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Looking for yield? The oil majors are rushing to assure investors their high yields are safe.
This morning, Royal Dutch Shell said it was committed to its dividend of $1.88 a share in 2015 and at least that level in 2016.
Conoco raised their dividend by a few cents just a short while ago.
How important is the dividend? Conoco's CEO, Ryan Lance, opened the conference call this morning with this statement: "The dividend is safe, let me repeat that the dividend is safe."
They went out of their way to note they had raised the dividend: "While every dollar matters, we believe this was an important message for shareholders."
Get the point? Think the dividend is safe?
You can't blame them. It's part of a desperate effort to remain relevant to investors. We all know the growth outlook...particularly the cash flow outlook...has been cut dramatically in energy stocks.
Given that fact, the best way to prevent a mass exodus from the space and boost confidence is to appeal to the legions of yield-hungry investors.
Big oil as a utility play? Believe it.
Look at the dividend yields of the majors:
These are juicy yields, particularly with the S&P 500 yielding 2.0%.
True, yields are high in part because of the price drops of the majors. Exxon, for example, is down 20% in the last 12 months.
The big kahuna in this space, ExxonMobil, will be reporting on Friday, and they will almost certainly commit to the current dividend, and may even increase it.
Look at the recent history of dividend per share payments for the company:
ExxonMobil (dividend per share, diluted)
2015 (est.) $2.87
Do the math: that is a 55% increase in the dividend in five years. Part of this is due to a reduction in the share count, which has been reduced by about 12 percent in the same time period, but that is less than 20% of the gain.
Can big oil keep the dividend protected--and perhaps growing--into 2016? Yes. For the moment, it's relatively easy to fund the dividend from the cash balance. The majors also have solid access to the capital markets that they can tap as well, and they will no doubt use that facility. Also, layoffs and increasing technological efficiencies are helping offset the severe decline in cash flows that many companies have seen.
But in the long run--I am talking a couple years from now--they will all need oil to be higher. Big Oil cannot forever sell itself as a Utility play. And that's the main objection that traditional energy investors have to the "Big Oil as a Utility" play: those who get the cycle wrong will lose money regardless of the dividend.
An upgrade to the U.S. jobs outlook is a clear signal the Fed has not abandoned the possibility of a September rate hike.
The Federal Reserve upgraded its assessment of the U.S. economy at several points, including this important upgrade of the jobs situation: "The labor market continued to improve, with solid job gains and declining unemployment."
"Solid" is an unusually aggressive word for the Fed to use.
The Fed also said that housing has shown "additional" improvement, and that labor slack 'has diminished' since early this year.
In the third paragraph, the Fed said it would raise rates when it has seen "some" further improvement in the labor market, a word it did not have in prior statements.
The Fed acknowledged that energy prices have remained low and that is causing inflation to run below the FOMC's long-run inflation objectives.
Sure, the Fed is "data dependent" so they are not going to come out and hold our hands with an obvious statement they will raise rates next month.
But the tone of the commentary on the economy clearly indicate that a rate hike is NOT off the table for September.
A surprising, large drawdown in crude inventories has taken everyone by surprise, causing a rally in oil and in dramatically oversold energy stocks. Many shale and exploration & production (E&P) names are up 2 percent to 5 percent.
And yet, there is scant belief that we are in for some sustained rally in oil stocks.
Partly, this is because trader sentiment is very negative after huge losses trying to buy the bottom in energy stocks January and March. Traders bought under the theory that a 50 percent drop in oil in the past was always followed by a comeback six months later.
Under this "V" recovery in oil, West Texas Intermediate should have been about $75 by the end of June.
That, obviously, did not happen. Worse, the trend went in the other direction: from $58 to back below $50.
What killed the "V" recovery hope was the combination of weak global demand (particularly China) and the tenacious will of the Saudis, who stuck to their stated intentions of pumping as much oil as they could to maintain market share, price be damned, and put pressure on U.S. shale producers.
