Cut These Dividend Stocks Before They Cut
Summary
- The stock market has moved largely in tandem with Coronavirus (COVID-19) news since March - down on fear, up on hope (with a slug of Fed Superman largesse).
- Hopes for a vaccine and a "V" shaped recovery are quickly fading though, as health and Fed officials have been giving a dose of reality.
- Despite the gloomy economic outlook, the stock market has rallied, giving investors a chance to sell troubled stocks.
- These stocks are all likely to cut their dividends by next year or sooner.
- Sell these at-risk stocks now if you care about managing risk.
- This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »
So far, executives have been trying to hold the line on dividend cuts, but are slowly giving in. As of the end of last week, dividend growth in the S&P 500 has been negative 3% in 2020.
As I talked about in Reopening Too Soon Could Cause Mega-Crash And Depression, the first wave of Coronavirus financial impacts has been bad, but the 2nd wave could be much worse. I am convinced that dozens of companies will throw in the towel and cut dividends rather than continue to raise debt.
Below are several companies that were poised for dividend cuts on any recession coming into 2020. With the mega-recession we are seeing, bordering on a depression, but offset by a massive Fed bailout of the corporate bond market, these companies are still likely to cut dividends by early next year or sooner.
Sell the following dividend stocks before the "biggest suckers rally in history" is kaput and the go full zombie.
Research Summary
I use multiple screens, as a first step, when searching for stocks to buy or sell. Once I've found an interesting company, I do a deeper dive. I have used several screens focusing on financial strength, dividend payout ratios and revenues to identify companies at risk for dividend cuts.
I originally did this exercise early last year when it became apparent from economic indicators the economy was starting to turn over. As I discussed with Margin of Safety Investing members and in recent webinars, I was able to identify nearly 150 S&P 500 companies at risk of dividend cuts in a future recession. That recession is here.
In the following table of S&P 500 dividend paying stocks, you can see the companies ranked by forward dividend growth as measured against their 12 month trailing dividend. Companies such as Occidental Petroleum (OXY), MGM Resorts (MGM) and Harley-Davidson (HOG) have already engaged in massive dividend cuts. Many S&P 500 dividend payers have reported flat or nearly flat dividend growth, as well as, suspensions. The result has been the negative 3% dividend growth mentioned above.
I have paid special attention to the Altman-Z indicator, which is a good indicator of companies that will need to take drastic actions to avoid bankruptcy. The common action to take if asset sales or debt addition fail is to cut dividends in most cases.
For REITs, I focused on FFO. I then looked for companies that could have unexpected capital investments to make as a result of COVID-19 on top of a reduction of collected rents.
Each of the following stocks have received deeper dives at Margin of Safety Investing. The following are summaries of my reasons for being bearish on these stocks.
Sell Simon Property Group (SPG)
Simon is a mall operator that would claim to be more than that. In reality, it is, but it is mainly a mall operator. In January, for members of Margin of Safety Investing, I forecast that Simon's stock could fall into the $50s if there were a recession. Indeed, I set our "bottom fishing" price on the stock at $50. That price was hit during the March Coronavirus crash.
The stock has rallied into past $90 and currently still resides north of $80. This has been on hope that reopening many venues that had been shut, will aid in a rebound. And, it very well might. However, that is probably not enough for the stock to set new lows.
Management has been telegraphing a dividend cut for some time now. This is from the first quarter earnings call:
"Let me turn to the dividend. The Board will declare a second quarter dividend before the end of June and that dividend will be paid in cash. We expect to pay out at least 100% of our taxable income in 2020 in cash. As a point of reference, there have been over 175 public companies who have either suspended or reduced their common stock dividend by 50% or more. We will not be one of those companies." - CEO David Simon
The takeover of Taubman Centers (TCO) at a significant premium was just pulled. I was against this merger in the first place, on the grounds that the cash would be better spent elsewhere. Pulling out of the deal is a prudent move by management that should keep the dividend cut from being total. Based on this action and what David Simon said recently, I'd anticipate about a 50% dividend cut.
I am extremely familiar with Simon. I have done several deep dives on the company's finances and business model over the years. Their challenges run deep and were fairly well known. The new batch of challenges from COVID-19 will not be glancing blows. It is clear that behavior will change, even with an eventual vaccine.
Redevelopment of many properties that had just recently been redeveloped will need to occur. This is on top of having to replace tenants that will be leaving due to financial hardships many leading to bankruptcy which will stick Simon with unpaid rents on top of pending vacancies. The double whammy of lower revenue and higher capital needs will drive Simon to cut the dividend soon (likely this month) and look to sell properties to retrench. The result will be a smaller and lower yield company.
Since 2005, I have done two or three annual drives around the country. One of the things that jumped out at me were the number of malls in trouble from around the financial crisis. Last summer, I revisited malls in several states including Pennsylvania, Ohio, Indiana and Illinois to see many never fully recovered. In Milwaukee, there is a mall that has sat vacant for 20 years on a huge piece of property that at one point was under contract to a Chinese developer (no more).
What I can say is that the mall model in general is in a massive transition phase once again. These transitions will likely work out in the long term - because there's only so much good real estate - but, in the short to intermediate term will be very painful.
Retirees who looked to Simon for income and some growth should look elsewhere the next few years. Sell Simon. Look at it again when it is in the $20s.
Sell Exxon (XOM)
I have stated my dislike for Exxon's business model multiple times on these pages. In short, the company's focus on expensive growth has undermined the long-term prospects of the company.
With oil prices unlikely to recover past about $60 per share (excluding for short periods if there is broader war in the Middle East), Exxon is in a world of hurt as the world adopts a working from home and tele-communicating (think follow-up doctors' visits and various forms of consultation) as a norm for many more businesses.
