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Re: This time is different - Dividend cuts


@DJANG0 wrote:

I'm starting to wonder if dividend oriented portfolios are sustainable. Even if a corporation has the cash flow to maintain a dividend, if a dividend cut or elimination becomes a competitive advantage, won't all companies follow suit?


Interesting point, Django.  If the choice is a debt downgrade to junk, bankruptcy or a dividend cut, a dividend cut is the better choice if for no other reason than to get back in the position to pay a sustainable dividend.  

I think you need to look at individual companies and industries.  Not just the numbers, but the type of business, cyclicality or lack thereof, essential nature, etc.  A quantitative screen is a decent place to start, but not a very good place to end your analysis, imo.

Companies I own that I'm pretty confident about their cash flows and ability to pay their dividends:  MSFT, VZ, DUK, D, PM, T, AEP, MO, PEP, PFE, and ABBV.  I also own VYM, which could have some decrease in the dividend, but I would expect it to be less than a 10-15% decrease, and to come back with the economy.  There are no absolute guarantees on anything though.

I dumped all my REITs as I just can't be sure how long this thing will last.  If it's 2 months and back to normal, I will have been foolish.  If it lasts 6+ months, I think it will likely have been sensible.  I don't know the future, but I agree with Mohammed El-Erian's risk minimization framework.  WELL and VTR (edit: I actually sold VTR last year after they botched their SHOP execution a couple months after their errant big growth projection on their investor day) I sold because of Covid-19 and nursing homes, LAMR because nobody is on the highways looking at ads and advertising is a discretionary expense that will go down big time as businesses are in survival mode, SRC and O because they are in retail, and even if it is better than mall quality retail, lots of restaurants are shut down.  

This sudden stop to the economy because of a virus is not something that I or anyone else as far as I know had figured into their economic and business analysis.  What % of retail REIT tenants will be paying their rent for a 2-4 months or maybe longer?  I struggled a bit with O, but came down on the side of caution.  I don't have a six figure earned income coming in for the next 30 years, so I am behaving more cautiously than I would have when I was 35 years old.

I like PAYX in normal times, but since they are in the blast zone of small and medium sized businesses and there is a non zero possibility this mess may go on a good bit longer than 2 or 3 months, I got out there too.

Also dumped my smallish position in PCI because of all of the liquidity issues in the bond markets.  Want to see if we are done with the deleveraging or if we have another big leg down and what that might look like.

I lucked out by getting out of the last of my MLPs in early to mid Feb, so no worries there for now.  I have about 15% "extra" cash in addition to my normal 20%ish I like to run with since I'm not a fan of bonds.  Will look for opportunities to redeploy.  

Hopefully I am being absurdly cautious and things will be back to normal in a couple of months and everyone can have a chuckle at my expense.  But as I learned from Josh Peters, when managing a portfolio of dividend payers, nothing is more important than avoiding the ones who end up cutting, in terms of long term total returns.  And many times there is a long ride down in price that anticipates the cut.  Occasionally they can be a buy post-cut.  But time will tell I guess.

“Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”
— Seth Klarman

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Re: This time is different - Dividend cuts


@DJANG0 wrote:

I'm starting to wonder if dividend oriented portfolios are sustainable. Even if a corporation has the cash flow to maintain a dividend, if a dividend cut or elimination becomes a competitive advantage, won't all companies follow suit?


Just what would be the competitive advantage to cutting a dividend if a company has the cash flow to maintain a dividend? Why would the company be rewarded by investors with a higher stock price and how would management explain the dividend cut to its shareholders to prevent them from selling off the stock to a much lower price? 

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Re: This time is different - Dividend cuts


@Intruder wrote:

@DJANG0 wrote:

I'm starting to wonder if dividend oriented portfolios are sustainable. Even if a corporation has the cash flow to maintain a dividend, if a dividend cut or elimination becomes a competitive advantage, won't all companies follow suit?


Just what would be the competitive advantage to cutting a dividend if a company has the cash flow to maintain a dividend? Why would the company be rewarded by investors with a higher stock price and how would management explain the dividend cut to its shareholders to prevent them from selling off the stock to a much lower price? 


