3Q20 Review & Outlook
‘It’s the Virus, Stupid’
While we have been optimistically playing the ‘recovery’, we are doing it with a seat belt on, in a relatively defensive posture. Our most defensive strategy is dividend growth, the foundation of our investment philosophy. And a surprisingly strong 73% of our portfolio has increased the dividend during this Covid year.
Recession – Lower For Longer
It appears the current recession that began in March is likely to last at least a year, maybe more. It certainly appears that any V-shaped recovery scenario is off the table, and that the rebound will take some time, hurt by high unemployment and consequent consumer effects. As a result, the velocity of money has dropped near an all time low. The bond market once again appears to agree with a pessimistic outlook, as the 10-year Treasury bond is currently yielding a paltry 0.74%.
However, the equity market discounts future conditions, not the current and past ones. And extremely accommodating Fed policy, now clearly communicated for a longer period, bolsters the longer term positive case for stocks.
Earnings Season Begins – What Matters
Here’s one we rarely see – estimates could actually go up during a recession. Why? Because the ‘Black Swan’ event of Covid scared analysts apparently into cutting too much. We started the see this phenomenon last quarter, and as we write this this first week of October, we are well into ‘warning season’ with very few such warnings, so we could actually see a ‘beat & raise’ cycle, albeit from the lower level. And though we are still in a recession, the market tends to be myopic about this in a second-derivative sort of way.
3Q20 Performance ‘Highlights’
Non-legacy growth tech, 5G – Technology is on an innovative growth spurt, propelled by the beginning of the 5G rollout, which drove QCOM, AVGO, and TXN in the quarter.
Renewables – ‘Renewed’ investment interest in renewable alternative energy drove interest in APD, NEE, and GM.
Consumer Staples with Growth – As we said, the market remains somewhat defensive, but liked the safer accelerating growth at PG and KO.
Consumer Discretionary with Strong Recovery – Investors also responded to evidence of consumer recovery at HD, MCD, GM and SYY.
Health care has lagged recently, likely due to political and policy concerns going into the election, (except for recovery play MDT). We continue our relatively defensive posture going into the end of the year, favoring growthier value over deep value.
Dividends Matter More Than Ever!
Over the last 60 years, dividends have accounted for 32% of the total market return for the average stock.
With interest rates at historical lows, investors’ ‘search for yield’ has become more important than ever and fuels the TINA (there is not alternative) theory for investors seeking yield. We feel this is constructive for our Long-Only investing approach. The 10-Year bond yield has plummeted to well below 1%, and corporate bond yields are not much better. Given this decline, dividend stocks and in particular, dividend growers, are even more attractive alternatives to bonds for long term investors.
Further, our CAIM average dividend yield remains 120 basis points more than the market yield (less than 2%). As of September 30, 2020, CAIM’s portfolio yields 3.0%. This favorable dividend yield on a relative basis is illustrated graphically below. In this environment, we believe the significant yield premium of our portfolio is an even more differentiating factor for investors. Further, we could see more dividend increases as stock buybacks become more limited for any financial or political reasons.
CAIM DIVIDEND YIELDS RELATIVE TO BONDS & STOCK MARKET