In this episode of Industry Focus: Consumer Goods, host Emily Flippen chats with Motley Fool contributor Jason Hall about the impact of coronavirus on dividend-paying companies, particularly Dividend Aristocrats, and what makes them so resilient. They also share some tips and some stocks for your watch list, as well as provide a sneak peek on what's coming up on Industry Focus on Thursday and much more.
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This video was recorded on March 24, 2020.
Emily Flippen: It's Tuesday, March 24th, and I'm your host Emily Flippen. Today is your Consumer Goods-focused episode, and joining me to talk about the impact of coronavirus on dividend-paying companies, in particular, the Dividend Aristocrats, is Jason Hall. Jason, thank you so much for joining me today, especially, because I know you're out there in California and I can't imagine how challenging things are out there right now.
Jason Hall: Emily, it is so nice to talk to a human being that I'm not related to that doesn't already live in my house. [laughs] So, this is wonderful. I want to give you a virtual hug for having me on, because you're saving my sanity. You're doing the world a favor right now.
Flippen: [laughs] Oh, that's good to hear. We, here at The Motley Fool, many of our listeners who are subscribers to one of our premium services are probably aware that we've been doing a lot of live streams for our members over the past week or so. I know you're plugging into that some. I know I'm plugging into that some. And it's definitely been an interesting and busy week for all of us here.
Hall: Yeah, people are just looking for any good information they can. I was on a live Zoom with three other colleagues who have all been on Industry Focus before, and it was a two-hour call and we had over a 1,000 people join this live call, and it was announced, like, the night before, and we had over 500 questions.
Yeah so, we want to do everything we can to try and help pull back the screen a little bit to help people make some sense of this madness. How are you holding up, Emily?
Flippen: [laughs] Well, this is my first experience working from home on an extended basis. And I have to say I have the utmost respect for a lot of The Motley Fool contractors now who work from home more permanently. Because I'll tell you what, I think I'm starting to drive my cat insane at this point. That's how nutty things have been just stuck in my relatively small apartment here in Maryland.
Hall: Yeah, the cats of the world are all wondering, "Why the help is staying at home all day long?" That's what they're trying to figure out.
Flippen: As we speak, my cat has found a nice, warm place in front of the fireplace for us this time. So, he's at least going to be quiet, hopefully, while we record this podcast, this episode of Industry Focus.
Hall: Yeah, I should go ahead and apologize in advance for any loud crashing, screaming noises people hear. I have a three-year-old that's running rampant through the house, so he could come flying into the office at any moment.
Flippen: Oh, that's great. Well, hopefully, if your three-year-old does come in, he'll have some opinions about, I guess, dividend-paying companies, which is what we're going to spend today's episode chatting about.
I'm really interested, it's a question that we're getting a lot in our live streams. Should I move into safer investments now? Should I move into companies that have a strong balance sheet, often pay out dividends? But I think a lot of our members who may be familiar with dividends are less familiar with what the Dividend Aristocrats are. So, maybe you could just tell us and give us a quick introduction to what being a Dividend Aristocrat means.
Hall: Yeah, absolutely, and just for a good place to go for anybody that can -- if you go to our website fool.com or just do a Google search, "fool.com what is a Dividend Aristocrat" you'll find an article that I help put together, that's called Dividend Aristocrats: Definition & List and it's something that we keep updated on a regular basis that explains this information in more depth than I'll give right now. But also, we're going to keep it updated as the list of companies changes; and we can expect that it will change.
But here's the short version. The Dividend Aristocrats is a proprietary name that's actually owned by S&P Dow Jones Indices, and Dividend Aristocrats, they must be a member of the S&P 500, but the short version is that these are companies that have paid and increased their regular dividend for at least 25 consecutive years. So, that's pretty impressive for a company to have increased their dividend for 25 consecutive years. And again, it's the base dividend, it's the regular dividend that they pay on a regular quarterly basis that they've been able to raise every single year. So, that's a pretty impressive track record for any company to be able to have accomplished.
At last count, I think there are 57 stocks on the Dividend Aristocrats list, so that's a lot of companies across a lot of industries for people to have invested in.