 

 Only the strong will survive. I read that out of the 74 oil companies that were operating at the beginning of the crisis, only about 10 are expected to be left once the virus runs its course. Preserving cash not only will enhance the chances of survival, but it will also put those with cash on hand in a better position to outbid other companies for the carcasses of the weak.

 Remember when the credit agencies were thinking about lowering the credit rating of KMI? It left them no choice but to cut the distributions to improve their balance sheet. Count on more dividend cuts and rely on a diversified portfolio rather than one heavily skewed to high yield value traps.

veni vidi vici vti
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Re: This time is different - Dividend cuts

As I titled this thread, this time is different.  I sailed through the financial meltdown, having sold my financial stocks before it started and having only one stock I owned cut its dividend.  I doubt I will be that lucky this time.  Despite the fact that my portfolio is skewed toward "defensive" stocks, which stocks seem safe this time is not as clear.  I think we can all name stocks that will likely cut their dividends - or already have - those in the travel industry, restaurants, etc.  I believe that utilities and pharmas will be fairly safe, but I think there are no guarantees this time.

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Re: This time is different - Dividend cuts

I plan to re-evaluate my REITs as the year unfolds and think about pandemic proofing my sleeve.  Just listened to a half hour COVID-19 Fireside Chat phone call moderated by Raymond James real estate analyst with the executive team at STORE Capital, a triple net lease REIT.  Here is summary of my notes:

Their belief is COVID-19 is a temporary pause in business.  They invest in industries that America uses and are relevant to our way of life.  They invest in middle market companies which should be able to take advantage of CARES Act and SBA loans.  They are focusing their time now helping tenants learn about and taking advantage of the Gov't assistance.  Also involved in rent deferral talks;  main sectors hardest hit are restaurants, health clubs and movie theaters.  Their lease forms don't have a Force Majeure clause so no tenant is talking about that.  Pandemics are generally excluded from business interruption insurance.  They said the Gov't may have to change that in the future.  There is no plan to re-purchase shares.  Leverage is 40% debt to cost, at lower end of their target range.  They have laddered debt maturities.  They have or will be filing an 8K that they drew down all of their credit facility "revolver" and now have $630M cash for liquidity just in case need.  They maintain a prudent capital structure and no plan to issue debt which probably hard to do now anyways.  They've always focused on strong dividends while keeping 70% or less dividend payout.  They will have to re-assess going forward and act prudently.  

I also own O.  I haven't heard anything from O management.  May have to wait for next earnings season late April to May.  There are other REITs in the cell tower/fiber and data center business that may be good diversifier for me. My past earnings call notes tell me O has high Moody and S&P credit ratings and a stronger balance sheet than most REITs.  They have lowest G&A expense in the business, low leverage, well laddered debt, conservative capital structure and a $3B line of credit.  If I had to speculate, I would think O dividends are safer than STORE, but what do I know.  

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Re: This time is different - Dividend cuts


@Bentley wrote:

@Intruder wrote:

@DJANG0 wrote:

I'm starting to wonder if dividend oriented portfolios are sustainable. Even if a corporation has the cash flow to maintain a dividend, if a dividend cut or elimination becomes a competitive advantage, won't all companies follow suit?


Just what would be the competitive advantage to cutting a dividend if a company has the cash flow to maintain a dividend? Why would the company be rewarded by investors with a higher stock price and how would management explain the dividend cut to its shareholders to prevent them from selling off the stock to a much lower price? 


 

 Only the strong will survive. I read that out of the 74 oil companies that were operating at the beginning of the crisis, only about 10 are expected to be left once the virus runs its course. Preserving cash not only will enhance the chances of survival, but it will also put those with cash on hand in a better position to outbid other companies for the carcasses of the weak.

 Remember when the credit agencies were thinking about lowering the credit rating of KMI? It left them no choice but to cut the distributions to improve their balance sheet. Count on more dividend cuts and rely on a diversified portfolio rather than one heavily skewed to high yield value traps.


