Whether the performance of the equity market during the first few weeks of 2016 can be attributed to the slump in the energy sector deserves to be a subject for debate. There is no denying that the business environment for the sector has deteriorated, perhaps even more rapidly in recent months than before. The outlook causes concern on the safety of the dividends paid by companies in the sector.
The energy sector’s market capitalization has shrunk significantly relative to the rest of the market. Its weight in the S&P 500 Index has dropped in half to approximately 6.4% in the past year. Its contribution to the dividends paid the entirety of the S&P 500 portfolio has not yet been reduced significantly. Based on the currently indicated dividends amount for the constituent stocks, the energy sector pays 11% of all dividends in the broad index. It is equivalent to roughly 4.7 out of approximately 44-45 index points per annum. As the companies within the sector experience cash crunch, their dividends could be “in play.”
Figure 1. Sector composition of S&P 500 Index dividends and excised versus. anticipated amount remaining for 2016 by sector (source: Bloomberg, CME Group Research)
The flow of dividend varies by sector. As of January 25, 2016, the total accumulated dividends was 3.184. The telecommunication services sector has paid approximately 23% of the anticipated annual1 amount. In contrast, the energy sector has only “paid” 0.5% of its indicated annual total. In that light, more than 4.6 index points worth of S&P 500 dividends from the energy sectors is a sizeable total for the rest of the year. It is conceivable that the actual accrual falls far short. For reference, the CME Globex traded December 2016 S&P 500 Annual Dividend Index futures is quoted at 45.00/45.15, as of January 25, 2016. Whether dividend increases from other sectors can offset any possible decreases from the energy sector would be interesting to see.
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