In this episode of Market Foolery, Chris Hill and Motley Fool analyst Bill Barker look at the latest business headlines. Johnson & Johnson (JNJ 0.87%) stock was up on positive announcements from the company. There is entertainment and oil industry news. They also chat about dividends, unusual stock splits, and much more.
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This video was recorded on April 14, 2020.
Chris Hill: It's Tuesday, April 14. Welcome to Market Foolery. I'm Chris Hill. With me is Bill Barker. Good to see you.
Bill Barker: Yes, good to see you. I mean, we're seeing each other through Zoom, but that's better than nothing.
Hill: That's better than nothing, absolutely. We've got oil stocks, we've got entertainment, but we're going to start with J&J.
Johnson & Johnson first quarter profits and revenue came in higher than expected. They also raised their quarterly dividend, which is nice to see in an environment when more and more companies are cutting their dividend. And shares of Johnson & Johnson were up around 5% this morning.
Barker: Yeah. They're bucking the trend with the raised dividend. I think that's mostly muscle memory there that, you know, they raised the dividend periodically, and this was a scheduled time to raise it. And the most interesting thing, perhaps, other than just how good the quarter generally was, was that they actually came out with some guidance rather than just eliminate it. They lowered guidance, certainly, for the rest of the year, but they didn't step all the way out of the business, which most places are doing.
Hill: Yeah. And this is unknowable, but I'm wondering how much of the rise in Johnson & Johnson stock that we're seeing today is because of that combination, the combination of raising the dividend, and yes, as you said, there's a muscle memory aspect to it. But also, I have to believe there are at least a few investors out there who are just looking at Johnson & Johnson, looking at the quarter, and even with the pulling back of guidance a little bit, there's just, you know, "Hey, they're not suspending it, they're not withdrawing the guidance. All right, yes, OK, I'm feeling better about this company, [laughs] I'm buying a few more shares."
Barker: Yeah, absolutely. I mean, who among us has not, at this point, suspended guidance? You know, when you're asked questions around the house, like, "Hey, Dad, are we still going on that vacation in August that you were talking about?" Like, "I don't know. I'll have to get back to you on that one." You know, "Hey, when are we going to be able to go back to school?" "Mmm...can't give you any guidance on that."
I mean, it's a reminder that most of your parenting is giving some sort of guidance projections. They're wrong a lot of the time, but at least you operate from some level of confidence, like, "Oh, I know how things play out at this time of year," "I can tell you what to get mom for Christmas," or "I can tell you where we're going to be at a certain time of the year." And now, it's just like "Uh! It turns out I don't know as much as I thought I knew."
Hill: I love that analogy, and I'm not going to touch it, [laughs] so we're just going to move on to Roku (ROKU 1.88%). Roku --
Barker: No, I'll finish up talking about Johnson & Johnson before you go there. To give a little details on the quarter, revenue was well above expectations by about $1 billion for the quarter. And that came from the pharmaceutical division was up about 10%, medical devices was off about 5% year over year; that's not in any way surprising as, you know, the knees, hips surgeries that are elective and can be put off and then Johnson & Johnson is one of the major suppliers of something like knees or hips and they'll sell those later, as surgical rooms are set aside for now. Downside in trauma divisions, one of the possible upsides of everybody staying in their houses, is there's less traumatic injuries. So that was all down. And consumer was up 11%, a little bit of stocking up for the various medical needs that people have. I think that'll adjust itself over the rest of the year. So they really lowered guidance for the rest of the year by about 8% on revenue and 15% on earnings per share. So they are being affected by this.
The first quarter was, sort of, stock-up quarter. Their business is far less affected than many others. They're a necessary service and they're up a little bit, but they're flat for the year. It's been, for them and their stockholders, a relatively uninteresting year when you look at just year to date. And having increased the dividend that the shareholder base is continuing to get what it expects out of the company.
Hill: Well, we're going to return to dividends being cut in a moment, but let's hit Roku first. Because Roku came out with preliminary results for the first quarter, and the stock was up about 9% earlier this morning, because not surprisingly, streaming hours for Roku are up nearly 50%.