Oil companies are like airlines, only the strongest survive which Is why I only oil majors like CVX. Over last 31 years CVX has not cut its dividend and even raised it in 2008 and 2009. I don’t expect the dividend to be raised this year or next year. I have never owned smaller co for the reasons you cited. CVX and XOM will buy the best of the fallen co at bankruptcy prices and they will not over buy because they have sufficient reserves with low cost to drill. CVX has suspended its stock buyback program saving 3.25B and cut spending by $4B to preserve balance sheet strength, preserve cash and lower short term production. CVX will raise $2B through asset sales and reduction in operating costs in 2020.

Price of oil will not remain in the 20s because neither Russia or SA economies can survive at that price.At current price of $20 Russia is losing $30 a barrel. Oil Provides 60% of revenue for Russia and 30% of GDP. SA needs oil at $60 to fund it’s ambitious reform program. There will be an opportunity for SA and Russia to cease their food fight over price of oil at OPEC s next meeting in June.

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Re: This time is different - Dividend cuts

Center Point Energy (CNP) cut their dividend in half on thur. after I bought some on wed.! How that far timing! :)

Copie

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Re: This time is different - Dividend cuts

Does anyone have thoughts or insight into AGNC? 

TIA

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Re: This time is different - Dividend cuts

Picked this up on SA:

"

According to Oil analytics firm OilX, 1 billion barrels is the world's global oil storage supply. 750 million barrels are already in storage, and the coming glut could fill the rest within a month. S&P estimates that by the end of April every storage tank in the world will be full.

Once storage capacity is at 100%, the price of crude could fall even faster, to once unimaginable levels.

Citigroup laid out a pessimistic scenario in which WTI falls to $5 per barrel. Energy Aspects said Brent could fall to $10. Mizuho Securities said some oil could even fall into negative territory absent shale shut-ins."

 

Much depends on whether Trump can broker a deal betwn Putin & the Saudis to cut production.   All parties have such a terrific incentive to  agree, I can't understand how they could stay on course for mutually assured destruction.   

Of course, we should never count out stupid, stubborn pride.

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Re: This time is different - Dividend cuts

Monthly divey aristrocrat spreadsheet is in.  To summarize:

Additions are those companies that have increased their diveys for each of the last 5 years, being added to the list of 5-10 year divey Challangers.  Promotions are those aristrocrats that got promoted from Challangers (5-10 year growers) to Contenders (10-24 year aristrocrats) or from Contenders to Champions (25 years or more of continuously increasing diveys).  Those under warning watch (might be dropped from the list in the coming months).

Finally, 53 companies declared higher dividends in the past month, with an average increase of 7.16% over their previous payouts. The latest version of the Dividends Champions List is available at the DRIP Investing website and is also attached below:

U.S.DividendChampions_2020-03-31.xlsx

The Dividend Champions universe has decreased to 853 companies. The average dividend streak remains at 14.8 years. The average yield has jumped to 4.39% from 3.21% the previous month.

Additions to Challengers

MGM Growth Properties LLC (MGP), BWX Technologies, Inc. (BWXT), Cabot Microelectronics Corporation (CCMP), SkyWest, Inc. (SKYW), Employers Holdings, Inc. (EIG), Systemax Inc. (SYX)

Promotions

 

American Tower Corp. (AMT), FBL Financial Group Inc. (FFG), Financial Institutions Inc. (FISI), Gentex Corp. (GNTX), Independent Bank Corp (INDB), Kohl's Corp. (KSS), QNB Corp. (OTCPK:QNBC), Reliance Steel & Aluminum Co. (RS), Service Corp International (SCI), SpartanNash Company (SPTN), Steel Dynamics Inc. (STLD), UDR Inc. (UDR), U.S. Physical Therapy Inc. (USPH), and WesBanco Inc. (WSBC) have been promoted to Contender.

RenaissanceRe Holdings (RNR) has been promoted to Champion.

