During these crazy market moves, a lot of us are keeping in the back of our mind a notion along the lines of, “hey, this might be the chance to buy something cheap… but it better be really, really good!”
And for many of us, that means our minds drift to “blue chip” type stocks — the companies that you’ve long admired or wished you had owned for the past few decades of extraordinary and steady growth, but that always seemed too expensive. Maybe now’s the time that we can finally stomach buying some of these?
It’s not easy, of course — when readers have asked about when it’s OK to buy during this coronavirus collapse, I always respond that there’s no one point that will be perfect, and repeated the old saying that “nobody rings a bell at the bottom,” but my favorite indicator is the vomit test… if pressing the “buy” button in your brokerage account makes you want to throw up, that’s probably an indicator that it’s time to start buying. I have been doing a little buying all the way down, including last week, (along with some selling as stop losses hit), but I favor making lots of small (usually very small) decisions over trying to make one big one… there’s no rush.
And in the abstract, the notion of “upgrading the quality” in your portfolio is a nice way to think about getting something good out of this horrible global crisis. As everything seems to fall together, maybe we can sell the companies who we know are not top-tier or put some of our idle cash to work, and use the moment to buy the giants who we know (or hope we know) will survive and thrive in the end.
So with that in mind, I’m stepping away from the “urgent briefing” ads for the moment and looking into a teaser pitch from Dividend.com — they hint at a stock that just “made a comeback” to their “best dividend stocks list” — they’re selling their Dividend.com Premium service ($149/yr).
(As an aside, is anything more annoying than every newsletter publisher hosting an “urgent” video briefing that purports to be a public service for a stricken country, offering guidance for panicked investors, but is actually a sales pitch centered around a stale stock pick they’ve been trotting out for six months? Don’t worry, I’m sure we’ll cover plenty of those in the weeks ahead as well).
So what is it we’re told about this dividend growth stock? Here’s the intro:
“The coronavirus has upended the markets. Global growth is slowing and the world’s economy appears to be heading towards a recession. For investors, the time to take risk isn’t now. Investors should be focussing on firms with large moats, big competitive advantages and strong demand even in the bad times. And no other stock fits that description better than our new Best Dividend Stocks List pick in the consumer sector.”
That’s fairly comforting language, so this is less likely to lead to hyperventilating than the pitches about COVID-19 vaccines or imminent bankruptcies and business closures… what clues do we get about the actual stock?
“Our pick is one of the largest retailers in the world and created the category in which it operates. With tens of thousands of stores across the world, our pick has been able to use its size and scope to be a low-cost leader. This focus on low prices and a broad basket of goods has given our pick tremendous staying power in times of trouble.”Are you getting our free Daily Update
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OK, that certainly narrows it down a lot — but it could still be a bunch of different companies, from Costco to Walmart to TJ Maxx, and we could include lots of specialty discounters and the various Dollar store chains and some Supermarket-style grocers in there as well.
What other clues do we get?
“With new apps, in-store tech upgrades, ‘click-and-collect’ and a series of shrewd DTC buyouts, our pick has quickly become one of the leaders in the online shopping space as well.”
“DTC” is “Direct to Consumer,” in case you’re wondering. But yes, this also doesn’t really narrow it down — all of the traditional retailers are desperately trying to remain relevant by building online businesses, with some doing much better than others.
There’s even a coronavirus mention in the ad, which I guess is required to get our attention these days:
“… with the coronavirus continuing to shift our shopping habits, our pick is poised to keep the growth going.”
And we get a few more specific clues that we can feed to the Thinkolator…
“… over 11,500 stores….
“Huge moat and recession-resistant nature allowed it to pull in a record level of sales last year….”
And we’re told that yes, this does pay a dividend (you’d assume so, no, from a Dividend.com ad?) — with a payout ratio of 43% that is described as “healthy,” a current yield of 2.06%, and a recent dividend increase of 2% with a “four decade” history of increasing the dividend.
So what is it?
Well, sometimes the most calming idea or answer is a boring one, and that’s the case today — this is a tease that we should buy Walmart (WMT).
