In this podcast, Motley Fool senior analyst Tim Beyers discusses:
- How Salesforce's recent acquisitions are the reason layoffs shouldn't be surprising.
- Why HubSpot's next move is one of the most interesting things in tech.
- One tech business bucking the trend by increasing its hiring.
Motley Fool senior analyst Matt Argersinger previews the year for dividend stock investors, discusses why the payout ratio is a key metric to watch, and shares two dividend stocks he believes are looking more attractive.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Jan. 04, 2023.
Chris Hill: Big tech is cutting jobs, and we've got some dividend payers you might want to put on your watch list. Motley Fool Money starts now.
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I'm Chris Hill joining me: Our man in Colorado, Motley Fool Senior Analyst Tim Beyers. Thanks for being here.
Tim Beyers: Happy New Year. Fully caffeinated, ready to go.
Chris Hill: Happy New Year to you as well, my friend.
Let's start with this. In what he called a very difficult decision, Salesforce CEO Marc Benioff told employees the company plans to reduce headcount by 10%. Given the workforce at Salesforce, that nets out to between 7,000 and 8,000 jobs. We'll get to the ripple effects of this in a second.
But I guess my first question is, Tim, were you surprised by this news? Because when I think about big tech companies considering layoffs, I did not have Salesforce at the top of my list.
Tim Beyers: Yeah, not on the bingo card. I'm not super surprised. But I am surprised. I didn't think we were going to start off 2023 with the purge. That wasn't on my bingo card, either.
The reason I'm not surprised, Chris, is because Salesforce has made quite a large number of acquisitions. And in the most recent earnings report, they signaled that sales cycles for enterprise software running were longer. That is a message we have heard from other companies, that as we are exiting 2022, coming into 2023, enterprise sales, meaning just -- plain language here -- a big piece of software takes a long time to sell. A lot of salespeople are involved. It takes a lot of implementation, so it's just a multimonth process. There are fewer companies that are wanting to write really big checks to companies like Salesforce.
So, in that sense, it's not a huge surprise. In the announcement, essentially, Marc Benioff, who's co-founder and CEO, said that they overhired, they overbuilt in 2020. That also is not something that is unique. We've heard that message before. So surprising but not surprising.
Chris Hill: You went exactly where my brain went this morning. We have heard this before, but we've heard it from the CEOs at places like Alphabet and Amazon.
Tim Beyers: Right.
Chris Hill: Which makes me wonder if, in the coming weeks and months, we're going to hear similar announcements from them. The reaction from Wall Street is, as often the case with large profitable companies announcing layoffs, it's a positive one. Depending on the time of the morning, shares of Salesforce up anywhere from 3% to 6%.
Again, you hinted at the length of the cycle, how long it takes to make these large enterprise sales, unwinding. A workforce similarly takes a decent amount of time as well. We can put Alphabet and Amazon aside, because they are the biggest of the big, or certainly on the shortlist of the biggest of the big. Are there other companies in the tech realm that you think are watching this closely, and maybe this is giving them even more license to cut back their workforce as well?
Tim Beyers: I don't think they need anymore license, Chris. There is a tracker called layoffs.fyi that you can check out for yourself. It includes everything from small companies and start-ups to the largest of the large public tech companies. We've seen a lot of them.
If you look at this, you are going to see quite a large number of companies that have laid off staff. As of the current number, I'm quoting this now, Chris, 1,013 tech companies tracked in layouts.fyi, and that has accounted for 153,160 job losses according to that site. I don't think they needed anymore license here Chris.
However, to answer your question, does this give some air cover maybe to some larger companies? I think unequivocally it does. I think it sets an expectation among investors, particularly institutional investors, saying, OK, when are your layoffs coming? There may be some activist investors who say, hey, you know what, you have a bloated company. You've got to lay some people off. You may have maybe less executives feeling free to lay some people off and more executives feeling under pressure from large institutions with money at stake saying, hey, when are your layoffs coming? We just saw Salesforce do this. You're bloated. When are you going to cut some people?
Chris Hill: It seems like that may have been the case with Salesforce. If you look at Starboard Value and their stake in the company and their potential role in nudging Benioff in this direction... There are absolutely institutional investors, and probably retail investors as well, who are sitting on the sidelines with some of these large tech companies, and one of the things they are looking for that is going to trigger their "buy" signal is an announcement of layoffs.
