Hurricane Sandy shut down the U.S. stock markets yesterday and today. This storm marks the first time in nearly three decades that the weather has shut down the exchanges, throwing traders for a loop. If the market reopens tomorrow as currently anticipated, wild swings are possible, driven by the weather, the release of earnings delayed by the storm, and general month-end professional money manager actions.
The thing to remember, though, is that no matter how wild the trading day may be, when all is said and done, Hurricane Sandy is still just a major "one-time event" that affects companies for a short while. A few unprepared or undercapitalized companies may completely fail, but they'll be the exceptions rather than the general rule. After the storm passes, the damage gets cleared, and people and businesses rebuild, things will generally be back to "business as usual."
Take a breather -- and evaluate what you own
If you or your family has been affected by Sandy, taking care of them is priority No. 1, of course. If, on the other hand, you've been left largely unscathed by this disaster, the two-day trading hiatus may be just what you need to look at what you already own and decide if it's still worth owning.
After all, as Warren Buffett said, "If, when making a stock investment, you're not considering holding it at least 10 years, don't waste more than 10 minutes considering it." If you have the chance to look over your portfolio while the market is shut down, ask yourself how comfortable you would be owning those stocks if the market stayed closed for years rather than days.
It makes a difference. As an investor, you have two general ways to get rewarded for the risks you're taking. You can either:
- Hope the share price goes up, giving you more for your slice of the company than you paid, or
- Insist on a direct reward in the form of a dividend, paid out of real earnings.
If the only reward you're getting comes from hoping the share price goes up, then you'd be in real trouble if the market were to shut down for Buffett's proverbial 10 years. Indeed, dividends are about the only way you can be rewarded for the risks you're taking from owning a company -- unless you're willing and able to sell that ownership stake (and thus, stop being an owner).
Follow Buffett's lead
In fact, if you look at some of the biggest companies whose stock Buffett owns through Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), the insurance company he leads, you'll find dividends aplenty. Beyond just paying dividends, though, you'll find companies with dividends that are well covered by actual earnings, a history of actively raising those dividends, and a solid financial foundation to keep those payments coming. From Berkshire Hathaway's most recent disclosure of its holdings:
|
Company |
Projected 2012 Dividend |
2007 Dividend |
Debt to Equity Ratio |
Payout Ratio |
|---|---|---|---|---|
|
CVS Caremark (CVS 0.10%) |
$0.65 |
$0.23 |
0.2483 |
21% |
|
Coca-Cola (KO 0.55%) |
$1.02 |
$0.68 |
0.9744 |
52% |
|
General Dynamics (GD +0.88%) |
$2.00 |
$1.10 |
0.275 |
29% |
|
United Parcel Service (UPS 10.47%) |
$2.28 |
$1.68 |
1.6996 |
64% |
|
Wal-Mart (WMT 1.00%) |
$1.59 |
$0.88 |
0.7366 |
32% |
Holdings data from Berkshire Hathaway's August 2012 13-F SEC filing. Other data from Yahoo! Finance, as of Oct. 29, 2012.
In spite of the fact that they're in businesses as diverse as defense, package delivery, beverages, drugstores, and general retail, what ties them all together are the following key features:
- Dividends that are higher now than before this economic mess started at the end of 2007.
- Payout ratios below two-thirds of earnings -- indicating sufficient retained earnings to reinvest in the company's future.
- Debt to equity ratios below 2, indicating that they haven't overleveraged themselves to juice returns, helping keep them away from an excessive risk of failing in the next financial crisis.
In short, they all share many of the key characteristics that make them worth owning if the stock market were to remain closed for the next decade.
Are your stocks worth owning?
As you enjoy your second straight forced day off from trading, ask yourself what the companies in your portfolio are worth to you as businesses, rather than as streaming bits of electronic quoted prices. If you can only justify your ownership by the belief that someone else will pay you more for the stock later, then you don't have a company whose shares you're prepared to hold for a decade.
If that's the case, then consider the flip side of Buffett's advice, and ask yourself whether that stock is worth considering for even 10 minutes. Because you never know when the market may be shut down next.
