Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi strategist Chris Montagu attempted to forecast the sectors and stocks where dividend cuts are most likely.
He was writing from a European perspective, but the guidance is highly relevant to Canadian income investors (my emphasis) ,
“The overall picture from Citi analysts is that most industries will see cuts to their dividends this year and next; Utilities, Materials and Health Care and Consumer Staples are the least affected sectors… the firms most at risk are Financials followed by Industrials and Consumer Discretionary … We observe that many of the recent dividend cutters are cheap, and most are low growth and high risk firms. For several sectors, the March Dividend Cutters are also low quality and large cap firms. To add to the above, 76% of those firms which cut their dividends during March were also in the bottom quintile according to their latest one-year DPS [dividend per share] growth value. So this indicates that DPS growth could provide an early warning signal of a likely dividend cut in the next few months.”
A lack of dividend growth and low credit rating appear to be the keys.
“@SBarlow_ROB C: how to tell when a company is about to cut its dividend” – (research excerpt) Twitter
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U.K. –based Morgan Stanley strategist Andrew Sheets is among the most bullish compared with the rest of Wall Street,
“If you give investors confidence that the worst is behind them, history suggests they can put up with quite a bit of bad news. We think this is especially true for credit spreads and levels of volatility, which often hit their worst levels several months before the trough in economic data (and even farther ahead of things returning to ‘normal’). If, as we forecast, April and May represent the low of economic activity in the US, a market low in March would be very consistent with past patterns of market anticipation. Indeed, the best times to invest are often when a weak economy creates lower prices.”
“@SBarlow_ROB MS (Sheets): “If you give investors confidence that the worst is behind them, history suggests they can put up with quite a bit of bad news” – (research excerpt) Twitter
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Citi’s Montreal-born U.S. equity strategist Tobias Levkovich is far less bullish than Mr. Sheets,
“We worry about sentiment moving out of panic so rapidly … we find ourselves regularly explaining the need to understand this year’s base to determine next year’s recovery opportunity. If we are correct and our $125 forecast for 2020 proves prescient, the $150 per share estimate for 2021 is realistic. If we are wrong and EPS dips to $100 or $110 this year, the 20% recovery in the subsequent 12 months only gets one to $120-$130 and 15x-20x ranges on forward multiples translates into 300-400 points of S&P 500 index target misses, so we cannot simply look past the likely challenging bottom lines … Credit conditions are not supportive of a late-year strong business activity recovery despite central bank actions (and we anticipate that banks will tighten lending C&I standards this month).”
“@SBarlow_ROB Levkovich: you can't just buy a 'throwaway year' for EPS” – (research excerpt) Twitter
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I haven’t written a lot about oil because, with respect to the intense financial pain in the sector, the story isn’t complicated – there’s no demand.
Things are particularly miserable for investors in the sector Monday morning as Canadian oil actually traded at a negative value and U.S. prices stand at 20 year lows,
“Oil plunged below $15 a barrel in New York, a fresh 21-year low, as inventories soar because of the supply- demand mismatch that’s been created by the coronavirus. The most immediate West Texas Intermediate contract fell as much as 22% to $14.19 a barrel. While a major part of the slump is because the May futures contract expires on Tuesday, the collapse nonetheless reflects a fast-growing glut of oil, and rapidly expanding stockpiles in Cushing, Oklahoma, the American pricing hub. As WTI futures have tumbled, it has opened up a discount of almost $9 a barrel to the June contract, to which most trading has now transferred. Buyers in Texas are offering as little as $2 a barrel for some oil streams.”
“Oil in New York Plunges Below $15 as Storage Sites Fill” – Bloomberg
“U.S. crude oil storage is filling rapidly” – Reuters
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Diversion: “IT’S TIME TO BUILD’ - Andreessen, Andreessen Horowitz
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Scott Barlow