Flippen: Yeah, I did a little bit of digging and the data that I found was as of the beginning of last month. So, this was before coronavirus -- I guess, the financial changes that it had an impact on many of those companies, or at least a few, to say the least -- but at the time, I think there were 64 Dividend Aristocrats, so. And again, it kind of depends on how you define them. But over a third of them were either classified as consumer staples or consumer discretionary companies. So, when I saw that, I thought, "Oh, there's clearly a large impact that the consumer space has on the Dividend Aristocrats," which is probably important for a lot of our Consumer Goods focused listeners to consider.
So, with the idea that the rest of those two-thirds being made up of industrial -- material and mostly financial companies, a little bit of tech, but not as much tech as you may assume -- this definitely exposed the Dividend Aristocrats to, I think, some unique strengths and weaknesses, just based off the industry classifications that are mainly included there.
So, what do you think about strength when you think about the Dividend Aristocrats?
Hall: So, I think one interesting thing to point out is that, remember, every current Dividend Aristocrat, because they've had to maintain or raise their dividend for at least 25 years, that means they've all managed through multiple recessions. These are companies that all managed to go through the global financial crisis just a little over a decade ago and the Great Recession that followed, but they also made it through the 2000 dot-com crash and the recession that followed that. So, these are companies that are practiced in and managing through economic downturns.
And sure, in some ways, this is going to be different, we don't really completely know exactly how different it's going to be besides the expectations that we're going to see a really hard, really sharp crash in consumer spending. So, you think about some of the stores that have closed, you know, it's mainly discretionary goods retailers, you know, companies that just sell apparel or clothing, those are the companies.
So, you look on the Dividend Aristocrats list, a company like VF Corporation, they make clothes, they could feel a much larger impact than, say, Hormel Foods, right. [laughs] You need food, that's a staple item, that's something that you're going to buy. So, I think on the strength side, you think about the consumer goods companies that sell staples that are going to remain, and if not, higher than usual demand, at least similar kind of demand that we've typically seen in the past.
And then on the weaknesses side, you've got the cyclical companies, so you've got the companies that might make industrial parts, Illinois Tool Works, you've got companies like that, that they could face a sharp dramatic fall-off in some of the things that they do as their industrial customers circle the wagons and cut back on spending.
So, you know that's kind of the weird oddness to what we're dealing with now, is because this is going to be such a short falloff in consumer spending that's going to have carryon effects throughout lots of industries, but we don't know how long it's going to last. There's a little bit of uncertainty there.
But I think on the other strengths side, you start looking at, you know, you've got healthcare companies. These are companies that generally should generate pretty solid and meaningful revenues through this downturn because they play a critical role that is generally unaffected by the economy. So, you know it's an interesting mix.
Flippen: So, I'm definitely among the investors who is guilty of not looking at a lot of the Dividend Aristocrats over the past decade or so as I've traded off for growthier companies, and that as this downturn has happened, I find myself suddenly interested in things like dividend yield, even though I'm 25 years old. So, I recognize that there are definitely some unique strengths that kind of come into play more often when there is some sort of recession, some sort of big pull back. But what are some of the weaknesses that you see in the Dividend Aristocrats?
Hall: So, I think in general, you know this is something that -- and it's not so much, I wouldn't really say that it's necessarily a weakness per se, but more of just this kind of a feature. The Dividend Aristocrats, these are companies that a lot of them have made paying and raising that dividend an important part of the investing thesis to attract investor capital. So, they tend to prioritize things like, you know, maintaining a balance sheet; generating at least certain levels of return, so they generate enough cash flows to support their dividend and to be able to raise it, even if it's a modest amount, raise it every year. And the impact of that means that they don't necessarily always dedicate as much capital to growth.
So, if you think about the stock market as one thing, on average it's generated around 10% per year in average annualized returns over the past 50, 60, 80 years, depending on when you measure it out over a long period of time. And a lot of those gains are gains in the stock price, right, because businesses get bigger, they generate more profits and the share prices go up as a reflection of you owning a share of those profits. You tend to see that most of the Dividend Aristocrats, they don't generally grow those capital returns as much. So, you're counting on more of your returns from the dividend, so they're just not as sexy. So, I think, if there's a weakness it's you tend to own slower growth businesses that prioritize growing the dividend.