As someone who has looked at this category for a long time, is that what you're looking for, or are you looking for companies that are still actually doing some hiring out there?
Tim Beyers: Yeah, it's the second. I like looking for companies... I think one of the most interesting things to look at now that Salesforce is laying so many people off is what does HubSpot do? Because HubSpot is in the small-business CRM. They're at the lower tier of the market, but they're trying to scale up so they can serve, say, like a Salesforce-like customer. But they've traditionally been the smaller player underneath the larger players. Salesforce the big brother, HubSpot the little brother.
But HubSpot is not laying anybody off, Chris. What's interesting to me, I'll be interested to see if HubSpot maybe increases some of its hiring. To me, I think it's an interesting signal when a company starts hiring when its peers are laying people off and putting up good numbers at the same time.
A good recent example of this would be monday.com. Asana, which is its direct peer, announced a layoff, and almost at the same time, monday.com came out with its earnings results and said, hey, our operating margins are getting better, and we're still hiring people. They talked about it like they are still hiring people. They haven't been like crazily overbuilding, but they're still hiring people.
That, to me, is an interesting signal when the results are getting better and you're still hiring. I'm going to be really interested to see what HubSpot does in, say, the next three to six months. Do they ramp up their hiring a little bit? Do they announce some new initiatives? It'd be fascinating to see. I like to see the companies doing well amid the downdraft for everybody else.
Chris Hill: Definitely going to give us things to be watching over the next few months. Tim Beyers, always great talking to you. Thanks for being here.
Tim Beyers: Thanks, Chris.
Chris Hill: Today we're continuing our series on previewing the year for different categories of stocks. On Tuesday's episode, it was a growth stocks. Today, we're taking a closer look at dividend stocks. Here to do just that is Motley Fool Senior Analyst Matt Argersinger. Matt, thanks for being here.
Matt Argersinger: You bet, Chris.
Chris Hill: In my fading memory, 2022 wasn't quite as bad for dividend investors as it was for stake growth investors. How should they be feeling this year?
Matt Argersinger: Well, your memory is good, because, yes, dividend-paying companies held up very well in 2022. In fact, if you look at some of the largest dividend ETFs, like the Schwab US Dividend ETF was down just 3.3% in 2022. How many of us would have loved to be down just 3% last year? I certainly would, because I lost many times that amount. You can also look at like the Vanguard High Dividend Yield ETF, which almost broke even in 2022. How about that?
Yeah, dividends in 2022, they did what they've done historically, which is they tend to lose less, far less during bad times or bear markets than the average stock. That's one of the reasons you want them in your portfolio. I think they should be a meaningful part of your portfolio.
If you look back through history -- and S&P Global has done some great research on this going back about 50 years -- dividend-paying companies, but especially dividend-growing companies, have been the best performers by a wide margin. No matter what happens in 2023, I think you want to have exposure to dividend-paying companies.
All that said, if you're expecting a big rebound in the markets this year, I would expect dividends to lag, because what will tend to outperform in a rally are the things that we're so beaten down last year: your technology companies, your software companies, your high-growth, high-beta stocks. They're the ones that are probably going to lead the charge.
But if you ask me, I don't expect 2023 to be a barn-burner of a year for the market. It's rare to have two back-to-back bad years in the stock market. It's actually only happened a few times over the last hundred years. I think stocks may still struggle this year. I think it's probable that we still have some degree of economic slowdown, earnings estimates probably come down. I wouldn't be surprised if, at best, maybe we have another challenging year, hopefully not as bad as last year.
Chris Hill: You and I are old enough to remember, there was a good stretch of time where a company starting to pay a dividend was almost like, I don't want to say it was a stigma, but it was almost like, Wall Street is going to put you in a different category. That was the big debate around Apple as they built up their cash reserves. It's like, well, if they started paying a dividend, we're going to put them over in this other category, and they broke the mold in that regard.
I don't look at companies paying a dividend or starting to pay a dividend as having that same black cloud over them. That being said, are there, if not black clouds, red flags that investors should be on the lookout for?
Matt Argersinger: Yes. I think when it comes to most dividend-paying companies, you're tending to look at companies in the industrial sector, consumer discretionary sector, financial sector, basic materials and commodities companies. These tend to be cyclical businesses that can be highly sensitive to any kind of economic slowdown. As I mentioned earlier, if we're heading into a situation or earnings estimates are going to come down, these companies might be more susceptible than others.
