Reverberations of the collapse in commodity prices have influenced much more than the commodity producers themselves. The slide has impacted business in a variety of sectors, almost across the board, as suppliers and customers seemed to pause to assess the damage and opportunities. The strengthening dollar is also having an unprecedented impact on the growth of global entities. If the disappointments yesterday (see here) didn’t signal an inflection point in the markets, then today surely has.
It was just yesterday that we reiterated our view that Peabody Energy’s (BTU) dividend was at risk, and almost on cue, the firm announced today that it would slash its payout more than 97%, to $0.085 per share on a quarterly basis. The Dividend Cushion ratio for Peabody Energy was -7.6 (negative 7.6), even worse than that of Cliffs Natural (CLF), which cut its dividend yesterday. A Dividend Cushion ratio below 0 signals significant long-term risk to the payout. Both firms were on the ‘Dividend Yields to Avoid’ list.
Cliffs Natural, in our view, is one of the best examples revealing how management can often be too optimistic with respect to their payout. As recently as Cliffs Natural’s third-quarter earnings call (a few months ago), management reassured investors that they were comfortable with the dividend. Apparently, the board decided otherwise. The reality is that numbers don’t lie, and the Dividend Cushion ratio is derived directly from the firm’s forecasted financial statements. Financial statement analysis will always be the key to success in the markets, regardless of what else you hear.
Freeport McMoran (FCX) may be next in line to slash its dividend.
There was a plethora of disappointments today. Dover (DV) pointed to the combination of falling crude oil and foreign exchange losses for why earnings per share in 2015 will be $4.70-$4.95 per share (was $5.05-$5.30), below consensus of $5 per share. The company had expected revenue expansion of 3%-6%, but due to lower energy revenue estimates, revenue could fall as much as 2%.
Steady-eddy industrial conglomerate 3M (MMM), while reaffirming its 2015 outlook for the top and bottom line, revealed weaker-than expected revenue in the fourth quarter. Organic local-currency growth was north of 6% in the period, so we can’t be too disappointed in 3M’s results, even if the “miss” suggests that the pace of growth may be slowing relative to expectations, if ever so slightly. All five of the company’s major business segments achieved expansion.
Caterpillar’s (CAT) outlook for 2015, however, may be most telling of the tumultuous environment commodity-linked companies are facing. The company said that the precipitous decline in crude oil prices is harming its Energy & Transportation business as it damages its construction operations in key oil producing regions. Lower prices for copper, coal and iron ore are also damping sales of the firm’s mining equipment. The economic environment in China is also becoming increasingly more challenging for Cat.
Even with all the renewed geopolitical uncertainty across the globe, defense contractor Lockheed Martin (LMT) said that 2015 earnings per share would fall below consensus expectations, to the range of $10.80-$11.10. The company’s backlog fell to $80.5 billion at the end of 2014 versus $82.6 billion at the end of last year. Though not an unexpected decline, it does speak to an ongoing tightening of defense budgets. The company’s dividend remains very healthy, however.
The chemical industry has not been spared from the uncertain market climate caused by declining commodity prices either. DuPont (DD) now expects earnings per share of $4-$4.20 per share for 2015, below consensus expectations. The company cited a whole host of reasons, including “significant market and macroeconomic challenges, including a weaker Ag economy, a stronger dollar and a difficult market pricing environment.”
I talked about the difficult revenue environment facing Microsoft (MSFT) in this video here, and while we acknowledge that short-term performance in the equity will be muted at best, Microsoft’s dividend growth thesis remains firmly intact. Still, we must be prudent and take profits on half of the position in Microsoft in the Dividend Growth portfolio, even as the firm falls below the low end of the fair value range.
ALERT: Specifically, we are removing from the Dividend Growth portfolio 154 shares of Microsoft at $42.34 each. We’re most concerned that a 4% dividend yield, a level where significant fundamental support rests in Microsoft’s shares, isn’t until $31 per share. Though there is material technical support in the $40 per-share range, general market weakness could threaten those levels. Shares are trading north of $42 at present.
Microsoft was added to the Dividend Growth portfolio in the mid-$20s. Stocks do not go straight up forever, unfortunately, and locking in gains is one of the most important aspects of investing.
All-in, we continue to encourage members in this environment to stick to high-quality undervalued ideas that have solid balance sheets, as measured by a firm’s net cash position (not necessarily its credit rating). As we had warned in the most recent edition of the Best Ideas portfolio , the equity markets appear vulnerable and perhaps are setting up for a multi-month downtrend.
Your baseline expectation should be for the market to pressure portfolio returns in the coming weeks.
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