Dow Jones Global Titans 50 SM EX (Euro)
In the middle of the worst decline for global markets since July 2002, large-cap stocks are now poised to show strength compared to smaller and mid-cap stocks. Though certainly no panacea amid a severe correction, large-cap stocks do provide a cushion for investors. Most multinationals pay regular dividends - now averaging 3%, trade at an average 12 times trailing earnings and harbor predictable revenue growth in all markets.
Since 2001, U.S. large-cap stock funds have gained just 0.5% per annum versus 10% per year for small-cap equity funds. Why the performance differential? Smaller stocks tend to post significant earnings growth at the start of an economic expansion while large-caps are superior performers towards the end of an economic cycle. The United States suffered a mild economic recession in 2001 and has since posted strong economic growth led by smaller companies and mid-cap stocks. But that trend ended in May as global investors reduced risk and shuffled their portfolios away from small stocks and emerging markets.
As investors grow defensive, money-managers swap portfolio risk and head into stodgy multinationals to protect their portfolios and generate income. This was the case in 2000 and in 1994 - both tough years for global investors. In fact, in 2000, large-cap value stocks withstood the first year of the bear market (2000 to 2002) and logged profits while the rest of the market cratered.
Another plus for global large-cap investors now is the growing trend in corporate insider buying for several multinationals. Also, many large-caps in the United States are aggressively buying back shares with record amounts of free cash-flow - a bullish sign for stockholders. Value investors tend to follow cash-flow, and today, global multinationals are sitting on record amounts of cash. Companies tend to reinvest that cash into their own businesses or increasingly, plow that cash-hoard into buybacks and rising dividend distributions.
Although certainly not a guarantee to future profits, insider buying is usually a very bullish signal for investors looking to ride the coattails of several directors or executives. With many of the Global Titans now trading at multi-year or 52-week lows, it’s no surprise several companies’ insiders are stepping up to the plate and buying stock with cash.
For example, Dell Incorporated’s founder and chairman, Michael Dell, along with the company’s chief executive officer, acquired a total of about four million company shares in late May. Valued at approximately US$96 million, the cash-based purchases are certainly a positive omen for future earnings growth. The average insider purchase in the United States is US$60,000. When two powerful executives spend almost US$100 million of their own cash as the stock hits a 52-week low, it’s worth noticing.
But insider buying doesn’t stop at Dell, either. AIG, the world’s largest insurance company by market capitalization, saw two insiders purchase US$200,000 worth of shares in late May following the market sell-off.
Another high-value Global Titan, Johnson & Johnson, recently increased their dividend for the 43rd consecutive year, raising the latest annual payout by 15%. Many of the Global Titans have also raised their payout ratios since the bear market low of 2002, including stock buybacks, special cash distributions and even bold compensation plans for executives.
At Coca-Cola, the world’s largest soft-drinks company, the Board of Directors recently voted to tie corporate compensation and options to performance targets—one of the first schemes now in place at a Fortune 500 company.
Like all ETFs, the Global Titans in the United States and Germany are inexpensive—certainly much cheaper than actively-managed funds. At 0.5% per annum, a global investor accesses many of the world’s most profitable conglomerates, all in one convenient ETF.