Flippen: Yeah, in an era where companies like Zoom are up 50% in five days, you're probably never going to see that type of movement in a Dividend Aristocrat. So, there's different data, I guess, that supports different conclusions about the viability of investing in the Dividend Aristocrats, at least as a basket. Obviously, very different, depending on which companies you pull out of that.
Over shorter time frames, as I mentioned in the past 10 years or so, it seems like a lot of these -- I guess, I'd say, legacy companies, is probably a strong definition for these companies, but -- companies that do a lot of traditional work versus companies that are techie, growthier, they seem to not keep up with a market that values growth. But over the long-term, historically, data does seem to support outperformance for this basket. So, how do you feel about the viability of investing in the Dividend Aristocrats as a basket for the average investor?
Hall: Again, I think it's still reasonable. Ever since I really started studying the Dividend Aristocrats as a class and thinking about dividends as a part of the total returns that stocks generate, I've always thought it was an appropriate basket with this caveat, that it depends on what you prioritize as an investor. If from everything that I've seen, the potential for returns compared to, say, the S&P 500, it can generate modest outperformance, but it's not significant. But again, because it's hedged toward companies that grow their dividends consistently and have proven the ability to do that, its core group of companies tend to be ones that have incredible financial strength.
So, they might not be growing like a Zoom, [laughs] I think is a great example or Slack Technologies or one of these cloud companies that's so important right now, and they can grow really quickly because they don't have to build a factory and spent $2 billion and take two years to build it. Their ability to lever up and grow is very different from a lot of these core companies. But these companies tend to have those rock-solid balance sheets and the ability to maintain something that's more stable, again, through those dividends.
So, again, if you're an investor that prioritizes kind of that little bit more stability then I think the Dividend Aristocrats make a lot of sense. As a group, it's consistently paid a higher than average dividend yield, as you would expect, than the S&P 500. Although, it's not that much higher in real dollars, in percentage-wise, it's substantially higher.
So, that could definitely be a nice thing, especially as we've gone through this 30% sell-off in the past five or six weeks. Most of the companies on the Dividend Aristocrats list are going to continue, I'd say on a percentage basis, you're going to see a lot higher percentage of Dividend Aristocrats maintain their dividend and then be able to still grow it a little bit within that 12-month window to stay on the list. And over time, that should prop up the value, it should -- I think it was Benjamin Graham that said, "In the short-term, the market is a voting machine, in the long-term it's a weighing machine." So, we still see a ton of volatility.
Like, right now, today, from the market peak to today's pricing -- you know, it's about 1 PM or so on the 24th -- the Dividend Aristocrats' group has actually fallen farther than the S&P 500, it's fallen about 1% more than the S&P 500. But I think as a group of companies, it's still relatively solid.
Part of the reason it's fallen so much is, you have individual sectors, like the oil and gas sector, that is being absolutely pummeled. You've got ExxonMobil, Chevron that have lost 50% of their value versus 28%, 29% for the market. So, that pulls a little bit more down. But again, I think in aggregate this basket, again, if you treat stocks appropriately, that's the big thing, you know, these aren't 90-day investments, these are 10-year investments, then that's where this basket is going to prove to generate those meaningful gains with dividend growth as being a big part of that.
Flippen: I love that. But for investors out there who maybe aren't interested in the basket, let's say, they don't have the capital to buy the full basket, they're just not interested. Are there any constituents of the Dividend Aristocrats that are maybe your personal favorite right now?
Hall: Yeah, you know, I think there's two different approaches you have to take right now. And I think this is the consideration that you, as an investor, need to consider. If you really want to focus on the companies that are going to be best prepared to maintain their dividend, not just from the balance sheet perspective, but more importantly, their viability through this downturn, you know, you start thinking about the consumer staples companies, like a Walmart and Target that are going to play really critical roles over the next three to six months of supplying the necessities that people have to have to live. Hormel Foods, again, it's a packaged foods maker.
And then you start thinking about, I don't know, I guess I'm supposed to lead off with what's our big paper selling company? Kimberly Clark, right, that's the toilet paper one, [laughs] that's the one we are all supposed to buy. But seriously, you think about Kimberly Clark, you think about Colgate-Palmolive, Procter & Gamble these are some of the ones that have held up better than the market, because people know they're going to continue to sell goods because they are things that people will continue to need.
