If You Don’t Want to Leave This Market, Stick with These Proven Winners

dividendsAs evidence of the fervor to which institutional investors are bidding this market, Johnson Controls, Inc. (JCI) jumped five percent on the day the company announced a new $3.65-billion share buyback program and a 16% increase to its dividends.

These are good times for corporations and equity investors. Companies can borrow on the cheap, and they are keeping shareholders happy with rising dividends and share buybacks.

Johnson Controls is based in Milwaukee and sells a great deal of equipment to the automobile and the heating, ventilation, and air conditioning (HVAC) industries.

The company’s dividends have been rising consistently, and for the quarter ended June 30, 2013, earnings per share grew an impressive 32%.

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Not surprisingly, the stock’s been doing extremely well. At the beginning of the year, it was trading around $31.00 a share; now, it’s around $50.00.

This kind of capital gain has been very common among countless blue chips. It is a highly unusual and monetary policy-fueled rise. In my view, in the case of Johnson Controls, the company’s share price is overvalued, even with the recent news regarding its dividends.

While there is certainly a lot of liquidity in the stock market now—and there is good action to be had, generally speaking—I’m very reticent to be a buyer. At the very least, it is difficult finding attractive stocks to buy that haven’t already gone up tremendously.

I view equities as one big hold right now, and I do think that share prices will be able to finish out the year strongly, given current information.

Looking at the financial results of countless large-cap corporations, there is operational leverage to be had next year if product and service demand continues to improve. Corporate balance sheets are in excellent condition, the cost of money is cheap, there’s lots of cash on the books ready to be put to work, and companies remain lean and mean.

There is definitely a lot of speculative fervor in the marketplace now. There are countless new initial public offerings (IPOs) to be had, and there’s been some tremendous wealth creation at exorbitant prices from many of these new listings. All this is indicative of a frothy and overbought stock market. But determining the time when it turns is virtually impossible. Right now, the market is hanging onto the Federal Reserve’s every word.

The fact that many large-cap, blue-chip companies are trading so strongly on the equity market commensurate with small-caps is a traditional sign of the beginning of a secular bull market. Of course, within a bull market, there can be spectacular declines as well.

But I want to come back to balance sheets and the fact that so many corporations are increasing their dividends and upping their share buyback programs in order to pay for them. (See “Why This Food Processor’s Numbers Are a Good Indicator for 2014.”)

Stock market action over the last four years has shown that dividends and large-caps are back in style. I think dividends are going even higher in 2014. Keep an eye on the market’s existing winners, as I believe they will keep on ticking higher until we hear a major policy change from the central bank.