.48%, and 84 of those have payout ratios of less than 60%. Earnings that are not paid out in dividends are reinvested for future growth, or are used to buy back stock, which also lifts earnings per share. Based on this year’s earnings, the earnings yield is 7.46%, and based on next year it is 8.62%.

Wall of Worry Remains

There is still substantial uncertainty about the strength of the economy. The inventory rebuild cycle is just about over, and the effects of the stimulus are wearing off. State and local governments are facing massive budget shortfalls, and will be forced to lay off many municipal workers like teachers and police. This has kept investor sentiment very muted, but provides a big wall of worry for the market to climb.

The time to buy is when others are despondently selling, and the time to sell is when others are greedily buying. This is particularly true when the actual fundamentals are solid and when the market is simply depressed. There is nothing more fundamental than earnings (OK, perhaps the balance sheets, but those look better than they have in decades as well, with about $1.8 trillion in cash sitting on them) and earnings look pretty good, or at least the expectations for them do.

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