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How Much Does The Volatility Of Individual Stocks Change Over Time?

Modern portfolio theory suggests that one must assume additional risk to achieve outsized returns…But, there is more than enough evidence to show that this doesn’t hold true in practice. In fact, low volatility stocks tend to outperform the rest of the stock market. This can be seen by comparing the performance of the S&P 500 Low Volatility Index to the performance of the vanilla S&P 500 Index.

Source: S&P 500 Low Volatility Index, Monthly Fact Sheet

The S&P 500 Low Volatility Index has delivered nearly 200 basis points per year of alpha over its benchmark during the last decade, returning 9.08% per year compared to the S&P 500’s 7.18% per year. Clearly, there is something to be said for investing in low volatility securities.

So how can investors find companies with high probability of delivering low volatility and high returns (which combine to give fantastic risk-adjusted returns)? One might think that investing in stocks with low historical volatility would do the trick, but past performance is generally no guarantee of future results in the investing world. Volatility may be the exception to this rule. There are generally qualitative, fundamental reasons why a particular stock will trade with low volatility. With that in mind, this article will investigate whether the volatility of individual stock prices tends to change over time, using the Dividend Aristocrats – stocks with 25+ years of consecutive dividend increases – as our sample.

Looking to Extreme Values to Find Trends

Sometimes, the best way to identify trends in the financial markets is to look at extreme values. With that in mind, this section will investigate the volatility variance (or volatility volatility, if you will) of the top 5 and bottom 5 most volatile Dividend Aristocrats, using a 10-year look-back.

The top 5 most volatile Dividend Aristocrats are:

  1. Nucor (NUE): 40% annualized price return standard deviation
  2. T. Rowe Price Group (TROW): 40% annualized price return standard deviation
  3. Franklin Resources (BEN): 38% annualized price return standard deviation
  4. Federal Realty Investment Trust (FRT): 36% annualized price return standard deviation

I will now investigate on a one-to-one basis the variance in individual stock price volatilities of these securities over time.

First, Aflac:

Source: YCharts

Aflac’s stock price volatility has varied from a maximum of 60.0% to a minimum of 30.1%, with a current value of 43.8%. Aflac’s stock price is very volatile, and this is likely because of the unpredictable nature of the insurance industry. Insurance earnings (and, as a result, stock prices) can vary wildly depending on two uncontrollable factors:

  • The volume of insurance claims filed during a given time period
  • The dollar value of investment income generated during a given time period

The next high-volatility Dividend Aristocrat that we will consider is Nucor:

Source: YCharts

Nucor’s stock price volatility has varied from a maximum of 48.5% to a minimum of 30.0%, with a current value of 40.4%. Nucor’s stock price is consistently volatile: the lowest 10-year stock price standard deviation Nucor has achieved is 30%, which is still quite high. Like Aflac, there are fundamental, qualitative reasons why Nucor’s stock price is volatile. As the largest steel manufacturer in the United States, Nucor’s earnings (and stock price) are unsurprisingly dependent on the price of steel and other related commodities. When the market value of steel commodities fluctuates, so does Nucor’s stock. This is the driver of Nucor’s high volatility. The next Dividend Aristocrat up for consideration is T. Rowe Price, a large asset management firm:

Source: YCharts

T. Rowe Price’s stock price volatility has varied from a maximum of 46.2% to a minimum of 38.3%, with a current value of 39.7%. The spread between T. Rowe Price’s maximum volatility and minimum volatility is quite narrow, which shows that this stock (like Nucor) is consistently volatile. This is very common in T. Rowe Price’s industry (asset management). These businesses are ‘doubly exposed’ to stock market fluctuations. When markets move (either upwards or downwards), three things happen that effect T. Rowe Price’s stock price:

  1. The stock will usually move in the same direction as the market, assuming nothing changes about the underlying business
  2. T. Rowe Price’s assets under management will organically shrink or grow due to the market’s investment returns, which result in corresponding changes to the firm’s earnings
  3. Investors will add to (in a bull market) or remove (in a bear market) assets from their T. Rowe Price investment accounts, which exacerbate the impact of market movements on the firm’s earnings

While #1 will occur with mostly any publicly traded business, #2 and #3 are unique among asset managers and explain why they typically have higher stock price volatility than the rest of the market. For another example of a high volatility asset manager, consider none other than the next stock on our list for this analysis: Franklin Resources.

Source: YCharts

Franklin Resources’ stock price volatility has varied from a maximum of 51.8% to a minimum of 32.5%, with a current value of 38.0%. Franklin Resources’ high stock price volatility can be attributed to its presence in the asset management industry, as was explained for T. Rowe Price previously. The last high volatility Dividend Aristocrat that we will consider is Federal Realty Investment Trust, a real estate investment trust (REIT):


Source: YCharts

Federal Realty Investment Trust’s stock price volatility has varied from a maximum of 39.1% to a minimum of 20.1%, with an average value of 36.0%. Federal Realty’s current stock price volatility is close to its all-time high. Moreover, it looks like the stock’s volatility is meaningfully higher than its levels during the 1991-2007 period. Thus, it appears that Federal Realty’s currently elevated stock price volatility can be partially attributed to the events of the 2007-2009 financial crisis, which hurt the broader asset class of REITs and reduced investor confidence in this security type. Moving on, this analysis will now cover the Dividend Aristocrats that currently have the lowest stock price volatility. The top 5 least volatile Dividend Aristocrats are:

  1. Johnson & Johnson (JNJ): 17% annualized price return standard deviation
  2. Consolidated Edison (ED): 18% annualized price return standard deviation
  3. PepsiCo (PEP): 18% annualized price return standard deviation
  4. Procter & Gamble (PG): 18% annualized price return standard deviation
  5. Clorox (CLX): 18% annualized price return standard deviation

Interestingly, there is much less difference...


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