In short, the oil complex is in trouble and Exxon is one of those in the most trouble due to what will be perpetually low energy prices.
Exxon's payout ratio is currently well north of 100% and their debt has swelled in recent years to over $45 billion.
Meanwhile, revenues have been falling for a decade:
And, earnings have round tripped since the early 2000s.
Riddle me this oil man: how does Exxon pay the dividend and the debt with weak revenues and earnings? Selling assets you say? Exxon has in fact been attempting to sell assets, but to little avail as there are few buyers at anything resembling a pre-2014 price.
Growth will not be the savior either. I have studied in depth the projects in Guyana and Suriname. I would be shocked if those are developed half of what is projected in the next decade. Exxon's other assets are also not as growthy as they once were thought to be. In the end, Exxon will have more stranded assets with sunk in costs.
Ultimately, Exxon will have to break up the company. I have discussed this for two years with MoSI members. Before that happens, the company will have to cut dividends in order to help stave off a debt crisis. There is a real possibility that Exxon goes bankrupt this decade. I wouldn't put the odds higher than about 20%, but that's not zero.
The bottom line is that the company has been managed terribly post Tillerson. And, it might not have been any better with him given the headwinds involved and that he never had to face the "end of the oil age" so who knows what he might have done. We know he bailed at a good time.
I believe that Exxon heads to $20 per share or lower once the dividend is cut.
Other At-risk Companies To Sell
Many companies are waiting to see if there is a V shaped recovery in the economy before they cut dividends. While I believe that odds of that are slim to none of a V shaped economic recovery, the reality is that nobody really knows just yet.
In April, I forecast 2020 S&P 500 earnings of $91-92. I am certain that was too optimistic and think somewhere lower is likely, though hard to put a number on due to known unknowns with Coronavirus.
"My own proprietary estimate of earnings is at $91-92 for the year. This takes into account a slowdown I already believed was coming and COVID-19 on top. If we "open the economy" too soon and get a second wave of infections and deaths, earnings will close in on zero."
That said, risk management should be your most important checklist item as a do-it-yourself investor. Hoping for a V shaped recovery is not a prudent investment strategy. Considering your risk tolerance for large and potentially permanent losses is what to do right now.
I currently rate all of the following companies as sells based on the risks related to a W, U or L shaped economic recovery. I have done similar deep dive analysis on all of these companies and would not own them with other people's money, much less my own. Sell the following stocks:
| Company | Symbol | Projected Cut Date |
| Simon Property | (SPG) | Imminent |
| Bank of America | (BAC) | Q3 2020 |
| Citigroup | (C) | Q3 2020 |
| JPMorgan Chase | (JPM) | Q3 2020 |
| Morgan Stanley | (MS) | Q3 2020 |
| Goldman Sachs | (GS) | Q3 2020 |
| VF Corp. | (VFC) | Q4 2020 |
| Corning | (GLW) | Q4 2020 |
| Royal Caribbean Cruises | (RCL) | Q4 2020 |
| Ventas | (VTR) | Q4 2020 |
| Exxon Mobil | (XOM) | Q4 2020 |
| Oneok | (OKE) | Q4 2020 |
| Iron Mountain | (IRM) | Q4 2020 |
In general, big banks are in trouble as the Fed has a say so in their dividends. Jamie Dimon has hinted a dividend cut could be coming. The investment banks could save themselves with a hero bet on markets or suffer worse.
Investment Summary
Even rumors of a dividend cut generally leads share prices to fall. In the current economic scenario, I believe most rumors will turn to reality by early next year or sooner.
The current "Hopium" Fed inspired stock market rally is a perfect time to trim away the tinder from your portfolio. Get rid of all of your second or third best ideas. Kill your zombies as I said a while back.
There is always another opportunity to buy stocks. Do not fear missing out on a few more points of a rally that has left the stock market at extremely overvalued levels.
Get our new quarterly special report "Investing In The 2nd Half Of 2020" and our newly updated "Plug & Play Portfolio Models" for building and protecting your financial freedom.
This article was written by
25+ years of beating markets with less risk. Margin of Safety Investing. "The three most important words in investing are margin of safety." - Warren Buffett
Get my Macro view and analysis of secular trends which led to my being named "The World's Next Great Investing Columnist" at MarketWatch. Join our investing group to get ETF asset allocation, top growth & dividend stocks, as well as, learn a repeatable approach to option selling for making more retirement income.
I own and operate Bluemound Asset Management, LLC - a boutique registered investment advisory that manages and consults on 9 figures of wealth. I was lucky to have several mentors who managed billions of dollars, including, one who literally helped write the book on option selling. I have now managed money since the 1990s through several major market cycles.
In the past decade I have worked on private equity led real estate projects, as well as, consulted to several private equity firms, hedge funds and family offices. I currently actively help accredited investors find sustainable real estate investments through private equity.
Since 2011, I have been widely syndicated and appear as an investing expert in the media. Follow my work, as I try to help you make great returns with less risk.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
On Friday mornings I hold a free macro and investment webinar for Seeking Alpha readers. See my blog for details. --- I own a Registered Investment, but publish separately from that entity for DIY investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.
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Comments (767)
So far the 2 stocks I own that you said would cut are still paying me those dividends. Glad I didn't listen to that bad advice xD
@Guy at Work reading SA , It looks like it is working for you.
@Guy at Work reading SA Sometimes the Fed has your back, sometimes they don't. Zombies eventually die ugly deaths.
@Kirk Spano , They can die just like vampires, with a wooden stake.
www.tradingview.com/...
There's a silver lining somewhere in this chaos.
