Category Archives: dividends

Will FedEx’ Dividend Crash?

From time to time, Political Calculations will follow a single stock. To qualify as a stock we follow, we look for one major characteristic: the stock must be on the verge of a major potential change involving its dividend, when the question of whether the company will change its dividend is still up in the air.

Stock Market Chaos!

In 2018, that stock belonged to General Electric (NYSE: GE), which followed through on our prediction that it would cut its dividend by a large amount. In 2020, we identified Iron Mountain (NYSE: IRM) as a promising investment based on the hypothesis it would not cut its dividend despite its depressed stock price.

Last Thursday, 15 September 2022, FedEx (NYSE: FDX) came roaring onto our radar screen when, after the market had closed, the firm tossed out the earnings guidance it presented to investors just three months earlier, because of the deterioration of the U.S. and global economy's outlook over the summer.

The company's stock price was hammered in the next day's trading, falling over 21% from the previous day's close, its "biggest plunge ever". But although the firm withdrew its previous earnings guidance and announced plans to shutter retail stores, park its cargo transport aircraft, freeze its hiring and cut back labor hours of its staff, it left one big cash-preserving option unaddressed. FedEx' leaders haven't announced what they might do about the company's quarterly dividend.

The following chart illustrates how we see FedEx' options potentially playing out:

Fedex (NYSE: FDX) Adjusted Closing Stock Price per Share vs Trailing Year Dividends per Share at Dividend Declaration Dates from March 2002 through August 2022

Superficially, FedEx' current situation is similar to what we found for Iron Mountain back in 2020. The company's current stock price is well depressed, where a handsome reward awaits if its outlook improves and no dividend cut is needed, or a major dividend cut needs to be on the table because its outlook remains grim.

The chart shows FDX lived through a very similar experience back in June 2020 as faces the company today. Then, the company's executives were presented with similar options. If the company's prospects improved, leaving the dividend alone would see its stock price soar back to the level the long term relationship between it and the company's trailing year dividends per share would place it. If they didn't, a dividend cut of 61% would make sense given the level of its stock price.

Ultimately, the prospects for the global economy and FedEx rapidly improved in the following months, and investors who might have bought into the company at that time were well rewarded. But what would happen today?

If the "outlook gets better" scenario holds, given where its stock closed on Friday, 16 September 2022, our simple analysis suggest FDX could double in value. But if the "things stay grim" scenario is the right one, FedEx' board of directors could cut the dividend by as much as 64%.

We have one more bit of information to consider that may tell us which way FedEx' board will go. In June 2022, they boosted FedEx' quarterly dividend from $0.75 to $1.15 per share, a 53.3% increase. When they implemented that dividend, it was based on the company's earnings outlook from that time. The one they just trashed. Since they've thrown out that forecast, we think FDX' dividend is now also on the cutting board, with at least a 50% reduction up for consideration. That's despite the company's history in avoiding cuts to its dividends for its shareholding owners.

The only question is now is how long it will be before the board acts. In ordinary circumstances, the company could wait to announce a cut when it will next declare dividends in early November. In an economy with deteriorating prospects, it would be to their advantage to act much sooner than that.

References

NASDAQ. FDX Dividend History. [Online Database]. Accessed 17 September 2022.

Yahoo! Finance. FedEx Corporation (FDX) Historical Data. [Online Database]. Accessed 17 September 2022.

Dividends by the Numbers in August 2022

The U.S. stock market had a mixed record for dividends in August 2022. Month over month, dividend increases were up and dividend cuts were down. But year-over-year, the opposite story is true, pointing to downward development for the stock market.

The following chart shows the monthly increases and decreases for dividends reported by Standard and Poor for each month from January 2004 through August 2022.

Number of Public U.S. Firms Increasing or Decreasing Their Dividends Each Month, January 2004 through August 2022

Here's August 2022's dividend metadata:

  • There were 3,728 U.S. firms declaring dividends in August 2022. That's an increase of 277 from July 2022's total, but a decrease of 1,532 recorded in August 2021.
  • A total of 74 U.S. firms declared they would pay a special (or extra) dividend in August 2022, up by 32 from July 2022, and also up by 19 with respect to August 2021.
  • Standard and Poor counted 149 U.S. firms announcing they would increase dividends during August 2022, an increase of 4 over July 2022. Unfortunately, that's a decrease of 20 from August 2021's level.
  • 12 companies cut their dividends in August 2022, falling by 23 from what July 2022 saw. Compared to a year earlier however, we find August 2022's total come in five higher than it did in Augsut 2021.
  • There were Zero U.S. firms suspending (or omitting paying) their dividends in August 2022, matching the market's nil totals for both the previous month and the same month a year ago.

