~ By Tim Murphy, Marketplace Success Manager
Thank you to all Earnings Preview Roundtable – Part 1 – Tech & Growth readers. Your comments and engagement were appreciated by all contributors involved.
Today, we have insights from seven of our Marketplace contributors on dividend, REIT and income coverage. Again, we asked the open-ended question – What are you watching with your followers this earnings season?
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David Alton Clark of The Winter Warrior Investor: All three major indices posted strong gains on Friday July 15 after fears that the Fed would hike rates by a full point waned. Investors can now focus on earnings results rather than rate hikes. I don’t see the Fed raising rates by 100 basis points independently, that would signal that they have lost complete control, which may in fact be true.
In addition, the 9.1% CPI figure is retrospective. My money is on the next reading showing that inflation fever has broken out. The day is coming, you will want to be long. In addition, the multiples have already been significantly compressed. The S&P 500 multiple fell 25% to 16 times currently expected earnings. This level has marked the bottom of stocks several times since 2000.
This chart shows the degree of valuation adjustment during past major sell-offs. Based on the current setup versus similar historical patterns, the odds favor positive returns ahead for the next two years if the historical data holds true. The S&P 500 breaking above $4,000 will be the first sign that the tide has turned. Still, another 10% drop could be on the cards if companies choose to “sink the kitchen” in the quarter, using inflation and recession fears as a hedge. Nonetheless, I view any weakness as an opportunity to buy solid income-generating stocks and build wealth for my retirement portfolio. My watchlist includes Devon Energy (DVN), Microsoft (MSFT), NVIDIA (NVDA), AT&T (T) and the Pimco Dynamic Income Opportunities Fund (PDO).
Disclosure: Long T and MSFT
Systematic Revenue ADS Analytics: This earnings season, we will be looking closely at BDC’s results. First, we expect a significant decline in borrower prepayments, which typically make up a large portion of BDC’s earnings. Second, we will be looking for any weakness in BDC’s net asset values due to lower prices for publicly traded loans. And third, we will monitor the evolution of non-bookings in BDC’s portfolios.
This year we have turned to BDCs with higher quality portfolios and those with greater frontline allocation like BXSL, GBDC and OCSL and expect these companies to remain more resilient and outperform this year.
Disclosure: Long BXSL, OCSL, GBDC
Chris Lau of DIY Value Investing: Almost all of the companies in our model of dividend income champions have been up strongly since 2020. Yet they have retreated from their highs in 2022, giving long-term investors another chance to capture yield. When they release results, look for a dividend increase, stock buyback and an update on economic conditions.
Expect Pfizer (PFE) to raise its outlook when forecasting paxlovid sales. Markets expect Pfizer to report EPS of $1.73. Its small acquisitions are worth less compared to a potential mega-deal. In the energy sector, Exxon Mobil (XOM) could beat the EPS estimate of $3.58. Listen to Exxon’s oil price forecast.
Newell (NWL), whose stock is paying a 4.8% yield, is expected to earn 47 cents per share. The company will indicate the health of its sales of household products. More controversial than ever, Altria (MO) reaffirms its confidence in its legal team. He will fight to keep Juul in the market, citing product safety. The stock’s dividend yield is around 8.5%. Expect EPS of $1.25.
Coca-Cola (KO) has exceptionally strong brand power and product lineup. Like PepsiCo (PEP), it can exceed expectations. Analysts expect EPS of 67 cents. Investors may “panic sell” Consolidated Edison (ED), citing higher interest rates. It is a mistake. The firm will post an EPS of 57 cents. The stock has a dividend yield of 3.4%, which is stronger than ever.
Steven Bavaria of Inside the Income Factory: Market downturns and periods of volatility are dangerous times for all investors, but especially for retirees and others living on income. Typical growth stocks only yield 1-2% and rely on earnings and dividend growth for an extra 7-8% to achieve the average total stock return of 8-10% of the last century.
But the average yields are just…ages. In bear markets, investors who need 4%, 5% or 6% to live on find themselves with the unfortunate choice of cutting spending or selling stocks at depressed prices. A high yield Income Factory strategy avoids this. We still strive to earn 8%-10% per year, but use asset classes that offer high enough returns to generate all or most of our 8%-10% return target in cash.
This provides us with the 4%, 5% or 6% we need to live without touching our capital, which is also depressed, just like stocks, but continues to pump its “river of liquidity” from 8% to 10% . The untouched part of which we reinvest and compound at favorable prices and returns. The key to doing this successfully is to execute our strategy only with funds whose distributions are well covered by their OWN cash flow, and DO NOT USE capital to make up shortfalls. As discussed in detail here ($).
These will not be equity funds, but largely credit funds, such as Ares Dynamic Credit (ARDC), KKR Income (KIO), XAI Octagon (XFLT), Pimco Dynamic Income (PDO) or New America High Income (HYB).
Disclosure: Long ARDC, KIO, AOP, XFLT
Big Picture Growth & Income’s Tariq Dennison: The main earnings release we are following this month is that of Unilever Plc (UL), which will publish its half-yearly results on July 26th. Unilever probably has the best overall picture of inflation and physical goods movement in most markets, and is likely a beneficiary of a weaker Euro. Dollar-based dividend investors may not appreciate that the dollar value of the quarterly dividend of EUR 0.4268 fell with the euro, but overall I see inflation as a net force for long-term dividend growth of that name. The image nicely encapsulates how their brand portfolio makes this name a beacon of the global economy and for world-class dividend growth investors.
Disclosure: Long UL, and also long via options and via stocks listed in London and Amsterdam
Dane Bowler of Portfolio Income Solutions: The million dollar question hanging over the market is whether or not we are in a recession. The benefits of 2T22 and the indications that accompany them will be an essential source of information to answer this question. At Portfolio Income Solutions, we’ve created a spreadsheet with earnings estimates for each equity REIT so we can quickly compare quarterly numbers and forecasts against estimates. Right now, REITs are on average expected to grow FFO/share by around 7% year-over-year, making the sector much stronger than the S&P, which is expected to see negative earnings growth. if the energy is deducted.
In the coming weeks, we will find out if REITs are actually doing as well as expected. My hunch is that it will be quite variable depending on the type of ownership and by individual business. We publish company-specific fundamental analysis to try to discern which companies are strong and which are weak.
Location is always a big issue, especially when it comes to offering new developments. Some submarkets are experiencing employment and population growth without a corresponding increase in real estate supply, which bodes well for existing properties. I particularly like sunbelt apartments, class B industrial with road or rail access, manufactured homes, hospitals and medical practices.
2Q22 earnings will be a huge influx of new fundamental data. I look forward to staying nimble and repositioning myself on occasion.
Fredrik Arnold of The Dividend Dog Catcher: Dividend stocks whose historically long annual dividend increases five or more consecutive years. Stay in shape with dividends from $1,000 invested exceeding the price of a single stock. While the current market is showing a rapid decline in stock prices, the strongest companies are showing dividends in this sweet spot. These include Dow Inc. (DOW), Intel (INTC), Leggett & Platt (LEG) and Amcor (AMCR).
Disclosure: Long INTC