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Pandemic Big Tech

Dividend Power Week In Review – The Pandemic Doesn’t Matter For Big Tech

The Pandemic Doesn’t Matter for Big Tech

As COVID-19 has spread across the world it has ravaged global economies. The U.S. Commerce Department just reported the steepest decline ever for Gross Domestic Product or GDP. However, the pandemic just doesn’t seem to matter for big tech. First lets take a look at the U.S. economy as a whole.

Pandemic Big Tech
Pandemic Doesn’t Matter For Big Tech

The GDP plunged 32.9% sequentially in the second quarter. Economists expected a 34.7% decline, so it was not as bad as feared. But to put this in perspective, the second worst decline was 28.6% sequentially in the second quarter of 1921. This decline far exceeds that of the Great Recession or even the Great Depression. Take a look at the chart below. The decline was driven by a 25% drop in services. People just simply stopped buying clothing, footwear, cars, gas, etc. Workers were told to stay home, and many were furloughed. Large parts of the U.S. economy simply stopped for about two months. This unprecedented stop in U.S. economic activity caused a shock that spread rapidly. Further, it is likely that economic recovery will be drawn out after an initial bounce back, not V-shaped as some had hoped.

Source: CNBC

Pandemic Doesn’t Matter for Big Tech

The exception though seems to be big tech. Let’s examine why I say the pandemic doesn’t matter for big tech. First the stock prices of the largest tech companies are setting record highs. Apple (AAPL) is trading at a record high and the stock is very likely to be the first $2 trillion market cap company. Amazon (AMZN) is also trading at a record high and market cap is not too far behind that of Apple. The same can be said for Microsoft (MSFT). Alphabet (GOOG) is also not that far behind the top three. All four of these companies have a current market cap of over $1 trillion at the moment. Even big tech stocks with sub-$1 trillion market caps are trading near record highs including Facebook (FB), Alibaba (BABA), Taiwan Semiconductor (TSM), Nvidia (NVDA), PayPal (PYPL), Netflix (NFLX), Adobe (ADBE), and Salesforce (CRM). Take a look the chart below. Every single stock is trading above where it was 12-months ago. In some cases, ~100% or more than 12-months ago.

What gives? Well, in regard to the pandemic it doesn’t seem to matter for big tech. Their revenue and earnings are simply not as affected relative to other companies. This is especially true when compared to companies in energy, retail, hospitality & leisure, restaurants, automotive, airlines, etc. Companies in these industries are for the most part are experiencing much lower top and bottom lines. Retail is suffering well publicized bankruptcies. Some industries, such as airlines are arguably on life support from government loans and stimulus.

Let’s look at Apple as an example. For third quarter, it beat revenue estimates by 10.9% and $7.13 billion at $598.69 billion. GAAP earnings per share were $2.58, which beat estimates by $0.51. Services revenue was higher than estimates and iPhone revenue was over $3.5 billion higher than estimates. This blowout quarter is despite the pandemic. Further, most of the stocks in the above list had a decent performance. Hence, my statement the pandemic doesn’t matter for big tech. Now that may change if the pandemic extends into 2021 but for now Big Tech is seemingly going to have an decent year.

List of Canadian Dividend Aristocrats in 2020

I updated the List of Canadian Dividend Aristocrats in 2020. There were several changes over the past few months due to COVID-19. The changes were all deletions due to dividend cuts and suspensions. When I published the list in February 2020 there were 95 stocks on the list. Currently, there are 81 stocks on the list after 14 deletions. The deletions were CAE Inc (CAE), Enerflex (EFX), Inter Pipeline (IPL), MTY Food Group (MTY), NFI Group (NFI), Richelieu Hardware (RCH), Secure Energy Services (SES), Uni-Select (UNS), Alaris Royalty (AD), Gildan Activewear (GIL), Methanex (MX), Suncor Energy (SU), Sleep Country Canada (ZZZ), and Laurentian Bank of Canada (LB).

The deletions also caused a shift in the sector weighting of the Canadian Dividend Aristocrats. The Energy sector was previously No. 2 but has dropped to No. 5. The top three sectors by weight in the list are now Financials, Utilities, and Industrials.

I expect more changes to the list as the year progresses.

Coronavirus Dividend Cuts and Suspensions List in 2020

I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 321. We are now over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.

This past week there were three companies added to the list. They were Martin Midstream Partners LP (MMLP), Boston Private Financial (BPFH), and Pacific Financial (PFLC).

I also added an update to the discussion in the article. The S&P 500 published a recent study that the U.S. dollar value of dividend cuts outpaced dividend increases for the six months through June 2020. On the other hand, from 2013 to 2019 the U.S. dollar value of dividend cuts was always much less than gains. This just points to the magnitude of the global recession caused by the coronavirus.

Interestingly, a few companies have started to reinstate dividends as companies change their business models and the economy recovers some. That said, we are still far from a normal economy. Dick’s Sporting Goods (DKS) reinstated their dividend as sales have recovered and the company is adapting to an omni-channel sales model, adding new concepts, and gaining market share. Dunkin Brands Group (DNKN) also reinstated the dividend. People still want their coffee, breakfast sandwiches, and donuts.

Stock Market Volatility – CBOE VIX

The CBOE VIX finished this week slightly lower. It still remains elevated relative to the long-term average though. The long-term average is approximately 19 to 20. Volatility declined and then spiked mid-week and then settled back down. It is unlikely that we will see a spike to 80 as in March. But that does not mean we will not see a future spike higher if further stimulus is not passed.

Volatility spiked a bit this week due to some economic reports. The U.S. GDP had its steepest decline ever at negative 32.9%. This was worse than the Great Depression and Great Recession.

Further, the U.S. Federal Reserve has stated that spread of the coronavirus has started to impact the economy. On the positive side, the Fed has stated that economic activity and employment have picked up some. The Fed has also indicated that they will hold rates steady. The Fed also is maintaining bond purchases and lending and liquidity programs. These are all plusses for the U.S. economy and arguably the stock market.

That said, over the long-term it’s all about the coronavirus. Economic recovery is linked to the spread of COVID-19 and a potential future vaccine in my opinion. 

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. There are seven indicators in the index. They are Stock Price Breadth, Put and Call Options, Stock Price Strength, Junk Bond Demand, Safe Haven Demand, Market Momentum, and Market Volatility.

The current reading is now at 65, which is in Greed. This is two notches above last week. The index has been in Greed now for three straight weeks. Note that this index rarely stays above 60 for an extended period of time. Typically, once this index goes over 60 there is a move down. However, this is not a hard and fast rule. Sometimes the index does go higher to even over 80. Why is this index still going up? Well, I would argue it is due to the continued rise of the S&P 500 that is being powered by the mega-cap tech stocks. These companies in aggregate are seemingly little affected by the impact of COVID-19 to date. Further, some stocks are now setting 52-week highs and there are more advancing stocks than declining stocks.

Source: CNN Business

Market Valuation – Pandemic Doesn’t Matter for Big Tech

The S&P 500 is trading at a price-to-earnings ratio of 28.1X and the Schiller P/E Ratio is at about 30.5X. These have ticked up since last week. Note that the long-term mean of these two ratios are 15.8X and 16.7X, respectively. I continue to believe that the market is largely overvalued at this juncture. In my opinion caution is warranted for investors.

S&P 500 PE Ratio

Source: multpl.com

Shiller PE Ratio

Source: multpl.com

Here are my recommendations:

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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