Here's what we know of the firms that announced dividend cuts during August 2022 from our sampling of dividend declarations:

In terms of affected industries, the list widely dispersed, though financial services accounts for 4 of the 11 firms in our sample. Two of these firms pay variable dividends however, so that's not necessarily anything out of the ordinary. What we find surprising is the lack of monthly dividend payers from the oil and gas sector, where we would have anticipated more of these firms cutting their dividends as oil prices have fallen from their highs in recent months.

References

Standard and Poor. S&P Market Attributes Web File. [Excel Spreadsheet]. Accessed 1 September 2022.

MarketBeat. Recent Dividend Cuts. [Online Database]. Accessed 31 August 2022.

Seeking Alpha. Dividend-Stocks News. [Online Database]. Accessed 31 August 2022.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 1 September 2022.

The S&P 500 vs Dividend Stock Funds

Morningstar's Amy Arnott wrote a column exploring whether dividend stocks provide shelter from a recession. It's a good article, and after reading it, we had a question. How would the S&P 500 (Index: SPX) compare with the three categories of dividend funds she discussed?

Those dividend stock fund categories include growth, growth and income, and income. In the following table, she gives some useful metrics for comparing how each type has performed during the past five years.

Morningstar: Risk and Returns for Three Dividend Strategies, 31 July 2022

The table presents the trailing twelve month dividend yield for each type of dividend stock fund, and also the five-year performance of each category for their Annualized Return, Standard Deviation (a measure of volatility), Sharpe Ratio (a risk-adjusted measure of investment return), and their Maximum Drawdown (the largest downward trend experienced from peak to trough).

We tracked down the same measures for the S&P 500. In the following chart, we've visually compared the index's dividend yield and 5-year annualized return with that of each of the dividend fund categories. We've also indicated the Sharpe Ratio for each in the column headings.

S&P 500 vs Dividend Growth, Growth + Income, and Income Fund Performance by Fund Type for Five Years Ending 31 July 2022

Although they have the lowest dividend yields, the S&P 500 and Dividend Growth fund categories provided the best total returns. That's also true after considering their Sharpe Ratio values, for which Arnott had indicated for the Dividend Growth category "posted the best combination of risk and return", beating the other two types of dividend funds. Speaking of which, Arnott recognizes that the dividend stock funds might have recorded better returns if not for having higher fees. She found that low-cost funds outperformed high-cost funds for overall returns.

The next chart compares the S&P 500's and the three dividend stock fund categories' standard deviation (volatility) and their worst recorded downward trend over the past five years.

S&P 500 vs Dividend Growth, Growth + Income, and Income Fund Volatility by Fund Type for Five Years Ending 31 July 2022

The standard deviation data for the S&P 500, Dividend Growth, and Dividend Income funds were all similar, with the Dividend Growth and Income fund recording the lowest volatility. Meanwhile, the S&P 500 clearly outperformed the other fund types by recording the smallest drawdown during the past five years, with Dividend Growth funds ranking second lowest. Dividend Income funds recorded the most adverse drawdown in the five year period ending on 31 July 2022.

Altogether, the data indicates the S&P 500 had the best overall performance, followed by Dividend Growth funds, then Dividend Growth and Income funds, and finally, Dividend Income funds.

References

Arnott, Amy. Do Dividend Stocks Provide Shelter From Recession? Morningstar. [Online Article]. 8 August 2022.

Morningstar. S&P 500 PR Risk Data. [Online Application]. Accessed 14 August 2022.

PortfoliosLab. S&P 500 Portfolio Trailing Twelve Month Dividend Yield [Online Application]. Accessed 14 August 2022.

Summer 2022 Snapshot of the Future for S&P 500 Dividends

The outlook for future dividends per share of the S&P 500 (Index: SPX) improved since our previous mid-season snapshot at the midpoint of 2022-Q2. The following chart shows those expectations as of Thursday, 11 August 2022:

Past and Projected Quarterly Dividends Per Share Futures for S&P 500, 2021-Q3 Through 2023-Q3, Snapshot on 11 August 2022

Here's how investor expectations for the S&P 500's future dividends per share changed for each of the upcoming quarters shown in the first chart since our last snapshot three months ago:

  • 2022-Q3: Up $0.07 per share
  • 2022-Q4: Up $0.45 per share
  • 2023-Q1: Up $0.56 per share
  • 2023-Q2: Up $0.54 per share
  • 2023-Q3: Down $0.45 per share

These increases across most future quarters point to an improved outlook for the S&P 500's dividends over the past three months, with the exception of 2023-Q3, where dividend futures point to a sharp reduction. But there's an important factor to consider about this latter development.

These figures are based on dividend futures data that tends to be the most stable for the nearest term future quarter and the most volatile for the most distant future quarters. As it is, we're pushing the limits in showing the expected future for 2023-Q3, the expectations for which are the least well established at this writing. That will settle down as time passes, but right now, it's very early days for dividend futures data for this quarter!

