In Focus: No More Dividends, Now What?
I love dividends. We consider ourselves at The Seville Report value investors. We will invest in a growth company from time to time, but overall we're all about finding and investing in undervalued companies.
The dividend payouts of the companies we research play a major role in the stocks we decide to invest in and feature in our newsletter. I have always viewed dividends as my payment to wait. Company X will pay me quarterly or semi-annual while I wait for the markets to recognize the value of Company X. I'm receiving a cash payment until the big payoff comes, the day when the stock price has reached its intrinsic value. Yeah, I love dividends, and you should too.
A study by Ned Davis Research proves the power that dividend payments have in creating wealth. Better than a company that pays dividends is a company that periodically raises its dividends.
Today, in the age of fractional share purchases and zero commissions, investors can really put every dollar to work and see a return on it (A small return is still a return). Dividend investing and reinvesting has never been easier or cheaper. But then COVID-19 happened.
Since the coronavirus crisis has caused the economy to stop dead in its tracks, many companies don't have the cash flow they had pre COVID-19, and therefore can't risk spending available cash on anything not related to operations. Disney for example suspended the first dividend payment of its semi-annual dividend payments, and will save $1.6 billion by doing so.
Nasdaq's list of companies that have suspended dividends, share repurchases, or both.
The need to preserve cash is absolutely understandable during current times, but I'm left wondering have CEOs forgotten about the stock dividend / scrip dividend? Companies that need to hold on to cash, could reward their shareholders with additional shares in lieu of a cash payment for the time being. Yes, a stock dividend would dilute the current share pool, and I can understand why some investors would be against this. But if I had to choose between no dividend and a stock dividend, I'd opt for the stock dividend.
I do worry about the amount of time we'll spend in an environment where companies suspend their dividends to make it through the crisis, and then rebound after the crisis. My fear is that after we exit the coronavirus crisis many companies will be left shell shocked by the experience and choose to hoard cash instead of paying it out to shareholders in the form of a dividend.
There's also the impact that re-establishing supply chains domestically could have on free cash flow. It's a topic that seems to come up at least once a week on investment related television and radio. Establishing new factories, paying U.S. salaries, and U.S. healthcare costs, all in an effort to rebuild our domestic supply chain would have a big impact on a company's ability to pay dividends over the next several years. As much as the ideal of domestic supply chains gets thrown around now I don't think it will happen, but if it does, expect to see some pretty measly dividend payments over the next few years, if we even see any at all.
But it hasn't been all doom and gloom during the crisis, some companies have actually increased their dividend payouts. Clorox (CLX) increased its dividend by ~5%, Proctor and Gamble (PG) increased its dividend by ~6%, Apple (AAPL) increased its dividend by 6.5%, and Chubb (CB) increased its dividend by 4.5%, and these are just a few of many companies who have decided to increase payouts to shareholders, while so many other companies are clinging to cash.
Several times over the past three months I've used this article to discuss how we can come out on the other side of this financial crisis richer than we were going into the crisis. The massive decline stocks experienced from late February to the end of March provided great buying opportunities for investors sitting on cash. Establishing a portfolio of companies with strong balance sheets, strong free cash flow generation, a history of dividend payments and dividend increases is another way to take advantage of current markets.
If you're lucky enough to be working during the crisis, take this time to seriously consider investing in companies that pay dividends. While not as sexy as the biotech company that's working on a potential cure for AIDS or COVID-19, the dividend payer will do more over the long term to increase your wealth, and ultimately that is why we invest right?