Wednesday, June 15, 2022

Paul Volcker Taught Us How to Tame Inflation

I started writing a monthly investment update for the investment firm I was with in 1975. I didn't know what I was doing at first, so the older people in the firm would feed me what to say, and I would write the update.  This was just a few years after the OPEC oil embargo and inflation had shot higher. As the months rolled on and inflation continued to rise, I found fewer and fewer of the old-timers were stepping up to tell me what to say, so I became a student of the Federal Reserve in order to have something halfway intelligent to say. That was no help for several years.  Inflation remained persistently high. At times, prices changed on grocery shelves and gas pumps while I was standing in front of them, ready to make a purchase.  Interest rates kept going higher and higher, and none of the Federal Reserve's rate hikes seemed to make any difference.  

An inflation mentality set in on Wall Street, Main Street, and Ivy Street. Inflation became a way of life. We had silly government programs such as Whip Inflation Now (WIN) and a lot of other kinds of cute sloganeering that was not rooted in any economic truth because very few people really understood inflation and how it worked. 

We all became followers of the money supply.  M1, M2, and M3 discussions went on at social gatherings like somebody somewhere knew what it all meant.  "Too many dollars chasing too few goods" became the wink and a nod answer to all things inflation.

There was one man who did understand what drove inflation and how to control it. His name was Paul Volcker. Volcker was promoted to chair of the Federal Reserve in 1979. He immediately began a series of rate hikes that would drive the Fed Funds rate up from around 11% in September 1979 to 20% in March 1981. The 6’7”, cigar-chopping man taught us all that in dealing with inflation, the right course of action was to use a leading interest rate strategy instead of a lagging strategy.  In effect, Volcker made it clear verbally and by his actions that wherever inflation went, he would push interest rates even higher. His leading strategy was truly remarkable, and it broke the back of the inflation panic that had been raging through the economy for years. Inflation peaked at 14.8% in March of 1980 and by 1983 had fallen below to near 3 %. 

Today, we face another inflation crisis and the same 'we got this thing under control' illusion that I watched play out for years in the late 1970s.  Modern Monetary Theorists, who spoke so boldly of 'we got this economic thing' and advocated dumping huge quantities of dollars onto anyone who could breathe, have become silent. They should have done so much sooner.

Inflation is as much of a psychological phenomenon as it is a monetary phenomenon. The present Fed has been saying 'we got this thing' for too long.  They are losing both the psychological battle as well as the monetary battle. They must come out of today's meeting with two huge changes in what they say and what they do.  First,  they must say "Paul Volcker taught how to tame inflation, and we are now following his playbook." Second, they must raise Fed Funds by at least 1% and promise even more 1% hikes in the future. Jerome Powell must ignore the politicians, jump straddle inflation, and fight it with tools history shows us have worked.  If he continues to bow down to the politicians and make small interest rate hikes, we may be fighting inflation four years from now.

I believe the stock market understands what needs to be done and will soon find a bottom if the Fed takes a tougher stance. If the Fed keeps nickleing and diming us along, stocks will likely keep falling because big investors know that the longer we allow the current lagging interest rate strategy to prevail, the worse will be the ultimate recession.

The illusion of 'we got this thing" should end today."         

Saturday, June 06, 2020

Dividend Watch: Divi-Do Land

  • Media headlines have growled that dividends were dying or dead for most of the last three months 
  • Yet, few in the crowd of 'Divi-Don'ters' have bothered to chronicle the 'Divi-Doers.'
  •  That's a shame because there is a splendid story in Divi-Do land.  

On April 7, we made the following statement:

    "We have long believed that dividends are the linchpin tying individual investors                   
      and corporations together.  With stocks careening all over the place, it would appear 
      that traders and speculators are betting that companies will break this bond.  
      We believe the bond will hold and provide an undergirding to the overall stock market."

Early on, over 20 S&P 500 companies announced dividend cuts, mostly in retail, energy, and travel and entertainment. In late March, estimates of dividend cuts by some observers for S&P 500 companies were as high as 35%.  But soon company after company began announcing that they intended to pay their dividends.  But that wasn't all; a surprising number of companies announced dividend hikes.  The table below shows the dividend actions of S&P 500 companies made from January through June 6, 2020. 

