FTSE 100 would sit at 9200 if dividend payments are included
Total returns from top 100 UK companies would push index higher but still amount to just 2.1% a year
The FTSE 100 is, as we know, close to its all time highs reached on the last trading day of December 1999.
The index is current up 8.65 points at 6812.52, compared to the peak of 6930.
But the rise in the index is only part of the story, as Mike Ingram at BGC Brokers points out. UK companies also pay out dividends to investors, something which pension funds and the like rely on.
According to Ingram's calculations, over the fourteen years since the FTSE 100 was last at 6800, its companies have paid out the equivalent of another 2400 in dividends. So if total returns are taken into account, the index would currently be closer to 9200. But he adds:
Unhappily this is not quite as impressive as it first sounds. Spread over fourteen years (and five months) that 35% return equates to a compounded return of just 2.1% per year. Factoring in inflation over the same period the FTSE-100 has just – and only just – kept up with the cost of living. One could be forgiven for thinking that UK PLC has been in the doldrums for more than a decade.
But again, the index level can easily mislead. FTSE 100 companies are generating more than twice the level of earnings per share than they were fourteen years ago. Indeed should analysts' forecasts for this year hold – and at the moment they are – FTSE 100 real earnings in 2013 will be at the same level as they were in the halcyon days of 2007. UK PLC isn't doing too badly.
So why has the FTSE 100 been a comparatively lacklustre performer? Ingram said:
The simple answer is that investors are less willing to pay a high price for earnings that they were in 1999. At that point, the market was prepared to pay a multiple of 25 times the following year's earnings. By 2013 this multiple has halved. Combined with a doubling of company earnings, the index is back to where it was fourteen years ago.
Part of this is undoubtedly due to the fact that the starting point for most media commentary is the height of the dotcom boom. But rather than telling us that the UK stock market is expensive now, it very largely tells us how expensive the stock markets were in 1999.
So from my perspective the performance of the FTSE 100 over the last fourteen years has essentially been a long, painful detox after a particularly messy party. The intervening financial crisis has further hindered this rehabilitation; growth prospects are less certain, company earnings were set back several years and investors were rudely reminded of how volatile stock markets can be. All continue to prevent would-be buyers from paying up. Nevertheless, if companies continue to deliver on earnings we may well continue to grind higher.
All things considered, the FTSE at 6800 today isn't an obvious bubble as some suggest. Unhelpfully, it doesn't look no-brainer cheap either. That said, in the absence of earnings shocks or a further eurozone crisis it's likely that it will continue to benefit from the fact that UK gilts currently offer no long-term value. History suggests that this will eventually push the FTSE into bubble territory.
And while this may excite many City traders and large parts of the financial press, those with an eye on the long-term health of stock markets should be wary; the FTSE has only just recovered from its last bust.