Author: Service2Client

Are Dividends Becoming a Luxury During the Coronavirus Pandemic?

5 min read

drop of 27 percent in dividendsAccording to the futures market, Chicago Mercantile Exchange contracts are forecasting a drop of 27 percent in dividends over 24 months for the S&P 500 index. Dividends are projected to fall to $42.05 in 2021, a drop from 2020’s dividend of $47.55 and 2019’s high of $58.24. Looking forward to 2026, according to CME’s futures contract, the dividend is expected to recover to $56.65. While the latter years are not as likely as what’s up next, it’s worth taking note.

Although these dividend levels have already been announced, the future doesn’t look much brighter. According to Goldman Sachs, Q2 economic growth is expected to drop by 34 percent. Even though the COVID-19 economic crisis is expected to be worse, we can get an idea of how bad by comparing it to the financial crisis of 2008. From 2007 to 2009, the S&P 500 dividend dropped by 25 percent; it took 48 months to recover from this drop. Based on this historical look-back, chances are it’ll take longer to get back to par this time around.

It’s noteworthy to highlight companies that suspended their dividends in April 2020, and when they last suspended their dividends, historically speaking. Dine Brands Global (DIN) initially paused its stock-buyback program. This was followed up with a suspension of its quarterly dividend of 76 cents. Royal Dutch Shell lowered its dividend by two-thirds to 16 cents per share, the first time since 1945. These examples illustrate just how dire the economic situation is for companies around the world.    

Cash Dividends Explained

A cash dividend is money distributed to stockholders according to a corporation’s present earnings or amassed profits. Dividends are declared and issued by a board of directors that determines whether they’ll remain the same, increase or decrease. 

Understanding the Need to Reduce or Cut Dividends

A dividend cut often results in a drop in a company’s stock price since it indicates a weakened financial position. Oftentimes, dividends are cut because earnings are dropping or there’s less money available to pay the dividend, which can be due to increasing debt levels.

The point here is that dividend cuts are a poor sign for a company that is facing financial difficulties due to reduced revenue, with the same overhead still needed to be paid (rent, wages, insurance, debt servicing). While dividends can be cut for short- or long-term reasons, such as buying their own stock back or buying out another company, with the ongoing coronavirus situation the majority of businesses aren’t doing it for positive reasons.

While reducing or removing a dividend from a company’s stock can divert cash for ongoing operations or debt servicing, it also can tell the markets things aren’t going well financially. This is illustrated by looking at AT&T. In December 2000, the company reduced its dividends by 83 percent, lowering it to 3.75 cents, versus the expected 22 cents by shareholders.

One of the first signals that a company can’t pay dividends, or won’t be able to in the near future, is to look at the company’s earnings trend and its payout ratio.

Looking at a Historical Example

During the second half of the 1990s, AT&T’s stock faced more and more competitors as deregulation went into effect. According to the company’s income statements from 1998 to 2000, annual earnings per share dropped by 50 percent.  

This data is according to AT&T’s 10-K, which shows that its yearly earnings dropped from $1.96 in 1998; to $1.74 in 1999; and finally to $0.88 in 2000. With this precipitous decline in earnings and the financial pressure it put on AT&T, a reduction in dividends came next. Based on this data and some analysis, we can explain how the Dividend Payout Ratio works.

Understanding the Dividend Payout Ratio

Using this ratio can help investors gauge how likely a company’s dividend will be cut or removed altogether.

Dividend Payout Ratio = Dividend Payment per Share / Earnings per Share

Looking at AT&T’s 10-Q report for Q3 of 2000, AT&T earned 35 cents per share and gave shareholders a dividend of 22 cents a share. Based on the dividend payout ratio formula, the resulting ratio was 0.63. This ratio means that 63 percent of AT&T’s earnings were given to shareholders via dividends. When companies have challenging earnings seasons, the payout ratio gets closer to 1 because whatever the company earns is eaten up by the dividend. Therefore, the closer the ratio gets to 1, the more likely the dividend will be lowered or suspended.

While there’s no predicting what the economy will do in the future, looking at past trends can give investors insight into what companies will do with their dividends when the economy faces new headwinds.

Why Sequence of Returns Risk Matters Now

3 min read

Sequence of Returns RiskThat year or two when you are closing in on your retirement date, followed by a year or two after you retire, are the worst times for a sustained market decline. Market analysts call this scenario the sequence of returns (SOR) risk – because once your principal has been significantly reduced, there’s not enough time in the market left for you to recover those losses.