They have stuck to their guns, though at a huge financial cost to them. But surprisingly, U.S. producers are still pumping oil at a brisk pace.
As a result, the "V" recovery hope has now given way to the "long slog" hypothesis, the idea that oil will indeed recover but it will be a process that will take a year or more, with no agreement on where we will be by then, though many talk wishfully about oil between $75 and $90.
Along the way, as hedges have come off, we have heard a lot about lower capital expenditures.
For example, BP spent $25 billion in 2013, then went to $24 in 2014, and will likely be $19 billion this year. That's a drop of about 20 percent from 2014 to 2015. And they are saying it will be $19 billion again in 2016.
It's the same with other big oil companies. The industry average drop in capital expenditures is about 39% from 2014 to 2015, according to Oppenheimer.
On Friday, we will be hear about ExxonMobil's plans.
You get the point. Capital expenditures are dropping. In theory, this should lead to a huge drop in oil production. But the companies are saying they can continue to pump the same amount of oil with lower expenditures.
How? They are learning to operate fewer rigs with fewer employees. Because of better technology and improving efficiency, oil companies are discovering that they can pump almost the same oil with fewer rigs.
That is contributing to the oil glut.
Predictably, now that we have ONE modest bullish signal, this is reviving talk about a bottom. "Buy when nobody wants them," one energy trader told me this morning.
But nobody think this is going to be the quick rally that was expected in the first quarter. The talk is to buy now, and hold. For a while. Like, a year or two.
That will greatly limit the number of people that will hop on that bandwagon. Too many have seen this movie before.
Would anything change this "long slog" scenario? Yes, if demand suddenly shot up, or if the Saudis said they were going to pull back production.
Funny you should mention that. Dow Jones has just run a headline mid-afternoon: "Saudi Arabia to Pull Back Production After Summer." Another small blip up in oil. And energy stocks.
Do you believe the Saudis will unilaterally cut production, essentially giving up the position they have held all year? Really?
My friend Kevin O'Leary, he of Shark Tank fame, recently got into the ETF business with the O'Shares Quality Dividend ETF, which invests in quality stocks that pay dividends.
I wrote about it last week here: 'Shark' Kevin O'Leary jumps into ETF biz
O'Leary came on the NYSE floor Tuesday to ring the opening bell, and I've often heard it argued by active traders that the relatively paltry dividend yield of most stocks (the S&P currently has a yield of 2.1 percent) would argue for investing in growth stocks that can see prices ramp up.
In other words, traders want to bet on price appreciation, rather than gains from dividends.
That's a mistake. O'Leary is right; in the long run, bet on dividends.
I'm not saying this because I have a slavish devotion to dividends. I have a slavish devotion to the best investment methodology, and investing in dividends is one of the soundest investment ideologies around.
Here's a few simple stats to illustrate why investing in dividend payers is a smart idea.
In the last 10 years, according to Standard and Poor's, the S&P 500 has risen 67 percent. However, the TOTAL return, including dividends, is up 110 percent. In other words, you got 64 percent more with the S&P paying a dividend than you did if there was no dividend.
That is huge. That is the beauty of compound interest. And the longer the time goes on, the bigger the numbers get.
Instead of 10 years, let's go back 25 years. Since 1990, the S&P 500 has had an annualized return, excluding dividends, of 7.15%. Including the dividend, the return has been 9.46 percent. So dividends have added roughly 2.3 percent points to your return each year.
Thanks to the wonder of compounding interest, that 2.3 percentage points add up to significant returns.
Since 1990, the S&P 500 has risen 485 percent, excluding dividends.
Including dividends, the S&P has risen 908 percent.
Because of that 2.3 percent additional dividend, your returns holding the S&P 500 are 88 percent higher.
O'Leary isn't the first to the dividend ETF space. There are many other choices on hand. But if you're looking for sound long-term investment advice, dividend investing in general is a good place to start.