S&P 500 Company Dividend Actions 
Through June 6, 2020

Companies Paying Dividends Paid

Companies Cutting Dividendsd 

Companies Raising Dividends




So far 47 companies have cut, suspended, or omitted their dividends.  That represents about 10% of the Index, but only about 3% of total dividend payments.  Wall Street now estimates that total S&P dividends for calendar year 2020 will fall approximately 2.5%.
        The reason the percentage total dividend cuts for the Index will be small is the 146 offsetting companies that are hiking dividends.  In addition, some of the dividend cutters, such as TJ Maxx, have announced they will reinstate payouts once they have assessed the damage from the quarantine. The dividend hikes have a median growth rate of almost 8%. 
        In analyzing the cash flows of hundreds of dividend-paying companies, it is clear many will be borrowing to pay their dividends.  That would have seemed like folly in a time of such great uncertainty.  We believe this commitment to paying a dividend is not well understood by many investors.  Companies know that many of their shareholders count on dividend payments to pay their bills.  They also know that millions of individual investors and thousands of dividend etfs and mutual funds will sell any stock that cuts their dividends.  Finally, these companies have experts advising them on the effects of the coronavirus and its impact on the economy both in the short run and in the long run.  These companies would not borrow to pay dividends if such an action would imperil their firm.  They are taking such actions because they have concluded that the doomsday scenarios spun by many politicians, media, financial analysts, and so-called scientists are far too pessimistic.  Life will go on, and as people return to the streets, business will come alive again.
        Think of it--almost 90% of S&P 500 companies that were paying a dividend before the coronavirus struck are still doing so in the face of the most horrific headlines since the 1930s.  Of this number, over 40% raised their dividends.  That's actual money going out the door.  Either these Divi-Do companies are daft or prescient.  We vote prescient.  

Sources: Bloomberg, Marketbeat, Seeking Alpha           

Wednesday, May 20, 2020

Dividend Watch: A Bar Bet You Will Win

  • Here's a bar bet you can win:  What is the ratio of S&P 500 company dividend hikes to cuts year to date?
  • Oops, I forgot the coronavirus has made bars and bar betting taboo for most of us.  Save this one until they open.
  • While the dividend news has been much better than almost any of your bar buddies would guess, there is some not-so-good news creeping in. 
First the good news: Through last Friday, 369 companies have paid a dividend in 2020.  Of these dividend payers, 124 increased their dividends at a median rate of 8%.  

Now, the bad news: 39 S&P 500 companies have suspended, cut, or eliminated their dividends since the first of the year.  More on this later.  

Back to the good news: Dividend hikes have outnumbered cuts by over three to one.  That tidbit of dividend news will win you the drink of your choice at a time and place when you once again can have social distance with friends and colleagues.  The financial media has been so full of bad dividend news that most people will bet just the opposite of what has actually happened.

Back to the bit of bad news: Bloomberg now estimates that cumulative S&P 500 second quarter dividends will fall by approximately 2% from last year.  Bloomberg also is now forecasting that total dividends for the S&P 500 in 2020 will be slightly less than 2019.  I'll keep you posted on changes in the estimates as we traverse the rest of the year.  

We look for dividend news to calm down for a few weeks.  Dividend news is often announced at regular quarterly earnings reporting intervals.  These meetings will not return to full throttle until July.

As the country opens and people begin to move toward some level of normalcy, the economic picture will either become clearer or even more opaque than it has been for the last three months.  We said early on that the dividend actions of major American corporations would tell us a lot about how destructive the coronavirus would likely be to the economy for the long-term.  We believe the dividend actions year to date by major American companies are telling a much more positive story than the "things will never be the same again" crowd who know very little about economics and even less about the truth. 

Sources: Marketbeat, Simply Safe Dividends, Seeking Alpha, Bloomberg, Value-Line


Monday, May 04, 2020

Dividend Watch: New Data Show S&P 500 Dividend Payments Still Rising

  • The percentage of S&P 500 companies paying dividends continues to be much better than was predicted two months ago.
  • Dividend increases are running almost 3 times that of dividend cuts.
  • Many companies are specifically committing themselves to honoring their dividends.
The news on dividend payments by S&P 500 companies continues to be better than many experts predicted in the early days of the coronavirus outbreak.  The table below shows the dividend actions of companies that either made a dividend announcement from March 1 through today, or paid a dividend during this time.

