Management Insights Are Extremely Important This Earnings Season
Earnings season is in full swing and as of Thursday; 120 companies in the S&P 500 have reported their first quarter results. So far, earnings per share have come in lower than anticipated, while revenue growth has been slightly higher than the consensus.
As previously mentioned, this earnings season will be particularly important because it will begin to shed some light on how corporate earnings have been impacted due to COVID-19. In addition, it will give us insight on how executives are maneuvering this challenging period.
As discussed on previous market updates, we separate our exposure to stocks and bonds into three tiers. Each tier has a specific objective and is unique to each client’s financial plan:
Tier One: Bonds are purchased to meet projected needs from the portfolio
Tier Two: Income producing stocks are bought and the dividends are accumulated and distributed to any of the three tiers, depending on the market environment
Tier Three: Growth stocks are included here, and the primary objective is capital appreciation
A large portion of Tier Two is comprised of companies that have paid a consistent dividend over the last 12 years and a large majority have increased their dividend over that period. Since dividend consistency is the objective in this tier, we are analyzing each company’s earning results and paying particularly close attention to management’s commitment to continuing to reward shareholders with dividends.
For example, when Johnson & Johnson (Ticker JNJ) reported, they announced an increase in quarterly dividends by 6.3% to $1.01 per share, which marks the 58th consecutive year of dividend increases. Management went on to say on their earnings call, “While certainly notable from a historical standpoint, this announcement is important in that it underscores our confidence and optimism for the future.”
Emerson Electric Co. (Ticker EMR) senior management made a strong statement on their commitment to keeping their dividend policy. The CEO went on to say, “And as long as I’m here, our dividend will not be cut, and we will maintain our dividend payments and history.”
These are the statements we want to hear during earnings calls because it provides guidance on the likelihood that the companies will continue to pay a dividend. If we notice any hesitation from management, we will place the security on a watchlist and remove it from our portfolio if we think the dividend might be cut.
We also use quantitative metrics, such as a dividend coverage ratio, which tells us for each dollar of dividends paid, how much earnings the company generated. The higher the number, the better positioned the company is to pay a dividend.
As we get more information both from a macroeconomic and individual company perspective, we will keep you informed if we make any adjustments to the securities held in our Tier Strategy. The ultimate objective is to position our portfolios to take advantage of the current and expected market environment.