The Stock Market’s New Best Friend—Buffett Will Be Pleased

In the age of austerity, it’s workers who are going to get squeezed. How else are so many large companies reporting excellent earnings? While everyone would like the economy to be at or near full employment, I think the stock market is now settling into the reality of a sustained higher jobless rate. At least right now, big companies would rather return excess cash back to shareholders in the form of dividends, as opposed to investing in new plant, equipment and workers.

Not every big company is doing well right now, but a lot are. The “Windows” sales of Microsoft Corporation (NASDAQ/MSFT) were a little soft, but guess what? It’s a very mature business and not everybody wants to upgrade their PCs right away. Consumers would rather invest in smartphones.

But if the retail technology sector is a little slow, the oil services business is booming. Schlumberger Limited (NYSE/SLB), which is essentially an enormous technology company serving the oil and gas industry, just announced a 64% increase in second-quarter profits and a 62% increase in revenues. Then there’s the railroad company Union Pacific Corporation (NYSE/UNP), which reported record second-quarter earnings of $785 million, up 13.6% on a per-share basis from last year (which is really good considering how mature the railroad industry is). The company reported that five of its six business groups showed good volume growth, with improvement in shipments of agricultural products and chemicals. Quarterly operating revenues grew 16% to $4.9 billion and management expects a solid second half.

One thing I’ve noticed is that the cash hoards of large corporations continue to grow and this is a good sign that dividend payments to stockholders will be on the rise over the coming quarters. In fact, I argue that the current environment is a very good time to be considering new positions in large-cap, dividend-paying securities. We do have the sovereign debt issue hanging over global capital markets. This is an investment risk that’s very serious and isn’t going away. But investors, especially institutional investors, have to put their money somewhere and, as we’ve seen recently, it’s going to go into big companies paying big dividends.

What this trend points to in my view is the continued success of those stocks that are already trading around their price highs. The momentum in this market is with large-caps that have previously gone up. This means that it’s more likely that a stock like International Business Machines Corporation (NYSE/IBM) will appreciate another 20% from its current price high of $185.00 per share than buying a value play and hoping for a 20% recovery.

This is the market we’re in. Good old-fashioned blue-chip investing with a dollop of speculation in commodities should be a decent strategy for the next several years. Dividends are now the stock market’s new best friend.

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