And since Walmarts are among the few stores that are open and still doing heavy sales volume in this world of toilet paper hoarding and “stock up for quarantine” shopping, the stock has held up much better than most — so while it is indeed a defensive name and a deep-moat stock, thanks in part to the fact that it’s the only grocer and mass retailer available to millions of Americans and tends to be the go-to retailer for customers feeling the impact of recessions… and while Walmart has been talking about beefing up the business and hiring, along with Amazon, while so many others are closing down… the stock has not really come down to “bargain” territory during this coronavirus panic.
Here’s what that looks like in chart form — with Walmart in blue, Amazon (AMZN) in orange, Kroger (KR) in red (that’s the grocer that Berkshire Hathaway started buying last year), Costco (COST) in purple, and the S&P 500 in green….
Walmart will probably post relatively steady revenues during these quarters of really direct coronavirus impact — they will be one of the beneficiaries of the “stock up” moves, along with other grocery stores and folks like Costco, though their costs are also rising and people will probably be buying more groceries, which are low-margin, and less of their higher-margin products in the other departments of the store. It is likely to continue to be relatively immune to virus panic, unlike a lot of stocks, though a deep recession (or worse) will certainly hurt Walmart — probably not as badly as many others, I imagine, but a shrinking economy and skyrocketing unemployment, should those things be persistent, would bring down numbers for essentially everybody.
For some perspective, I thought I’d go back and see what happened to Walmart during the 2008-2009 crisis… and it turns out that the stock climbed nicely in 2007 and the first part of 2008 as what I’d interpret to be somewhat of a “flight to safety” trade (it’s dangerous to assign a narrative to a stock chart, but that’s roughly how I remember thinking about WMT at the time as well), but then once things really fell apart WMT fell pretty sharply into late 2008… though when the March, 2009 bottom hit it was still roughly flat with the price it had traded around for much of 2006 and 2007 while the S&P 500 was down by roughly 50%.
That doesn’t mean it will happen the same this time around, of course, a pandemic is not the same thing as a financial crisis, but with the mass unemployment and financial panic most people were feeling in 2008 and 2009, tightening their belts and worrying about foreclosure, it’s worth noting that it wasn’t just the stock price that held up relatively OK during that period, it was Walmart’s revenue as well… here’s that same chart with Walmart’s trailing revenue mapped right along with the stock price (in orange):
So sure, recession-resistance and “not as bad as the market during ugly times” are reasonable tags to apply to Walmart. The flip side of that, of course, is that you’re not buying it cheap today, and as the coronavirus passes it will be the weaker growth stocks that get the attention again, not the steady performers like Walmart, so you’ll see that relative performance flip. We don’t know when the bottom might be, if it’s this week or in a month or few, or even in a couple years if the economy is genuinely destroyed and the public health response fails, but we can probably be pretty sure that from the bottom, Walmart will trail the market pretty dramatically — that’s just math, if you don’t fall as much, you don’t have the potential to recover as sharply, and everything is relative.
As an illustration of that point, here’s what Walmart looked like next to the S&P 500 if you bought it not in the halcyon days of 2007, but after the crash in the fall of 2008 (we’ll assume you didn’t buy at the market bottom, but just when it was most of the way down — we’ll use November 20, 2008, which was right around one of the “bottoms”):
So that’s the downside of buying “defensive” stocks — when the all-clear is sounded (sadly, we each get different signals, and they’re only in our head, but eventually everybody gives up on panic and starts to want to make money again), investors don’t tend to rush into Walmart and utilities, companies that will go from “pretty good” to “a little better” in a recovering economy… they rush into companies that will go from death’s door to glorious profitability.
Still, defensive has a place, and it feels good. When you own a few stocks that you’re worried might go out of business, it’s nice to know you’ve also got an allocation to a company that will definitely survive and might even thrive.
Because it feels good, though, it’s still trading at 22X earnings with very tepid earnings growth expectations (the S&P 500 is trading at only about 13X forward earnings now, though that’s mostly because we all know the earnings number is going to come down dramatically once estimates are updated), and with a below-average 2% yield that’s growing at just barely the rate of inflation. So there’s safety in Walmart’s business right now, but I’d say there’s not really a “margin of safety” in its valuation at this point. You can’t have everything.
