Well, Maybe the Naysayers Were Right

A couple weeks ago, I thought the sell-off was overblown. Now I’m just happy my portfolio isn’t down more than 30%, and I’m wondering how much my dividend income is likely to decline this year.

The stocks I chased down? Wells Fargo, Clearway Energy — I should have waited. I could have picked up those shares even cheaper. 

We don’t know for sure yet how much the Covid-19 pandemic will disrupt the economy, at what cost, and for how long. But the handwriting is on the wall: many companies will have to reduce or eliminate their dividend. That’s especially true in the hospitality and travel sector. In addition to the economic hit they are taking, the bailout legislation recently passed by Congress prohibits companies that receive assistance from paying dividends in the near future.

According to a report in Barron’s, IHS Market predicts that 230 of the 1,800 largest corporations in the world will cut their dividends. (Barron’s cited IHS Markit as its source.)

Some sectors that may be immune from dividend cuts, at least if the pandemic slowdown doesn’t endure too long: health care and financials. I would guess consumer staples could do well too, though you wouldn’t know it from the performance of companies such as General Mills (which I own) in recent weeks. Technology stalwarts also may be able to maintain dividend payments.

And in the long run, the economic stimulus bill is one big charge adding to the nation’s federal debt, a problem the current administration seems determined to ignore.

With the markets tumbling amid Coronavirus fears, and with the federal government’s management of the epidemic ranging somewhere between abysmal and terrible, in my opinion, it’s worth assessing whether or not this bear market presents a buying opportunity.

In my opinion — not yet.

I’ve made my usual mistake of chasing some stocks down as the market tumbles. (I added small amounts to my holdings of Intel and Clearway Energy recently, only to watch the share prices continue to fall. Now I’m ready to wait a while before jumping in again.)

The sheer volatility in the markets is mind boggling. Watching the Dow fall 2000 points and then bounce back by more than 1000 points is making me dizzy. But volatility doesn’t instill confidence, and likely portends more selling in the near term than buying.

So I urge discipline (especially for myself, prone to trigger happy buying sprees whenever the market dips). Corrections are historically a good time to buy shares in quality companies. But I’m thinking the best names in the market — Microsoft, for instance — may be more attractively priced a few months from now than they are today.

 

The news media, not unexpectedly, is aghast over this week’s stock selloff. The fastest correction in history! $3.6 trillion in market value “erased!”

Let’s put the correction in context. Last year, the S&P 500 posted a 30% total return. That’s what you might call a dose of irrational exuberance.

As Mark Decambre of MarketWatch points out, Coronavirus isn’t the only factor driving the weak’s selloff. Recession fears, rising bond prices, election jitters and high valuations also played a role. 

James Mackintosh at Barron’s says that even if the pandemic fears wiped out profits for a couple of quarters, that would only justify a “small drop in share prices” as long as profitability is expected to bounce back and firms have the financial resources to weather the storm.

As for me? I’m not ready to jump in and buy on the decline yet. I added a bit to my holdings of Clearway Energy (CWEN) and Wells Fargo (WFC), two attractive dividend payers that I think have room for share appreciation. Time will tell if I’m chasing stocks down too early, but I’m keeping most of my powder dry in case better buying opportunities emerge. 

Were I looking to ad a new name to my portfolio, say something that has sold off heavily in the wake of the coronavirus, I’d take a close look at Carnival (CCL). After this week’s selloff brought the stock down 37% since the start of the year, the dividend yield stands at 6% and the P/E at a mere 8. It’s tempting enough that I plan to keep CCL on watch. The stock is down 37% since the start of 2020.

It’s tempting to book a cruise right about now. No doubt prices are attractive.

 

The search for yield (about 4% as of this writing) has emboldened me to finally buy some shares of Wells Fargo. My thesis is that as other investors hold back, scared off by regulatory overhang and uncertainty about the new CEO, the shares are trading at something of a discount.

I’m looking at a trailing price-to-earnings ratio of about 12 and thinking this is an attractive price for a big-cap financial stock in today’s market. Were the most recent quarterly results impressive? Not really. Were they reassuring? I’d say yes. Earnings and revenue fell short of analyst estimates, and the company warned that regulatory issues may not be resolved this year. But the company remains solidly profitable. My take, the drawbacks baked into the company’s stock price are overblown in the long run.

As I write this, I hear Billy Joel whispering in my ear:

“You may be wrong and you may be right.”

Analysts overwhelmingly have a “hold” rating on WFC. The average price target is $51, with shares trading at just under $49 mid-day on Jan. 17. The dividend is likely to be a key component of the total return for this stock this year and perhaps beyond. Still, it’s enough to tempt me into buying at a time when I think the broad stock market is largely overpriced.