Then you think about the healthcare side, you think about Johnson & Johnson, between their pharmaceuticals business and their business selling Band-Aids and all the other healthcare products, consumer products. Then you've got Becton, Dickinson, I think is one that people can overlook, they do a lot of healthcare supply; so that's a really critical business right now.
So, I think if you want to shop -- and, again, I'd say pick 10 to 15 yeah, with most brokerages you don't have to pay trading fees anymore. It's easier to build a small basket even if you only have $1,000 to $2,000 to throw a couple hundred bucks here and there at different ones and build a diversified basket. Focus on the ones that are selling consumer staples, healthcare goods. And I think that's where you can build some stability and not be as concerned about seeing a dividend get cut, you know, that sort of thing.
Now, on the flipside, let's think about the situation that we're in from a historical perspective. Stocks fell 30%. Today is a big bounce-back day, it's a great day, [laughs] but we don't know how many people are going to be unemployed, we don't know how long this is going to last, so don't base anything on a day. You know, today is a big jump, you might buy something and next week or a month from now it's going to look stupid because the price is going to be lower, but in a decade, I think anything you buy on this list is probably going to look brilliant.
But I think the other side of it that I want to mention in terms of a way to take advantage of the market correction is you start looking at some of the really financially strong companies that could still, for one reason or another, face a dividend cut or could still face substantial implications for their business. So, you think about Nucor, you think about Stanley Black & Decker. Nucor is a steelmaker. Stanley Black & Decker makes tons and tons of power tools, things like that. They have a really small healthcare business, but it's a tiny part of their business. The bottom-line is that demand for things like steel and power tools is probably going to plummet over the next three to six months to some extent, but these are companies that have been paying dividends for half-a-century and growing them. They've been on this list for forever.
Then you look at a company like Aflac, the stock has absolutely been smashed down. This is a company that has decades and decades of history of navigating these environments.
So, I bring these up, because these are stocks that are far more beaten down than the market but they have great balance sheets, managements that have proven so good at navigating these environments in the past, and I think that even if you see a dividend cut from one of these stocks and it falls off the Dividend Aristocrats list, these are the kind of stocks that if you buy at today's prices and you fast-forward out two, three, five, ten years from now, the potential returns are absolutely enormous, absolutely enormous.
If you think about a stock that's lost 50% of its value from the peak today, if you purchase today, the market recovers, the company gets back to normal and just returns to its previous stock price, your value doubles, your investment, just to get back to that prior stock price. So, the mathematics work in your favor to buy even these companies that have some risk of cutting their dividend, if they're the strongest companies, definitely plays to your advantage.
These aren't airlines that are on this list. These are companies that'll see a cyclical decline but have the ability to manage through it and come out and still be very viable.
Flippen: I love how you clarified that these aren't airlines or cruise ships, for instance, companies that are operating in industries that will likely need bailouts or some sort of large cash influx just to keep themselves afloat. It's a great clarification to make when people look at just dividend yield, that can be very misleading for a lot of these, maybe companies that have some more terminal issues, at least some very strong headwinds in front of them.
Now, I feel like you've kind of already answered this question, but I'll hit on it again. My impression was, and again, I'm young, so this is the first big market pullback that I've been actively investing through for the most part. My impression is, when we see big pullbacks like this, a lot of people tend to not only flood out of equities, but flood into companies that they see as being safe investments. So, do you not fear at all about the valuations of these Dividend Aristocrats being somewhat artificially inflated right now, because they're viewed as safe investments?
Hall: I really don't. I think even the ones that have held up the best have still lost value, and there's a ton of uncertainty right now. Even, I think, you look at a day like today where stocks are up 7% or 8%. They're up that much because nobody knows what the hell is going to happen. It's not responding to good news, it's the equivalent of a bunch of people standing around in the emergency room and somebody serving up shots to everybody and say, "Hey, the doctor just said that he might not die." [laughs] You know, it's not great news. So, there's so much uncertainty baked in that we don't know.
