Eq: Large Cap
Income investors have been frightened by the extent to which the current Coronavirus downturn is going to cause an economic downturn and thus a big cut to dividends. The only good news on this front recently has been that companies are suspending buybacks before dividends. In assessing the damage, Goldman Sachs says overall dividend payouts are going to be slashed by 25% this year. That figure includes a 38% fall for the next nine months added to the 9% rise in dividends in the first quarter.
FINSUM: This is big, but it would be far from catastrophic levels.
Anyone paying any attention to the economy or markets knows dividends are in trouble. With the economy set to shrink 30% in Q2 and a likely big negative growth number for the year, companies are going to have a very hard time maintaining profitability and dividend levels. With that said, here are some stocks that should have safe dividends. Texas Instruments and CVS both look attractive, yielding 3.6% currently, as does Intel (which yields 2.5%).
FINSUM: The brightest news for investors is that many companies have announced a suspension of buybacks but have plans to maintain their dividend, so there should still be some decent income.
Many have been wondering when junk bonds were going to start feeling pain. Despite the previous risk of recession, junk bonds did quite well over the last several months. However, since the big flare up over coronavirus, they have started to be seriously wounded. On Friday, junk bond spreads to Treasuries were at 366 bp—very low. As of yesterday, they were at 418 basis, a 50bp+ rise in two trading days, showing how much investors fear the economic impact of coronavirus.
FINSUM: We think these spreads are going to keep moving higher, even if stocks level out. Bond investors are a suspicious bunch and an economic slowdown would hit high yield companies harder than average.
Everyone has heard of the “Dogs of the Dow”, or the strategy of buying the laggards of the Dow. It is has been of the few highly successful value-based strategies over the last decade. If you have liked the Dogs of the Dow approach then check out “Fast Dogs”, which could be a good strategy. The idea is to buy the ten stocks with the fastest dividend growth in the Dow. The strategy has performed well in the last three years and just edged out the S&P 500’s performance (it is hard to track it further because dividend growth rate data is historically spotty). What will likely make this strategy successful is that companies with rising dividend growth are naturally signaling improvement and a brighter future, so an increasingly optimistic outlook is de facto. And of course, investors love dividends.
FINSUM: We like this idea. It would probably work better in rising rate markets, but generally speaking it seems like a smart approach in any environment.
The stock market is a tough game right now. Valuations are sky high and earnings are trending the wrong way, which makes picking any stock difficult. Even buying popular high-priced stocks isn’t a good plan when earnings are falling, which makes it seem as though there are few good options. With that in mind, consider buying cash cows like Facebook, Google, and Ford. With such good earnings prowess and free cash flow, these kinds of companies have the money to keep buying back shares, which should drive their valuations over time.
FINSUM: Cash cows can feed their own market pricing even in really rich markets, so this seems like a smart call.
Bank of America Merrill Lynch has just published a new survey of institutional money managers and found an interesting sentiment among those managing a hulking mass of American money. That finding is that money managers are much more worried about the election than they are about the trade war. Institutional investors think election worries will have a much greater effect on markets than the trade war will. The chief US economist at Goldman Sachs summarizes the situation this way, saying “While there are no obvious signs of election-related effects on economic activity so far in this election cycle, there is some concern that . . . uncertainty could have a more noticeable effect on sentiment and activity as the election approaches”.
FINSUM: We absolutely agree. The trade war seems to be cooling as both sides appear as though they want to hash out the issues. The election is an event with potentially hugely variant outcomes and it is highly difficult to predict. This all means it is hard to price, and that uncertainty can weigh on companies and markets.