This is one of those stocks that six weeks ago, when people were putting together lists of, well, what are the stocks that should do well in a "everybody needs to stay home" environment. Roku, Netflix, those were both on the list. And I don't know, I mean I'm not a Roku shareholder, I'm happy for the shareholders that they're having a good day, but I'm not surprised by this, are you?
Barker: No. Especially since I'm one of the people who, while being confined to the house, has finally adopted Roku and uses it and loves what it provides. So I think that a lot of other people are in the same boat. And I think that it was a very strong first quarter. Usually, unsurprisingly, in the fourth quarter a lot of people buy these, give these for Christmas. So it's a little bit seasonal, and this first quarter was much better than anticipated, at least, precoronavirus anticipation.
It's not all good. The downside is some of the ad dollars are down, that's a part of the business, not just selling the hardware, but all the streaming, the sales they make in the ad-supported business on the free TV. So a lot of the advertisement is being pulled all over the place. You know, newspapers are being hit harder by that than streaming services. But that is part of the equation, and that was off, that was really the only negative to what was otherwise a preliminary report, not a full report.
Hill: Anheuser-Busch InBev (BUD -0.05%) is cutting its dividend in half. And I'm starting to think that particularly with -- you know, like, these are two -- and we'll get to ExxonMobil in a moment. ExxonMobil, Anheuser-Busch InBev, Johnson & Johnson, these are three huge stable dividend payers, and I'm wondering if a year from now it's going to be a talking point for investor relations departments that didn't cut their dividend or, in the case of Johnson & Johnson, even increased their dividend through this whole mess, that it becomes a point of pride and essentially, not to be crass about it, but essentially a selling point for the stock. Like, "Hey, look, when the chips were down, we actually raised our dividend, unlike those people at Anheuser-Busch InBev."
Barker: Yeah, Anheuser-Busch is already operating at a deficit from that, because they cut their dividend, I don't know, a year or two ago. They took on tremendous amount of debt to buy SABMiller,and they are sitting on, I think, $96 billion in debt, and bars are closed and they are not selling as much beer as they would like to. People stocking up at home, but that's not making up for all the closed restaurants and bars. And you know, at this point, you're not investing in this company for the dividend, because they've cut it twice.
Hill: Let's move on to the energy industry then. And we've got three in the news today. Valero Energy came out and said that their loss in the first quarter could top $2 billion. ExxonMobil didn't cut their dividend, because they appear to take their dividend very seriously, and they're doing everything to avoid cutting their dividend, including what they did today, which was to sell another $9.5 billion in debt, not at a particularly high interest rate, though.
And Chesapeake Energy (CHKA.Q), a company we haven't talked about in a while, Chesapeake Energy shareholders approved a reverse stock split so that the company could stay in compliance with New York Stock Exchange listing rules. I've never seen a reverse stock split like this. It is a 1-for-200 stock split. So if you own 200 shares of Chesapeake Energy, congratulations, after this split, this reverse split, you're going to have 1 share. Take those in any order you like.
Barker: Well, you know, they're different variations of the same thing, which is, although the stock market has obviously recovered quite a bit from its lows, the oil market is, and there's some marginally better news for oil given the seeming agreement between OPEC+, but still, oil companies have rarely seen a shock to their sales, both, in price and in demand, that they're seeing right now. And it is playing itself out in terms of big, big, big losses for Valero. A need for cash, for operations to keep going, in terms of [inaudible], you know, a financially stable company there. It wasn't that long ago that they were the biggest company in the world, I guess, by market cap. Chesapeake had plenty of mistakes over the years, and a 1-for-200 stock splits is about, as you point out, as bad as it gets for your stock. And I don't know what the future for that is. Exxon's got a better future.
But all these companies are in a space which is under incredible amount of near-term pressure and also long-term pressure as the oil gets more and more of its shareholders are under pressure to divest. Institutions and universities and states are all seeing a lot of pressure to divest from their oil holdings. And as a group, this may be the bottom, but it's been sort of a long ride down over the last couple of years.