Two things will likely happen. First, the amount of retirement income you can withdraw each year is irrevocably reduced. For example, if you were planning to withdraw 4 percent a year from a $350,000 portfolio, you would have received a supplementary income of $14,000 a year. But if your principal drops to $280,000 a year, your 4 percent draw will generate only $11,200 a year. If you need that additional money, you will have to increase your draw to about 5 percent of the principal each year.

This leads us to the second consequence of a market decline: your principal will diminish faster. The longer you live, the greater your chances of running out of money.

How Big Is This Problem?

Because the coronavirus pandemic has sent stock markets reeling over the past few months, SOR risk has become a widespread concern. According to research by Spectrem Group, at the end of 2019, there were 11 million millionaires in the United States. By the end of March this year, at least half a million of those people were no longer millionaires.

While losses among millionaires may be disconcerting, the situation is far direr for middle-class investors, who might not have several hundred thousand dollars to spare in their retirement portfolio.

Strategies To Offset SOR Risk

If the last recession is any indicator, the economic recovery going forward could take several years. That’s not good news for people who were looking forward to retirement. This group may want to seriously consider the merits of delaying retirement and continuing to work longer, such as:

  • Allowing their portfolio time to recover
  • Continuing to contribute to tax-advantaged retirement accounts
  • Enabling their Social Security benefits to accrue higher

Another strategy to help protect your portfolio against future SOR risk is to position a larger allocation to fixed-income assets and/or an annuity. While this might limit your potential for income growth in the future, these assets are backed by more reliable payors and less subject to the vagaries of the stock market. By diversifying your current assets, you can build multiple streams of reliable income to protect you from the future threat of market losses, a global pandemic, or changes in Social Security benefits.

It’s worth considering that once we emerge from this current crisis, legislators will have to find a way to deal with the federal deficit and growing debt. The Social Security program was already projected to cut benefits by 2035 without any new funding solutions. Now, that threat is even further exacerbated by the enormous jump in unemployment numbers. This situation leaves even fewer people paying into the Social Security and Medicare programs.

All of this is why it’s very important to address today’s challenges presented by the sequence of returns risk. Explore ways to develop multiple income streams to protect your current assets and ensure they last throughout your lifetime.

How IT Spending Will Change When Business Resumes

4 min read

How IT Spending Will Change When Business ResumesMost states are starting to relax stay-at-home restrictions. As such, businesses are developing plans for bringing employees back to work. Many businesses are already affected by the pandemic and their future looks grim. Specifically, we are going to look at the IT sector and examine what spending might look like in a post-lockdown economy.

Disruption

The COVID-19 pandemic has resulted in an unprecedented disruption in businesses. As a result, management has tried to reduce costs to survive or risk shutting down. IT departments have suffered the most with major budget cuts due to a reduction in revenue. As a result, non-urgent purchases have been eliminated; initiatives have been suspended; and employees have been terminated.

Of course, technology also has been playing a great role in supporting businesses during the pandemic, especially by enabling work at home and keeping in touch with clients. But there are expectations for major challenges when businesses get back to normal. For instance, the post-coronavirus business world expects travel restrictions, office distancing, business continuity, and pandemic regulations. As for onsite work in the office, challenges will include distributed collaboration, endpoint data protection, scalable administration, and secure access to corporate data.

It also appears that the impact will vary from industry to industry. Companies that depend on face-to-face contact are in danger of lost income and bankruptcy. At the same time, other businesses are thriving.

Consider digital marketing industries. With more businesses moving online, there will be a rise in the purchase of IT-related expenditures such as software. The entertainment sector has found solace in digital platforms, while there is an increase in the work-at-home trend.

The Future

Despite the uncertainties, some predictions can be made.

One thing that is certain is that the impact on IT spending will vary depending on the IT stack. While the infrastructure, branch networking, middleware, and enterprise apps might see a drop, areas such as communication/collaboration, cloud storage, security, and compliance will likely see an increase in spending as more people work remotely.

While the impact on the IT industry will definitely vary, we could see a lot of new innovations. Such innovations might include customer-facing and worker productivity apps. Some companies may increase spending on new innovations to help outperform their competition.

Another factor affecting IT spending is the size of a business. While big businesses may get back to normal after a few months, small businesses have to tread carefully. As such, IT spending for different-sized businesses will not be similar.

A decision to have employees continue working at home means that IT expenditures will take a different shape. While there will be less need for office equipment, there will be an increase in spending to enable offsite work.

There could also be more spending by businesses investing in continuity strategies such as more remote locations, new training in information and communications technology (ICT) and automation of processes.

