The year 2020 was starting out as just another great year of the continued economic expansion. The phase-one trade pact with China was signed and global trade was set to start expanding again. That was all before the coronavirus took over the news. The U.S. markets and economic data kept rising into February, but the all-time highs in the middle of the prior month have all turned into a bear market, with 20% and 30% corrections seen in the major market indexes and in the leadership stocks. In many cases, the drops have been far worse.
24/7 Wall St. has covered many aspects of dividends for investors over time. The reality is that there just isn’t a good playbook for a COVID-19 pandemic for the markets and the economy. We have screened for companies with safe payout ratios, but there remain many unanswered questions about what would make for a safe earnings stream, a safe balance sheet and so on under the equivalent of a zombie apocalypse or big meteor strike. At this point, we are also assuming that countless millions of American lives will not be lost due to COVID-19. Sadly, we have no better crystal ball than anyone else and have certain assumptions we have to make.
Government help in the traditional sense can only go so far. The Federal Reserve can cut interest rates and buy more Treasuries all it wants to. The consumer’s risk of a loss of a paycheck due to forced work closure or businesses disappearing simply will not go away unless the government resorts to dumping helicopter money to those who need it the most. Even then, millions of people are terrified about contracting COVID-19, and at some point people will not leave their houses for any circumstances, if the virus gets to exponential growth from current levels.
As of mid-March, the U.S. and global economies have all entered into de facto recession, whether or not anyone wants to admit that. Economic data of course is not long enough to confirm a recession, but look at the fallout and consumer panic buying of any nonperishable foods, consumer products and the like. Our hope, probably just as much as any others, is that we all get to look back on this time and see how ridiculous or silly we were all acting. That said, hoping is hoping and panic is panic.
Back to dividends. Investors have just figuratively faced a firing squad from the coronavirus. Companies in all walks of life have dialed down or simply withdrawn any guidance they have previously offered. Many industries and businesses are being squashed. And the Fed’s last emergency rate cut to zero percent means investors who jump into short-term Treasuries earn literally nothing.
We have screened industries that are expected to remain safe with some earnings power. The aim is to see which companies have the best chance at not having to lower their dividends at all and those that almost certainly will retain much of their current dividends in the recessionary scenario we all now face. High cash balances and earnings power, as well as an ability to keep operating and serving their customers, is paramount here. Again, there is no historic playbook that can be used in the modern era and the modern economy, so if this pandemic moves from hundreds of thousands into millions of cases and if the death toll screams higher due to the medical community being overwhelmed, then all bets are off.
Before getting into nine “safe” dividends even under a coronavirus pandemic, note that it is starting to feel impossible to predict just how low the market, and even the best stocks, can go. Earnings multiples are now too hard to quantify, so even investors only willing to pay a lower multiple becomes impossible to quantify on top of panic selling just to raise cash from any source. And major exchange-traded fund (ETF) and mutual fund selling is adding pressure to even the most stable companies.
American Electric Power Co. Inc. (NYSE: AEP) is not the largest electric utility in America, but it has been among the most stable. AEP also has been as deeply committed to its dividend as any dividend-paying company in the past. It has not lived up to its defensive utility share price game now that its shares are down in bear market territory with a 20% correction. AEP is not the most leveraged of utilities, but the $84 share price at $2.80 per share dividend brings about a 3.3% dividend yield. With normalized earnings in excess of $4.00 a share, that payout should be safe even if companies and individuals use less electricity in the years ahead. AEP also wants to have a role in storage and coming energy trends, and the Fed’s most recent rate cut could allow it to refinance its debt at record-low yields.
Apple Inc. (NASDAQ: AAPL) has faced undue pressure from retail all the way up its supply chain, and now the company has closed all its stores outside of China. That said, Apple can withstand a very long period of interruptions, and its $1 trillion-plus market cap is only one factor here. The biggest issue of all is that Apple ended 2019 with $100.5 billion in cash, and that number would be substantially higher had it not spent endless billions of dollars on stock buybacks.
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