Hill: I think the last time we talked about a reverse stock split on this show was sometime last year, and I don't even remember what the company was, but there was some company, they did a reverse split and it was 1 for 25, and I said at the time "Holy cow!" Like that's -- I don't think I've seen anything that big in a long, long time. Have you ever seen something like this, 1 for 200? Like, at some point, don't you just have to have a modicum of pride and say -- you know what, we're just going to fold up our tent and go home.
Barker: [laughs] Rather than do the 1 for 200. Basically, the market has folded up the tent for you. At the point at which you're doing a 1 for 200, it's $0.14. So $0.14 for 200 shares, so you're going to get $7. Anyway, I don't know, it's been a long, tough road for Chesapeake shareholders. And kicking them again today while they're down seems unnecessary.
Hill: I'm just marveling at the size. I'm just --
Barker: I mean, I'm considering kicking them while they're down, but I'm telling myself, it seems unnecessary. I think that [laughs] they've received plenty of kicks.
Hill: Let me ask, I'm going to go completely off the board and ask you about something that came up yesterday when I was talking with our good friend from the Great White North, Jim Gillies. He was talking about Kinder Morgan. And Kinder Morgan reports earnings next week, I believe it's April 22 they're scheduled to report. And they are another energy company that is having some trouble and they are scheduled to announce an increase to their dividend of 25%. And this is something they've mapped out over the past few years. And so, if they stick with this, it would go from $1 to $1.25. And I said to him, there's no way they're going to do that. How could they possibly do that? Like, that company, in that industry, they're going to come out and not only are they going to maintain their dividend, they're not going to cut their dividend. You're telling me, they're actually going to go through with an increase of 25%?
And earlier in the conversation, breakfast cereal had come up, because apparently Gillies is very much a fan of breakfast cereal and is consuming more of it these days. And I said, look, if Kinder Morgan actually goes through with it, I'm going to send you a box of your favorite cereal, whatever.
So my question for you is, given what you've just said about the energy industry, do you think I'm going to have to pay up? Do you think I'm going to have to send Gillies a box of cereal? Is Kinder Morgan really going to bump their dividend 25% next week?
Barker: Well, I'm looking over, as you droned on there, I pulled up their financials, because you're springing this on me. And they've worked their long-term debt down to a little under $32 billion from $42 billion three or four years ago. So they've been acting pretty responsibly over the last several years. I mean, they still are sitting on all that debt, granted, but I mean, I'm hoping that you have to pay off. So I'm going to say yes. And I'm going to say that they are in a position to do so, because of how they've acted responsibly in the past. But their stock has certainly put a hurting on the long-term shareholders. It's been kind of flat over the last four years, but you go a little before that and you're looking at people that bought into the stock at $40-some and it's $15 now. So desperate times call for desperate measures perhaps. And I don't know, increasing your dividend may or may not be desperate, but I'm just hoping you have to pay off. What kind of cereal is at stake here?
Hill: I'm not certain what his favorite cereal is, although, I could have sworn I heard him say something about Fruity Pebbles. So I don't know, we'll find out a week from now or eight days from now we'll find out (A) if I have to pay up, and (B) what his favorite cereal is.
Barker: Yeah. I hope it's a really shockingly sugary one, because they've come out with some stuff in the last couple of years that really, I think, continues to push the boundaries on that. And so, I think it should be left to you.
Hill: To buy whatever cereal I want for him or --
Barker: Yeah, a projection of what might turn out to be his favorite, I think that's where you should take this one. Like, if he likes Fruity Pebbles, wow! Maybe you haven't discovered, you know, the most recent alarming trends in what they can do with sugar and cereal these days and artificial colors.
Hill: The most recent one I've seen is Sour Patch Kids cereal. So I may just not even ask, I may just send him that if I have to.
Barker: How many essential vitamins and minerals are in Sour Patch Kids cereal?
Hill: I didn't look at that, I was too focused on just the fact that it existed. So it was a little bit like staring into the sun, like, there was not a lot of room for nuance and detail.
Barker: It's part of a completely nutritious breakfast.
Hill: [laughs] We should wrap up here. Bill Barker, thanks for being here.
Barker: Thank you.
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.