This also will depend on business operations. Consider a business that had already migrated to the cloud before the COVID-19 pandemic. Such businesses did not suffer much disruption compared to those still using on-premise applications and proprietary data centers. Thus, IT spending for both types of businesses will vary in the future.

Lastly, businesses will want to invest in projects that are likely to provide a return on investment faster.

Conclusion

The disruption to businesses by the COVID-19 pandemic is like none previously encountered. One thing is certain: Things will not bounce back to the known normal. Rather, we should expect a new normal. And, as we have seen through the examination of certain IT expenditures, the success of each industry is dependent on various factors.

Understanding the Federal Government’s Proposal for Opening Up Again

4 min read

Understanding the Federal Government’s Proposal for Opening Up AgainAfter seeing a peak and then a sustained decline in coronavirus cases, hospitalizations, and deaths resulting from COVID-19, the White House and the Centers for Disease Control and Prevention has rolled out a three-tier approach to get the nation back to its pre-coronavirus economic activities.

While this program is led by the Federal Government, it is ultimately up to governors how they will reopen states and localities. However, there are some universal criteria that states must follow to gradually reopen the economy.

Before transitioning from the stay-at-home orders to the three phases, certain criteria must be met. In order to move to less restrictive phases, there must be a dropping trend of documented cases over 14 continuous days or a downward trajectory of positive tests as a percent of total tests over 14 continuous days, according to guidelines set out by the White House and the CDC. Once the initial gating criteria are met, the local government can move into phase one.

Phase One

This stage will permit establishments such as places of worship, movie theaters, restaurants, and sporting arenas to reopen if they abide by strict social distancing guidelines. Along with recommending stringent sanitation guidelines for permitted establishments to reopen, this phase also suggests telework for employees and minimizing nonessential travel.

Phase Two

Schools, daycare centers, and camps (and similar events) could resume, along with nonessential travel. Establishments permitted to reopen in phase one can remain open and are now permitted to relax their physical distancing to a moderate level. Bars can start reopening, with diminished standing-room occupancy, and gyms can stay open with strict distancing and sanitation protocols.

Phase Three

This phase would come into force when the state and/or locality has no evidence of a relapse. Worksites would see normal staff protocols without restrictions. Large establishments will be able to function under limited social distancing protocols; gyms will operate with standard sanitation protocols, and bars would be able to run with increased standing room occupancy.

As states across the country are reopening, there are many preparations that businesses can implement to stay compliant with government mandates, including re-integrating their workforce and encouraging customers to return to establishments.

Sanitation

Along with social distancing, maintaining sanitation is equally important. Encouraging workers to wash their hands at every available opportunity, including upon arriving at work; before and after eating; after touching doors, desks, keyboards, and other materials; using the restrooms, etc.

Cleaning

Whether it’s an office environment or a retail/restaurant establishment, cleaning surfaces at least once a day is recommended, but more often for surfaces that are touched or used during the course of business. Examples of items to sanitize regularly throughout the day include handles, tables, elevator buttons, sinks, registers, and point of sale terminals.

Signage

Reminding employees and visitors to go home if they have symptoms or have been exposed to the coronavirus through signage is recommended. A protocol to contact the front office based on these circumstances should be implemented.

Encouraging Telework

Identifying tasks suitable for telecommuting versus in-office is helpful for task completion, as well as promoting social distancing. Look at the perspective of work from two buckets – solitary or collaborative – and telecommuting and office time can be split accordingly. If an employee is tasked with writing reports, performing research, or calling experts, he or she could easily work from home. While collaborative work can be done remotely, it is better to be done at the office.

Other Considerations

Along with face masks, there are other ways to reduce the potential for coronavirus transmission. Offices and other establishments can have fewer seats in common rooms, using tape to mark 6 feet or more of distance. When it comes to hallways, one way to stop face-to-face exposure is to have one-way corridors. While it might create longer days, staggering shifts to reduce the number of people in the office and rearranging breaks would also reduce unnecessary employee-to-employee interactions.

Ditching cash as an accepted form of payment is another way to reduce the likelihood of coming into contact with the coronavirus on currency, along with encouraging social distancing since cash doesn’t need to be exchanged. Using online/digital payments or credit cards only is one way to accomplish this. Using designated entrances for workers (or customers), coupled with designated entrances and exits can help reduce opposing traffic and people meeting face-to-face.

While research continues to create a vaccine and render the coronavirus harmless, until that happens, businesses have many tools to reopen their businesses for the foreseeable future.

Sources

https://www.whitehouse.gov/openingamerica/