Dividend future

Abstract: The authors analyze the dynamics of analysts’ dividend estimates and dividend futures prices and combine them to decompose fluctuations in the equity market into fundamental expectations and discount rate adjustments. Although analysts tend to be overly optimistic about dividends paid over short horizons, the authors find analysts possess skill regarding the direction of future dividend growth. The authors provide evidence that prices of dividend futures are driven more by hedging activity than fundamental views or uncertainty around future cash flows, leading prices to drop significantly below analysts’ expectations and subsequent realized payoffs in times of increased equity market volatility. Looking at the outbreak of COVID-19 and the following Euro Stoxx 50 crash, they find that most of the drop in the equity index was attributable to discount rate adjustments, not fundamental views. Investors can use the methodology the authors present to formulate an alternative view on the drivers behind future market swings. TOPICS:Fundamental equity analysis, derivatives, futures and forward contracts, performance measurement, financial crises and financial market history Key Findings ▪ Consensus dividend estimates for European blue chips tend to be too optimistic during both market crashes and stable times. ▪ Prices of Euro Stoxx 50 dividend futures are affected by hedging activity related to their origin in structured equity products, causing prices to drop significantly below analysts’ expectations and subsequent realized payoffs when markets are volatile. ▪ Using both analyst estimates and the prices of dividend futures allows us to attribute a large fraction of the equity market crash during COVID-19 to discount rate adjustments rather than to changes in fundamental expectations.

Abstract: This paper estimates the effect of monetary policy on the term structure of stock market risk premia. Stock market risk premia are solved using analysts’ dividend forecasts and dividend future prices. Although risk-free rates have decreased after the global financial crisis, the results indicate that the expected long-term average stock market return has remained quite stable at around 9 percent. This implies that the average stock market risk premium has increased since the financial crisis. The prices of dividend futures suggest that the rise is related to changes in the term structure of risk premia. The effect of monetary policy on risk premia is analysed using VAR models and local projection methods. According to the results, monetary policy easing raises the average risk premium. The effect is driven by a rise in long-horizon risk premia.

Abstract: We use dividend futures prices to derive a dividend future discount model. Arbitrage arguments postulate that the sum of discounted dividend futures prices should equal the index price, i.e. the sum of discounted dividends. We analyze whether this relation holds and find that the two valuation approaches lead to a different valuation of expected dividends. These observations indicate that dividend futures and index prices seem to provide the investor with different information on future dividends. We further show that the difference in valuation can be used to forecast index returns and show how an investment strategy can exploit this predictability.

Abstract: We analyze the association of operating country profitability with stock returns on a large sample of Australasian, European and North American multinationals. Our evidence suggests that it heavily depends on investors' expectations of operating regions, which are not totally met. Investors in non-dividend paying stocks comparatively seem to be sensitive to both profitability levels and changes. By contrast, dividend-paying stock returns seem rather associated with profitability changes, connected with existing projects and permanent profitability, because the dividend policy measures may already contain information about the profitability of numerous foreign projects. A firm with a low dividend yield and dividend payout ratio may be valued more in terms of its future investment opportunities and dividend future growth. We find that the dividend yield and the payout ratio will generally be pushed down by regions of operations with many sustainable growth opportunities and pushed up by regions with relatively few profitable investment opportunities. However, excess transitory profitability from regions with many growth opportunities tends to be paid out through sporadic stock repurchases, while excess transitory profitability from regions with few profitable investment opportunities tends to be paid out through dividends.