I think the other thing too is, let's be honest, we think about valuations, we start looking at P/E ratios, price to cash flows, all those valuations that we use, they're based on last year's results. I don't think last year's results really offer us any clue about most of the companies on this list, how their 2020 results are going to be; it could be very ugly. But they do give us a baseline of how these companies may look in two, three, five years out. And every one of them is discounted double-digit percentages from where it was six weeks ago. So, again, there's tremendous value here.
I think the other part of it too is that we need to think about where interest rates are now. Even when things get back to normal, and they will, they will get back to normal; normal may look a little different, but things will get back to normal. Interest rates are going to remain exceedingly low for an extended period of time as the Fed slowly raises rates back up. I think we've already seen that over the past decade where the window for what is a reasonable valuation for a dividend stock has been moved higher because interest rates are lower. And I think that could maintain the case for an extended period of time.
I think where we also have to be careful is, remember that Dividend Aristocrats will fall off the list. The global financial crisis in 2009-2010, a total of 19 companies fell off the list, about half of them were financial companies, like banks, which was the biggest banking crisis in almost a century. And this time around, that's different, right. So, the companies most at risk are companies like VF Corp. I think about a company like Cisco that supplies tons and tons of stuff to restaurants. And that industry is absolutely getting obliterated, so.
And then on the other side too, you have energy companies. ExxonMobil and Chevron, they have really good balance sheets, they carry tons of cash, they have very good credit ratings, so they have access to low cost capital. But oil prices are between $20 and $26 a barrel right now. Nobody makes money -- there's no U.S. oil company that's making money with oil if it stays below $30 a barrel for an extended period of time, oil producers, I should be very specific about.
So, we're going to lose companies here and who knows what's going to happen. But again, in aggregate, thinking about the long-term opportunity, the high-quality companies that aren't necessarily subject to potential devastation. These are the prices that may look stupid in a month, but they're going to look brilliant in a decade.
Flippen: I love that. Jason, before I let you go, I know that you wanted to make a quick plug for an upcoming Industry Focus episode that kind of applies to what we're talking about today.
Hall: Yeah, our colleagues and friends, Nick Sciple and Lou Whiteman, they're going to be on Thursday on the Energy and Industrials show, they're going to be talking about one of the Dividend Aristocrats that's spinning off part of its business. United Technologies is a large conglomerate with a lot of defense industry parts, but it also owns Carrier air conditioners and a couple of other more consumer, commercial stuff. And they're spinning off some subsidiaries and that could have some repercussions to its status as an aristocrat. So, tune-in on Thursday to hear Nick and Lou share some information on that story.
Flippen: Yeah, I'd definitely be interested in listening to that. I'll tell you what, Jason, I'm way more interested in the Dividend Aristocrats now than I was approximately an hour ago. [laughs] So, I appreciate you coming on.
Hall: Absolutely, absolutely. I think, just in general, it's the reminder, you have to treat stocks appropriately, you have to own them for the long-term. The Dividend Aristocrats are no exception to that. And bottom-line for me is, there's plenty of clichés, Buffett is greedy when others are fearful, Baron Rothschild's "Buy when there's blood in the street, even if it's your own blood." The bottom-line, those are persistent clichés, because they're true. This is exactly the time that history proves out that the buyers are the ones who will win, not the sellers. Yeah, there's going to be losers, and that some of these Dividend Aristocrats are going to be losers. But I think it's still a viable approach, you could buy the whole basket, you could buy the ProShares Dividend Aristocrats ETF or you can pick the 10 to 15 across various industries and hold for the long-term. You may get burned in the months ahead with, you know, stocks are going to fall, you might see some dividend payouts get cut, but when you measure it out over a few years or decades today's prices are going to look very smart.
Flippen: Jason, thank you so much for joining us today.
Hall: Thanks for having me on. I appreciate this moment of sanity and I hope to help some of you out there listening.
Flippen: Well, it certainly helped me. Listeners, that does it for this episode of Industry Focus. If you have any questions shoot as an email at Industry Focus@Fool.com or tweet us @MFIndustryFocus. And if you're looking for any more of our podcasts, you can always subscribe on iTunes.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for his work behind the screen today. For Jason Hall, I'm Emily Flippen. Thanks for listening and Fool on!