Dividends, of course, are paid out of earnings. If earnings come down, dividend growth is likely to slow, especially case for companies with poor balance sheets. It could be in dividends get cut, or even suspended.
I would pay attention to things like payout ratio, which is, of course, dividends per share as a percentage of earnings per share. If you're looking at a company and the payout ratio is above 60%, which means that the company is, of course, is paying more than 60% of its earnings out as dividends, and it's an industrial business or retail company that's built up a lot of inventory on its balance sheet, susceptible to an earnings slowdown, that dividend could come under pressure. That's a bit of a red flag.
An example of a business I own in my own portfolio that's really struggled lately is Stanley Black & Decker, well-known tools and machinery brand. They had a huge earnings miss late last year. They actually slashed their earnings from over $10 a share to $4. They also announced a big restructuring.
They had simply built up too much inventory, business load. They had a slashed prices. They face big challenges now. The thing is, though, they haven't cut the dividend yet. That's because even with that big earnings drop, their payout ratio is so low that it was enough to protect the dividend, at least for now.
That's not going to be the case for a lot of companies, especially if we get into an economic slowdown. Some just won't be able to afford to keep paying the dividend with any kind of earnings drop.
Chris Hill: Well, and that's just as we've seen with a lot of companies over the last 6 to 12 months cutting back on their marketing spend. Because that's a relatively easy lever to pull. I understand if someone looks at the dividend and says, "Well, just cut the dividend." That's an easy lever to pull. In theory, it is, but companies really hate doing that. It's almost a last resort.
Matt Argersinger: They do totally, especially, you've got the Dividend Achievers and Dividend Kings, the ones that have been paying a dividend for so many consecutive years. It does.
I would say... you mentioned earlier there's a stigma for us as a company starts paying a dividend. There's definitely a stigma when a company stops paying a dividend; it almost gets put into the dustbin. There are times when it's smart to cut the dividend. I remember Vail Resorts, which has a great track record, they cut the dividend shortly after COVID started. Of course, makes sense; they didn't know if anyone was even going to show up at their ski resorts that winter. They resumed the dividend the next year, always good, but there are times when that happens, and the market really doesn't like it.
Chris Hill: If not specific stocks, are there areas of the market that you think dividend investors should take a closer look at because maybe they're looking a little bit more attractive right now?
Matt Argersinger: Oh yeah, I've got a couple, Chris. I'm still seeing a lot of value in REITs. I know people who've listened to me on the show over there, I know I talk a lot about the real estate sector.
One REIT that I'm excited about lately is Extra Space Storage, the ticker is EXR. It's one of the leading owner-operators of self-storage facilities. If you think about self-storage, can have some countercyclical aspects to it. If people move or downsize in a recession, that can lead to needing more temporary storage. There's also this big trend for baby boomers who are retiring and downsizing and finding out that their children don't necessarily want to inherit all their stuff. But either way, you have a very well-run company with a great track record and a 4% dividend yield.
Then outside of REITs, one that I've become interested in lately is one called Lennox International. The ticker's LII. Again, another boring company: It produces HVAC and refrigeration appliances. Super boring. That's why I love it. It's been a killer stock. They've slowly taken market share from larger companies in the industry. While the dividend right now is just about less than 2%, so the yield is not that exciting, they've actually grown that dividend by more than 18% a year for the last 10 years.
I'd say one caveat with Lennox, because it's industrial, because it's cyclical, I might wait a few weeks until the company reports its G4 earnings. I'm not trying to time the market here, but I think they'll likely disappoint, especially when it comes to their guidance as we see with a lot of companies. Residential HVAC is a big share of the business. Housing market can slow down, constructions already slowing down. If you can buy the stock for closer to $200 a share, which I would like to do, I think it could be a home run.
Chris Hill: Matt Argersinger, great talking to you. Thanks for being here.
Matt Argersinger: Thanks, Chris.
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Chris Hill: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks-based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Chris Hill has positions in Alphabet and Apple. Matthew Argersinger has positions in Alphabet, Extra Space Storage, Stanley Black & Decker, and Vail Resorts. Tim Beyers has positions in Alphabet, Apple, HubSpot, and Salesforce. The Motley Fool has positions in and recommends Alphabet, Apple, Asana, HubSpot, Monday.com, Salesforce, and Vail Resorts. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