If you’re looking for those “maybe my blue chip has finally fallen enough” stocks these days, by the way, the Dividend Aristocrats list can be a good starting point — dividends are a steadying force, and over time they’ve accounted for a huge portion of market returns, so returning to these lists of dividend leaders can be a way to “discover” stocks that you have forgotten because you didn’t want to chase them during the past few years. There are many listings of these stocks, the Aristocrats are stocks that have raised their dividend annually for at least 25 years, with some doing so for many decades longer — these are the top ten holdings of one of the ETFs that tracks the list, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL, which itself yields close to 3% now and is now down to almost a 5-year low):
Target Corp. (TGT), which has been a little more defensive than some this year, with a lot of “necessity retail” and grocery sales and a good online business, but isn’t in Walmart’s category on that front — either now or back in 2008
AbbVie Inc. (ABBV), which is forecasting a revenue decline because of the patent expiration of Humira, but does pay a huge dividend and is probably still several years from that decline hitting.
Johnson & Johnson (JNJ), which is one of the obvious defensive “go to” stocks when we’re thinking about healthcare — not yet cheap, but at least finally back to 2017 prices and with a 3%+ dividend and slow but steady revenue growth.
Leggett & Platt Inc. (LEG) is far more economically sensitive than some, since they supply parts that go into cars, homes and airplanes — analysts haven’t penciled in a declining revenue year just yet, but it seems awfully likely. Still, they’re a long-term survivor with a solid balance sheet and the stock is down 58% from its highs, with now a 7% yield… in 2008-9 they waited until the last minute to raise the dividend, but did make sure not to go eight quarters without a hike and technically keep that “every year” pace going.
Archer-Daniels-Midland Co. (ADM) didn’t show any real resilience in 2009, and the stock is down 40%+ this year to trade again at 2010 prices as agricultural commodity prices got beaten up in the trade war and are again getting hurt by economic fears… but we all gotta eat, farms aren’t going less industrial any time soon, and the dividend yield is up to almost 5%.
Stanley Black & Decker Inc. (SWK) has been one of the more dramatic declines this year, more than 50% to bring us probably to where a low-growth tool maker ought to be — their stock got cut in half in 2008-9, but has already done that in one month this year. Earnings could fall in half and they’d still be able to pay the dividend, so there’s some solace there at about 11X earnings and with a 3.7% yield.
Illinois Tool Works Inc. (ITW) is a hugely diversified manufacturing company, so they’ll clearly feel a broad economic hit like the coronavirus is bringing but it’s hard to know which divisions will be more hurt by the real downturn than others, they are very active in reorganizing and efficiency management and have a very good long term track record but are more of a “resilient” than a “always growing” company and things like the automotive slowdown will definitely hurt.
Dover Corp. (DOV) has some exposure to the energy business, which is hurting them, but also to refrigeration and food equipment that is somewhat up in the air — we’ll keep eating and shopping at grocers, but new restaurant openings and equipment demands will probably slow. Similarly valued to ITW, with a yield around 3% and no top line growth but a long history of efficiently managing the business and surviving.
Air Products & Chemicals Inc. (APD) is a huge industrial gas supplier, so that’s hurting in construction and energy but the demand from healthcare should pick up some of the slack — and they’re in a near monopoly provider situation in many areas, which is why the shares have fallen “only” 25% but are still at 20X earnings now.
Becton Dickinson & Co. (BDX) is the world’s largest manufacturer and distributor of medical equipment, focused on disposables and consumables like surgical and diagnostic supplies. That would seem like a resilient business, with lots of disposables, and that’s true — though it’s not necessarily a coronavirus beneficiary because the rest of the medical world is in a pause just like the rest of us while all the attention goes to COVID-19 treatment (no well visits, no elective surgery, etc.), so it may be reasonable here but it’s hard to call it cheap.
And I’ll leave you with that today, dear friends — when fear and panic cloud your eyes, and you’ve watched too much of the news, sometimes the “greed” exercise of trying to find diamonds in the rubble can help to calm the mind. Best wishes to you in your search, and feel free to share your favorite “down so much I wanna buy” ideas below, whether it’s Walmart or a dividend champion or something completely different. Stay healthy, wash those hands, and use the happy little comment box below…
Disclosure: of the companies mentioned above, I own shares and/or call options on Amazon and Berkshire Hathaway. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.