Dividend Actions by S&P 500 Companies 
March-May 4, 2020

Dividend Paid

Dividend Increased

Dividend Decreased




We are approaching the end of the initial round of dividend actions by S&P 500 companies since the onset of the virus, and so far the news is good for the overall stock market and income investors.  We are awaiting only nine companies that pay irregular dividends, usually annual or semi-annual payers, and 16 companies that did not make dividend payments or declarations in March or April.  We should be able to log the remaining companies over the next six weeks.  Remember, seventy-nine companies do not pay a dividend. 
        Even though the number of companies cutting dividends are the most in many years, we are not even close to the number of cuts in the 2008-2009 Great Recession.  This has surprised many observers because the economic impact of the massive country-wide shutdown is having a more negative effect on the overall U.S. economy than did the Great Recession.  Of even more interest, many companies are taking the unusual step of promising their shareholders that they are committed to paying their dividends and will cut them only as a last resort. The following are statements from some of the largest companies making these types of public statements:

United Parcel (UPS): Our dividend remains a high priority and is a hallmark of our financial strength. We are confident our actions will continue to enable us to fund the business and support shareowner interest.

Coke (KO)We will of course continue to focus on protecting the progress we made on working capital and free cash flow in 2019. And in this context, our capital allocation priorities remain very much focused on investing wisely to support our business operations and continuing to prioritize our dividend. Specifically, with regard to the dividend, we currently have no intentions to change our approach.

IBM (IBM)The key here for investors I think are two questions. One, in any of these scenarios, do you still have the strength of your cash, your liquidity position to ensure that you can, one, invest in your business to make sure as you come out of this—that you can emerge stronger. And two, can you maintain your capital allocation and your commitment to our investors with regards to the dividend, and both of these [we answer] emphatically, yes.         

Starbucks (SBUX): To further enhance our financial flexibility, we have also temporarily suspended our share repurchase program and are taking steps to defer capital expenditures and reduce discretionary spending. We do not expect to reduce our quarterly dividend.

Caterpillar (CAT): "We continue to expect our strong financial position to support the dividend. As a reminder, Caterpillar has paid a quarterly dividend every year since 1933 through a variety of challenging business conditions. We remain committed to returning substantially all our free cash flow to shareholders through the cycles." – CEO Jim Umpleby

Exxon Mobil (XOM):  After all, Exxon and its predecessors have paid uninterrupted dividends since 1882, and management continues to emphasize that "a reliable growing dividend" 
remains a priority.

Chevron (CVX): “Chevron’s financial priorities remain unchanged. Our focus is on protecting the dividend, prioritizing capital that drives long-term value, and supporting the balance sheet.” – Chevron CFO Pierre Breber

        Some of these companies, such as the oil companies, would almost certainly have to borrow to pay their dividends.  That might seem risky, but Exxon recently reaffirmed their continued dividend payments, indicating that nearly 70% of their shareholders were either individuals who count on the dividend income or long-term investors who seek stable growing income. 
        The dividend story of 2020 is still in the early stages, and the recent positive trends could change if the country's economy takes too big a hit from the shutdown and the virus, but the story thus far has been much brighter than observers were predicting.  We believe this is an indication that stocks have seen their lows and will continue to push higher.
        The other bit of good news is that total dividends paid by S&P 500 companies is still higher than it was a year ago.  With few exceptions, the companies cutting dividends have not been big dividend payers compared to the average S&P 500 company.  Thus the cumulative dividend increases from companies hiking their dividends has more than offset the dividends lost resulting from the cuts, even though the cuts on a percentage basis have been higher.

Saturday, April 25, 2020

Dividend Watch: The Financial Media Are Barking Up The Wrong Tree

  • The financial media are howling about all the companies cutting, suspending, or omitting dividends; but among S&P 500 companies, they are barking up the wrong tree.  
  • Since March 1, only 28 of the S&P 500 have officially cut or omitted their dividends.
  • That number of cuts pales compared to the 212 companies that have paid dividends and is blown away by the 103 companies that have raised their dividends.
  • The financial media might be guilty of looking so hard for the bad news that they are ignoring the good news.
  • Since March 1, nearly 50% of the 212 companies announcing or paying dividends have hiked them compared with just 13% that have cut them.  We expect more good news in the weeks ahead. 
The media are missing the powerful message that most major U.S. corporations are broadcasting:  "The coronavirus is devastating and creates much uncertainty, but we believe it will pass sooner than most headlines are stating"
         As I mentioned in a previous Dividend Watch, in 2008-2009 we noticed that apart from the banks, few U.S. companies were cutting their dividends in the face of the recession.  Indeed, much as today, many companies were hiking dividends.  That was one reason we became more optimistic that the credit crisis would be shorter and more shallow than was the consensus of the day.              The coronavirus pandemic is unlike anything we have ever seen, but the greatest corporations in the world are telling us, at least for the present, that tomorrow is coming and it will be much brighter than most of us now believe.
        You may argue with the point I'm making, but I believe the stock market has zeroed in on the net positive dividend actions of major corporations, and that is one of the reasons stocks are nearly 20% above their recent lows.