Analyst's Notes

Six weeks ago, we started tracking what the S&P 500's quarterly dividend futures look like about a week after the end of each dividend futures contract expiration date to capture changes in expectations that investors update during these busy options trading periods. Our next update on dividend futures will be in late September 2022 and will present how they've changed from 27 June 2022 through 26 September 2022.

More About Dividend Futures

Dividend futures indicate the amount of dividends per share to be paid out over the period covered by each quarters dividend futures contracts, which start on the day after the preceding quarter's dividend futures contracts expire and end on the third Friday of the month ending the indicated quarter. So for example, as determined by dividend futures contracts, the "current" quarter of 2022-Q3 began on Saturday, 17 June 2022 and will end on Friday, 16 September 2022.

That makes these figures different from the quarterly dividends per share figures reported by Standard and Poor, who reports the amount of dividends per share paid out during regular calendar quarters after the end of each quarter. This term mismatch accounts for the differences in dividends reported by both sources, with the biggest differences between the two typically seen in the first and fourth quarters of each year.

Reference

The past and projected data shown in this chart was taken from the CME Group's S&P 500 quarterly dividend index futures on the indicated dates. The past data reflects the values reported by CME Group on the date the associated dividend futures contract expired, while the projected data reflects the values reported on 11 August 2022.

Dividends by the Numbers in July 2022

The U.S. stock market began showing some cracks in July 2022. Measured by its dividend announcements, the market's performance appeared, on the whole, to be respectable. But looking underneath the hood, there is developing cause for concern for investors.

Let's get straight to it. Here is the dividend metadata for July 2022:

  • 3,451 U.S. firms declared dividends in July 2022, a decrease of 1,247 from the 4,698 recorded in the previous month. That figure is also 1,634 lower than July 2021's total of 5,085.
  • Some 42 U.S. firms announced they would pay a special (or extra) dividend to their shareholders in July 2022, a reduction of 4 from the number recorded in June 2022 and 12 fewer than the total recorded in July 2021.
  • 145 U.S. firms announced they would boost cash dividend payments to shareholders in July 2022, an increase of 82 over June 2022's total, but a decrease of 11 from the 156 dividend rises declared back in July 2021. That figure is respectable, but represents the continuation of a downtrend for the number of dividend rises.
  • A total of 35 publicly traded companies cut their dividends in July 2022, which was up by 19 over the number recorded in June 2021. The month's dividend reductions came in 23 higher than they did in July 2021. That's a respectable outcome because July 2022's total falls below the threshold indicating recessionary conditions have developed within the U.S. economy. However, the number of dividend cuts announced during July 2022 is the highest figure recorded since June 2020, when the U.S. stock market was still directly showing the negative impact of the Coronavirus Recession.
  • No U.S. firms suspended (or omitted paying) their dividend in July 2022, continuing what is now a year long streak.

The following chart shows the monthly increases and decreases for dividends reported by Standard and Poor for each month from January 2004 through July 2022.

Number of Public U.S. Firms Increasing or Decreasing Their Dividends Each Month, January 2004 through July 2022

Of the 35 dividend cuts reported for July 2022, we counted fourteen within our sampling of dividend declarations for July 2022. Here are the dividend cutting firms we found in our sample:

Here's the breakdown of dividend-reducing firms by industry sector:

  • (4) Real Estate Investment Trusts (REITs) - Two are healthcare-related
  • (4) Oil and Gas Industry - Three pay variable dividends
  • (2) Financial Services - Both pay variable dividends
  • (1) Healthcare
  • (1) Materials
  • (1) Mining - Pays a variable dividend
  • (1) Consumer Goods

Firms that pay variable dividends see fluctuations that are directly related to changes in their revenues and earnings. We cover them specifically for that reason, because their dividend cuts reflect a negative changes in their financial performance. That said, the six dividend cutting firms that fall into this category this month is below the threshold of ten we use to signify when these firms are facing a higher level of distress.

The data for dividend cuts provides a simple, near-real time measure of the relative health of the private sector of the U.S. economy. That's because it lags slightly behind changes in business conditions that prompt firms to reduce their dividends. The next two months will tell us more about how dividend-paying companies see their business outlook.

References

Standard and Poor. S&P Market Attributes Web File. [Excel Spreadsheet]. 1 August 2022.

MarketBeat. Recent Dividend Cuts. [Online Database]. Accessed 29 July 2022.

Seeking Alpha. Dividend-Stocks News. [Online Database]. Accessed 29 July 2022.

Trading Stock Alerts. Dividend Cutters - Stocks and ETFs that cut dividends. [Online Database]. Accessed 31 July 2022.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 29 July 2022.