Hopefully, most of you have already read our earlier post: “Dividend Kings Round Table: Stay Calm, This Too Will Pass.” In the post and the accompanying video, we talked about being patient and suggested that the current crisis in the market would be temporary in nature. Therefore, as long-term dividend growth investors, we are best served to take the long-term view and ride the short-term volatility out.
However, there is also another aspect of the above report that I want to be sure that our readers and subscribers clearly understand. This is not likely to be a normal bad market. Consequently, I tried very hard to point out that we needed to have a pragmatic perspective. What that means is that we need to be realistic in our assessment of what is going on.
The drop in stock prices so far are real and may or may not be over. Nevertheless, as those of you who have read my work for a long time would attest, I rarely worry too much about stock price action. On the other hand, I do focus on fundamentals first and when I see situations where they begin to deteriorate in conjunction with prices dropping, then I do begin to worry. This is what concerns me with this current black swan.
I am confident that we are going to see fundamental deterioration over the short run as a result of the fear that the coronavirus has instigated. However, we will not see the real numbers for at least a couple of months. In other words, for those companies with calendar fiscal years, we are in the 3rd and final month of the quarter, it usually takes 45 days before financial statements are reported. Unfortunately, it is too early to tell how much economic impact the virus has really brought. Clearly, there are certain industries such as cruise lines, airlines and of course the additional stress in energy related stocks that I would expect to be more profoundly impacted than most companies.
To state this more clearly, earnings estimates for most companies have not changed since the virus scare has begun. However, I do believe it’s inevitable that they will. But once again, I believe it is too early for us, and therefore, certainly for the analysts to have really formulated a change in consensus because not enough time has passed to assess the situation completely. On the other hand, I do feel strongly that we are likely to see lowered guidance and eventually lower consensus estimates on many companies over the next couple of quarters.
In the longer run, I do believe that most companies are very strong and will eventually see growth resume once this event crisis has run its course. But again, it’s the short to intermediate term that concerns me, not to long-term. Therefore, I do believe that we should be greedy while others are fearful. However, I don’t believe that we should be complacent or foolish. Although we can expect to make perfect market tops or market bottoms decisions, we can strive to make prudent ones. Therefore, I simply wanted to offer this cautionary and hopefully pragmatic message. It is very possible that things can get messier over the short to intermediate term before they actually get better. Consequently, I believe we should prepare for the worst over the short run, but expect the best over the long run.
The Dividend Aristocrats
With the above said, I do want to provide each of you a perspective of how things have changed in the short time since March 6 when I published the article: “Recent Market Action A Value Investor’s Perspective.” In the article I said this about the Dividend Aristocrats:
“The S&P Dividend Aristocrats Still Mostly Overvalued
From the perspective of the dividend growth investor, today’s market levels are very challenging. The crème de la crème of dividend growth stocks could be considered the S&P Dividend Aristocrats list. However, with interest rates as low as they currently are, high-quality dividend paying stocks have become overly competitive with fixed income instruments. As a result, demand for quality dividend stocks has driven valuations to extreme highs for most of the best-of-breed dividend growth stocks. I will also provide examples later in the video of just how expensive the Dividend Aristocrats currently are. However, I will also highlight a few that are undervalued as well.”
It is amazing how things have changed in such a short period of time. As I’m preparing this post for today, instead of only a few Dividend Aristocrats being attractive, I am now seeing half of the 64 companies as interesting buys. I do believe this is a good thing and it will help us secure our futures over the long run. Prior to the virus, markets and great dividend stocks were expensive. Now, the opportunities are becoming enticing.
FAST Graphs Friday analyze Out Loud Video
This video will be a short update from the video I presented in the article I published last Friday. My how things have changed in such a short period of time!
Summary and Conclusions
For prudent investors, bad markets are actually good markets over the long run. As I’ve often pointed out, all bull markets end with a bear market and vice versa. After such a long-running bull, we needed something to bring valuations back to sane levels. Although I hate to see the catalyst that brought us this bear market, the silver lining is the opportunity that it has brought to invest in great dividend growth stocks at attractive values. However, I do believe that patience is still in order. In other words, let’s make sure things actually settle down before we get too aggressive. Even though it is a time to be aggressive, is not a time to be impetuous.