The following are the 28 S&P 500 companies that have cut or omitted their dividends.  We will have a list early next week of companies whose dividend may be in jeopardy.

S&P 500 Companies Cutting Their Dividends
 From March 1-April 24  

Alaska Air
Darden Inc.
Invesco Corp
MGM Corp
Apache Energy
Estee Lauder Co
Noble Energy
Aptiv PLC
Ford Motors
Kohl's Corp.
Occidental Pete
Boeing Corp
L Brands Inc.
PVH Corp
Carnival Cruise
Gap Inc.
Las Vegas Sands
Schlumberger Int'l
CenterPoint Energy
Hilton Worldwide
Macy's Inc.
TJ Maxx
Delta Air
Helmerich &Payne
Marriott Int'l
Tapestry Inc.

Sunday, April 19, 2020

Dividend Watch: Increases Still Outnumber Decreases

  • Dividend Cuts by S&P 500 companies during the coronavirus have been far less than what was predicted just a month ago.
  • From March 1 through April 17, only 27 companies in the S&P 500 announced dividend suspensions or cuts.
  • Dividends remain an important linchpin connecting major corporations and income-hungry investors. 
  • We forecast total S&P 500 dividend payments will fall in the range of 10-15%, far less than Wall Street expectations. 
Dividend announcements were slow last week.  They will speed up in late April through May.  Here are the most recent overall dividend data. 

Dividend Actions by S&P 500 Companies 
March-April 17, 2020

Dividend Paid

Dividend Increased

Dividend Decreased




The number of companies increasing their dividends since March 1 grew to 96,  with two important companies, Johnson and Johnson (JNJ) and Procter and Gamble (PG), hiking payouts approximately 6%.  The star of the week was Skyworks Solutions (SWKS), who raised its dividend an eye-popping 57%. While 27 S&P 500 companies have announced dividend cuts, most of these were smaller companies with modest dividends.  So far, the 96 companies that have raised their dividends, have pushed total dividends paid for the period modestly ahead of the same period last quarter.  

        We believe more cuts are inevitable as companies are forced to take government bailouts in the months ahead.  However, we believe total dividend cuts by S&P 500 companies will be far less than the 25%-30% levels predicted just a month ago, perhaps less than half that number.

        Next time we'll list companies that have announced dividend cuts, and list a group of companies that our research suggests are in danger of lowering or eliminating their dividends.

Greg Donaldson, Founder
Donaldson Capital Management


Monday, April 13, 2020

Dividends Are Not Dead--They're Still Growing

  • Since 1958, cumulative annual dividend cuts in S&P 500 companies have been rare with only 5 annual cuts over 1%.
  • In the early days of the current coronavirus scare, investors were betting that dividends would be slashed across the board.
  • Dividend cuts in March and early April have been remarkably tame and outdistanced by dividend hikes.
  • Upcoming earnings season announcements may provide more clarity about companies' dividend payment intentions.
In order to see a broader picture of the dividend actions of the S&P 500, I tabulated all companies in the S&P 500 that either announced a dividend action or paid a dividend from March 1 through today.  The results are far different from what the headlines might suggest.

Dividend Actions by S&P 500 Companies In March-April 2020

Dividend Paid

Dividend Increased

Dividend Decreased




One hundred eight-seven companies paid a dividend in March or early April, and of those, 87 have hiked their dividends.  Only 21 companies have announced dividend cuts.  The dividend increases had a median growth rate of 7.85%, about the same percentage hikes as in 2019.  A Barron's article this weekend says S&P 500 futures are pricing in dividend cuts of approximately 30% for the next twelve months.  Barrons also mentions that many Wall Street analysts are reducing their dividend-cut predictions.  
        The dividend actions thus far suggest that the big worries that ripped through the markets about dividend cuts in the early days of the sell-off are diminishing.  Importantly, for the economy and the stock market, if corporations continue to pay and hike dividends like they have in the last month and a half, it would signal that many top managers are optimistic that the economy can recover faster than is now being touted by the financial media. 
        Wishful thinking is not always a good business or investment strategy, and the recent good trends could reverse, but if the dividend data continues to surprise to the upside, it might be the ray of sunshine we all need.

Greg Donaldson, Founder
Donaldson Capital Management