Deletions

Boeing Company (BA), Alaska Air Group Inc. (ALK), Bloomin' Brands Inc. (BLMN), Cracker Barrel Old Country Store, Inc. (CBRL), Delta Air Lines Inc. (DAL), EQM Midstream Partners LP (EQM), Lear Corp. (LEA), La-Z-Boy Inc. (LZB), Macerich Company (MAC), Marriott International Inc. (MAR), Oxford Industries Inc. (OXM), Occidental Petroleum (OXY), Ryman Hospitality Properties Inc. (RHP), Steelcase Inc. (SCS), Signet Jewelers Limited (SIG), SYNNEX Corp. (SNX), Sotherly Hotels Inc. (SOHO), Service Properties Trust (SVC), Texas Roadhouse Inc. (TXRH), Calvin B. Taylor Bankshares Inc. (OTCQX:TYCB), and Vector Group Ltd. (VGR) have cut or suspended their dividends.

Due to the extenuating circumstances, I will continue tracking these companies and they may be reinstated if dividends are resumed.

Warnings

It has been more than one year since the following companies last increased their dividend: Flushing Financial Corp. (FFIC), Fulton Financial Corp. (FULT), Omnicom Group Inc. (OMC), Vail Resorts Inc. (MTN), Taubman Centers Inc. (TCO.PK), and Tootsie Roll Industries (TR)

ElLobo, de la casa de la toro caca grande
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Re: This time is different - Dividend cuts

I just updated my spreadsheet on my dividends.  See no reductions yet.  My DoubleLine bond OEFs raised dividends in March.  I recently updated my domestic, international and EM mutual funds to Reinvest all dividends and cap gains.  Particularly with the down stock market I am leaning on bond dividends for Income to live on, and minimizing dividends from equity.  My exception is REITs, BDCs and HQL.  I need those dividends to maintain my 4.5% portfolio yield and not get too risky with overall AA.  A good portion of a growth portfolio's long term return comes from reinvested dividends and gains.  Spending the dividends lowers the overall return.  

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Re: This time is different - Dividend cuts


@Bentley wrote:

@Intruder wrote:

@DJANG0 wrote:

I'm starting to wonder if dividend oriented portfolios are sustainable. Even if a corporation has the cash flow to maintain a dividend, if a dividend cut or elimination becomes a competitive advantage, won't all companies follow suit?


Just what would be the competitive advantage to cutting a dividend if a company has the cash flow to maintain a dividend? Why would the company be rewarded by investors with a higher stock price and how would management explain the dividend cut to its shareholders to prevent them from selling off the stock to a much lower price? 


 

" I read that out of the 74 oil companies that were operating at the beginning of the crisis, only about 10 are expected to be left once the virus runs its course."


Bentley, do you have a link to the above? I would think CVX would be near the top of the list of best to own and also not to drop its current dividend. Yes, No?

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Re: This time is different - Dividend cuts


@richardsok wrote:

Picked this up on SA:

"

According to Oil analytics firm OilX, 1 billion barrels is the world's global oil storage supply. 750 million barrels are already in storage, and the coming glut could fill the rest within a month. S&P estimates that by the end of April every storage tank in the world will be full.

Once storage capacity is at 100%, the price of crude could fall even faster, to once unimaginable levels.

Citigroup laid out a pessimistic scenario in which WTI falls to $5 per barrel. Energy Aspects said Brent could fall to $10. Mizuho Securities said some oil could even fall into negative territory absent shale shut-ins."

 

Much depends on whether Trump can broker a deal betwn Putin & the Saudis to cut production.   All parties have such a terrific incentive to  agree, I can't understand how they could stay on course for mutually assured destruction.   

Of course, we should never count out stupid, stubborn pride.


I thought Trump brokered a deal with SA and Russia to cut production by 10 million barrels a day.

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Re: This time is different - Dividend cuts

 I just spent 3-4 minutes Googling and can not find the source. I just skimmed the article but the things that stuck out were this "industry expert" and former CEO with 43 years in business gave his best guess that around 10 out of top 74 US oil companies will survive, those being the ones with the best balance sheets.........I do not even remember if he mentioned any by name. He was quoted a couple of times in the article.

veni vidi vici vti
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Re: This time is different - Dividend cuts

So far, so good, I haven't had any dividend cuts yet.  I was surprised at copie's report that CNP cut their dividend.  I usually consider utility dividends pretty safe.  

