Tags: Nygren | earnings | growth | economy

Oakmark’s Nygren: Earnings Growth ‘Could be Surprisingly Strong Even if Economy Isn’t’

By Dan Weil   |   Monday, 16 Apr 2012 07:36 AM

Many experts expect the economy to slow down from the fourth quarter’s 3 percent growth pace. But that doesn’t mean corporate earnings will follow suit, says Bill Nygren, star manger of the Oakmark funds.

Analysts on average forecast that dividend payouts for companies in the Standard & Poor’s 500 Index will total only 28 percent of expected earnings this year, he writes on Morningstar.com.

“That leaves 72 percent of earnings to fund incremental growth,” Nygren points out. Even after investing for internal growth, companies will have plenty of cash to spend on share repurchases and acquisitions,” he says.

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“With acquisitions adding to the earnings numerator and repurchases reducing the denominator, earnings-per-share growth could be surprisingly strong even if the economy isn’t.”

And where does Nygren stand on the raging debate over whether stocks or bonds represent the better investment opportunity now? “We think equities remain the easy choice,” he writes.

“Bonds are near historically low yields, yet stocks remain priced slightly below their long-term average P/E multiple. Stocks currently yield more than intermediate-term bonds and are expected to continue to increase their dividends.”

Hedge fund legend Michael Steinhardt agrees with Nygren. “Bonds are no place to be,” Steinhardt, now chairman of WisdomTree Investments, tells Bloomberg.

“Equities are cheap by historic standards. Equities that pay high dividends relative to bonds, relative to the stock market, I think that’s a good place to be.”

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2012

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