S&P 500 dividends are expected to rise about 6% next year and nearly 7% in 2024. The futures market has a different take.
The S&P 500 Annual Dividend futures contract for December 2024 was recently trading at 60.45, however, down some 8% from the futures contract that expires at the end of this year.
The difference from the positive consensus estimates that were compiled by FactSet reflects a view that S&P 500 dividends will decrease over the next two-plus years. That 60.45 price represents the per-share amount the underlying index will pay out in dividends for the year ending December 2024.
Futures can be tricky, however, and it’s important to emphasize that a futures price isn’t necessarily a forecast. Rather, it’s a price at a moment in time and can change quickly. These financial instruments can be used in different ways, including as hedging tools.
Still, says Ben Snider, a senior equity strategist at Goldman Sachs, “you can look at the dividend futures market as a signal for what is being priced for these S&P 500 dividends in the future.”
Someone buying, or long, that 2024 contract is willing to pay that price of 60.45 points for those S&P 500 dividends. The buyer, however, may think that those dividends will go higher so that price isn’t necessarily a forecast. If the final total of those dividends is 61.45 points, for example, the holder of that future would pocket $250—the difference between the price she paid for that contract and the final amount of dividends paid. The multiplier for this contract is $250, so the calculation would be 1 point times $250; that 1 point represents going from 60.45 to 61.45.
Someone who is selling, or short, the 2024 futures contract, meanwhile, is willing to take that price of 60.45, figuring it could go lower.
Rather than getting too bogged down in the details of these futures, it’s more important for the purposes of this column to consider the bigger picture, notably the expectation put forth by the futures market that S&P 500 dividends will decline.
It’s hard to pinpoint what’s driving this view in the futures market, but the specter of a recession is probably a key contributor.
Two equity strategists Barron’s spoke to for this column, however, are confident that the futures market is too pessimistic.
“The large dividend decline currently priced into the futures market is unusual relative to history,” says Snider. “The decline also appears fundamentally unlikely.”
As Snider pointed out to Barron’s recently, S&P 500 dividend declines during the 12 U.S. recessions since World War II have been modest for the most part. The median decline was 1%, he adds.
Savita Subramanian, head of U.S. equity and quant strategies at BofA Securities, thinks the dividend futures market is too gloomy as well. “When you look at cyclical sectors like energy or financials or even select industrials, they are not as levered as they used to be,” she says.
BofA Securities is forecasting a 13% increase in S&P 500 dividends this year and 3% in 2023, down from 7% previously owing to the team’s latest forecast that includes a mild recession. “Despite the earnings decline, we expect dividends to hold up as payout ratios remain near record lows, Subramanian wrote in a Thursday note.
She points out that the dividend payout ratio for the S&P 500 is around 30%, well below its long-term average of 50%. That suggests that companies have more room to boost their dividends.