No. of Recommendations: 37
In a followup to my 'FAANMG valuation update' (post# 577625), I've taken a look at
the DJIA and compared it's 2019 year-end index price vs the total 2019 revenue and net
income of all 30 component companies, and then compared these values to historical year-end
values going back to 2005. I would have preferred to use the S&P 500, but it would have been
too time consuming. A link to a spreadsheet containing the data can be found below.

(CUMULATIVE GROWTH
DJIA @ DJIA TOTAL DJIA TOTAL YEAR END VS 2005 YEAR END)
YEAR YEAR END ANNUAL REV($M) ANNUAL NET INC($M) INDEX REVENUE NET INC REV/PRICE NET INC/PRICE
2019 26,379.55 $ 3,152,434 $ 292,231 150% 35% 34% $ 119,503 $ 11,078
2018 25,046.86 $ 3,118,527 $ 278,098 137% 34% 28% $ 124,508 $ 11,103
2017 21,750.20 $ 2,836,997 $ 243,452 106% 22% 12% $ 130,435 $ 11,193
2016 17,927.11 $ 2,687,754 $ 229,006 70% 15% 5% $ 149,927 $ 12,774
2015 17,587.03 $ 2,746,399 $ 228,065 67% 18% 5% $ 156,160 $ 12,968
2014 16,777.69 $ 2,866,604 $ 294,716 59% 23% 35% $ 170,858 $ 17,566
2013 15,009.52 $ 2,865,984 $ 312,602 42% 23% 44% $ 190,944 $ 20,827
2012 12,966.44 $ 3,088,124 $ 269,891 23% 33% 24% $ 238,163 $ 20,815
2011 11,957.57 $ 2,985,238 $ 277,740 13% 28% 28% $ 249,653 $ 23,227
2010 10,668.58 $ 2,749,474 $ 257,673 1% 18% 18% $ 257,717 $ 24,153
2009 8,885.65 $ 2,564,382 $ 204,947 -16% 10% -6% $ 288,598 $ 23,065
2008 11,244.06 $ 3,034,009 $ 165,214 7% 30% -24% $ 269,832 $ 14,693
2007 13,178.26 $ 2,719,856 $ 205,023 25% 17% -6% $ 206,390 $ 15,558
2006 11,409.78 $ 2,495,602 $ 264,806 8% 7% 22% $ 218,725 $ 23,209
2005 10,546.66 $ 2,328,098 $ 217,537 $ 220,743 $ 20,626



Below are the data points that I find most remarkable.

Between year-end 2005 and 2019, the DJIA index price has risen 150%. Over the same 14 year
period, the total growth in annual revenue and annual net income for all DJIA companies has
only risen 35% and 34% respectively. Total price growth has exceeded total annual revenue
and net income growth at more than a 4-to-1 rate.

The DJIA index closed year 2012 at 12,966. That year, it's component companies generated
$3.088 trillion dollars in total revenue. The DJIA index closed year 2019 at 26,379. In 2019,
it's component companies generated $3.152 trillion in annual revenue. 7 years later, and
DJIA annual revenue has only increased 2% TOTAL, meanwhile the index is up 103% over the
same period! And before you ask, yes, this includes adjustments for all companies that have
entered and have been booted from the index.

And finally, perhaps the most interesting statistic. At year-end 2005, 1 DJIA index point
was worth $220,743 in total component companies annual revenue. At year-end 2019, that same 1
DJIA index point was only worth $119,503 in annual revenue. Some may respond that revenue isn't
as important today as it was in 2005 - companies are leaner, meaner, and technology has
ensured that more and more revenue falls down to the bottom net income line. Right? Wrong, at
least in the case of DJIA component companies.

At year-end 2005, 1 DJIA index point was worth $20,626 in total component companies annual
net income. At year-end 2019, that same 1 DJIA index point was only worth $11,078 in annual
net income. This dwindling net income secret has been muddied by the buyback bonanza that
US corporations have been on for the last decade.

So does any of it matter? I would say it most certainly does. If DJIA price-to-revenue and
price-to-net income ratios were ever to revert back to 2005 levels, we would be looking at a
DJIA index price somewhere around 14,280 compared to today's nearly 30,000. Also keep
in mind that 2005 wasn't exactly a period of cheap valuation for stocks, so even that 14,280
number might be too optimistic.

More than anything, I think these data show what many of us believe: the relentless rise in
US stock markets in recent years (far outpacing global peer markets), has had very little to
do with the "greatest economy in the history of the US", and much more to do with
valuation-expansion as investors are forced out of fixed income and into stocks due to lack
of reasonable yield in sovereign debt markets, backed by an ever-obliging Federal Reserve.

Does that mean everyone should run out and sell stocks? No, but I do think we all need to be
aware of the environment we are operating in, be aware of the narratives we are being sold by
CNBC and politicians, and act cautiously. History shows that at today's levels, it's not about
how much money you can make, but rather how much money you can afford to lose. Just my opinion.


Link to compiled financial data and calculations:

https://docs.google.com/spreadsheets/d/1ub8QA2NEp7d-MNuJQMd1...
Print the post  

Announcements

This is a Politics Free Board
Politically charged posts are not permitted on the Metar Board. If you make a political post, and it is alerted, the post will be removed. Thanks!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.