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Re: This time is different - Dividend cuts

" Spending the dividends lowers the overall return. "

Only whenever fund NAVs, and share prices, are going up.  Compounding returns, or not.  When going down, spending dividends increases the returns.  Actually, doesn't loose as much!  8-)

ElLobo, de la casa de la toro caca grande
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Re: This time is different - Dividend cuts

Kathie ...  I believe the theory is so many people live paycheck to paycheck and with no work its hard to pay your utility bills.  Utilities seem to be correlated downward with my retail REITs with concern about tenants unable to pay the monthly rent. 

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Re: This time is different - Dividend cuts


@outandabout wrote:

@Bentley wrote:

@Intruder wrote:

@DJANG0 wrote:

I'm starting to wonder if dividend oriented portfolios are sustainable. Even if a corporation has the cash flow to maintain a dividend, if a dividend cut or elimination becomes a competitive advantage, won't all companies follow suit?


Just what would be the competitive advantage to cutting a dividend if a company has the cash flow to maintain a dividend? Why would the company be rewarded by investors with a higher stock price and how would management explain the dividend cut to its shareholders to prevent them from selling off the stock to a much lower price? 


 

" I read that out of the 74 oil companies that were operating at the beginning of the crisis, only about 10 are expected to be left once the virus runs its course."


Bentley, do you have a link to the above? I would think CVX would be near the top of the list of best to own and also not to drop its current dividend. Yes, No?


CVX is cited as having a stronger balance sheet than XOM . CVX is saving 4B by curtailing it’s stock buybacks and another 4B by reducing operating expenses. Right now dividend is 7.25%. Free cash flow exceeds Dividend by $3B. Many frackers and smaller producers will not survive.

 

 

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Re: This time is different - Dividend cuts

@ Intruder: Per today's Financial Times, an OPEC official described Lump's tweet as "Trump talking before his brain engages."  Russia stated that no talks had taken place between it and Saudi Arabia and none were planned.  Further they said, "no-one has started talking about any specific or even abstract deals."  That's why oils were off today: no real evidence of Lump's claim, along with his long history of unreliable statements.

I would add this: the Saudi action is aimed as much at US shale production as it is at getting Russia back to the negotiating table.  Why would they stop now, when the shale E&Ps are just beginning to go bust?  They can afford to keep the campaign going for a while yet, as can Russia.  Both have enormous financial reserves that will allow them to ride out quite a long period of uneconomic oil prices.

I appreciate that while the shale E&Ps will go bust in droves, that does not make their oil go away.  However, it will move from "must drill for cash flow to service our debts" holders to financially more solid holders that can afford to sit on the reserves until they are economic.

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Re: This time is different - Dividend cuts


@Kaicho wrote:

@ Intruder: Per today's Financial Times, an OPEC official described Lump's tweet as "Trump talking before his brain engages."  Russia stated that no talks had taken place between it and Saudi Arabia and none were planned.  Further they said, "no-one has started talking about any specific or even abstract deals."  That's why oils were off today: no real evidence of Lump's claim, along with his long history of unreliable statements.

I would add this: the Saudi action is aimed as much at US shale production as it is at getting Russia back to the negotiating table.  Why would they stop now, when the shale E&Ps are just beginning to go bust?  They can afford to keep the campaign going for a while yet, as can Russia.  Both have enormous financial reserves that will allow them to ride out quite a long period of uneconomic oil prices.

I appreciate that while the shale E&Ps will go bust in droves, that does not make their oil go away.  However, it will move from "must drill for cash flow to service our debts" holders to financially more solid holders that can afford to sit on the reserves until they are economic.


Well, if Trump is Speaking BS why did Saudi Arabia call for an emergency meeting of OPEC and non OPEC countries on Thursday? The Russian statement is true only in the narrow context it referred to which is to get you to believe it. you obviously don’t know how negotiations between governments are conducted. 

Reason saudis and Russians have to come to an agreement on oil production is because they need for the price of oil to go way up. SA needs for oil to be $80 a barrel to cover the cost of its government reforms. Russia needs a minimum of $50 a barrel because oil is 60% Russia’s revenue and 30% of its GDP. Energy is only 6.5% of US GDP. Neither country’s economy can survive for long at $30 a barrel which is why they want to come to an agreement on oil production to raise the price of oil which would include the US which is both the largest global producer and consumer of oil.

 

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