Euro Stoxx 50 Dividends—Reconciling Analyst Estimates and Dividend Future Prices

Abstract

The authors analyze the dynamics of analysts’ dividend estimates and dividend futures prices and combine them to decompose fluctuations in the equity market into fundamental expectations and discount rate adjustments. Although analysts tend to be overly optimistic about dividends paid over short horizons, the authors find analysts possess skill regarding the direction of future dividend growth. The authors provide evidence that prices of dividend futures are driven more by hedging activity than fundamental views or uncertainty around future cash flows, leading prices to drop significantly below analysts’ expectations and subsequent realized payoffs in times of increased equity market volatility. Looking at the outbreak of COVID-19 and the following Euro Stoxx 50 crash, they find that most of the drop in the equity index was attributable to discount rate adjustments, not fundamental views. Investors can use the methodology the authors present to formulate an alternative view on the drivers behind future market swings.

TOPICS: Fundamental equity analysis, derivatives, futures and forward contracts, performance measurement, financial crises and financial market history

Key Findings

• ▪ Consensus dividend estimates for European blue chips tend to be too optimistic during both market crashes and stable times.

• ▪ Prices of Euro Stoxx 50 dividend futures are affected by hedging activity related to their origin in structured equity products, causing prices to drop significantly below analysts’ expectations and subsequent realized payoffs when markets are volatile.

• ▪ Using both analyst estimates and the prices of dividend futures allows us to attribute a large fraction of the equity market crash during COVID-19 to discount rate adjustments rather than to changes in fundamental expectations.