The biggest biotech IPO in recent memory started trading today on the NASDAQ. NantKwest, the cancer immunotherapy company controlled by L.A. billionaire Patrick Soon-Shiong, opened at $37 after floating 8.3 million shares at $25, well above the price talk of 7.0 million shares at $20-$23.
According to Renaissance Capital, the folks who run the Renaissance Capital IPO ETF, that makes it the largest biotech in at least the last 10 years, with an initial market cap of $2.6 billion.
Wow. Not bad, considering Soon-shiong bought the company for $48 million less than a year ago, and controls almost 60 percent of the company.
Let's leave that alone. Here's a different issue: the float is small. The valuation is big, but the float is small.
The company has 78 million shares outstanding (not including options). The IPO floated 8.3 million shares. However, 2.2 million shares were bought by management and Franklin Templeton at the offer price of $25. That leaves 6.1 million shares that are tradeable.
6.1 million shares/78 million outstanding = 7.8% tradeable float.
OK, I know cancer immunotherapy is a hot space, but this is a very small float.
Typically, the float of an average IPO is 10 to 20 percent of the total shares outstanding.
Unfortunately, keeping the float small (10 percent or below) has become much more common in the last couple years.
Why? Well, restricting supply does help with the price, right? Of course, no one would ever say that. Of course not. Hrumpf.
Still, this can be an issue. Most indexes, including those used for ETFs, have minimum float requirements.
The Russell indices, for example, have a 5 percent tradeable float requirement. The Renaissance Capital IPO ETF (IPO), a basket of roughly 60 of the most recent IPOs, also has a 5 percent float requirement.
NantKwest beat that requirement, but barely.
The other downside to a really small float is you get a really small representation in indexes you go into. Which means less influence.
None of this is on the minds of investors in NanKwest today, however. The stock opened at $37 and has held in the $30s all day.
A positive start to the trading day, and boy do we need it. We are in some very rare oversold territory. Consider:
1) The S&P 500 has dropped five days in a row. It's the first five-day losing streak since January, but before that, the last five-day losing streak was December 2013;
2) The S&P 500 materials sector is down nine days in a row, which hasn't happened since May 2012;
3) The NYSE Advance/Decline line has declined seven days in a row, an equally rare event. The NYSE Composite Index has also been down seven days in a row.
4) There were 467 new lows on the NYSE, or nearly one in five of the stocks, a very high number.
Even though the S&P 500 is only 3 percent from its recent high, this decline in the Advance/Decline line indicates the leadership is becoming much more selective.
The Shanghai Composite closed down 8.5 percent Monday, the biggest single-day loss in eight years, while the Shenzhen was down 7 percent.
On the Shanghai, there were 75 stocks declining for every one advancing. Ouch.
It's not clear what caused the decline. There are the usual rumors that the government would either not continue to support the market or that such support would be ineffective.
What is clear is it's becoming impossible to make an investment decision on China right now. It's a complete wild card. Chinese stocks could be down another 8 percent tomorrow, or up 8 percent. There's no way to know.
China's weakness is spilling over into the rest of Asia:
And it's spilling over into the commodity markets. Copper is down 1 percent to its lowest level in 6 years. Crude is weak, with West Texas Intermediate down 1.6 percent to $47.38. We are getting very close to the March 17 closing low of $43.46, which was the lowest close since 2009.
So much for the idea that China doesn't matter much for the U.S. investor. It does, because it impacts commodity prices, as well as materials, industrials, and energy stocks.
This is creating some very strange statistics. For example, the S&P materials sectors is almost 2.8 standard deviations (SD) below its 50-day moving average, the energy sector is 2.42 SD below, and the industrials are 2.38 SD below, according to our partners at Kensho.
This is very rare territory. Standard deviation of 3, for example, means the sample is within all observable samples 99.7 percent of the time. These are not yet 3 SDs, but they're close. We are in 98 percent territory, surely. In other words, these sectors are very stretched on the downside. A typical quant would look at this as a potential buy signal.
The focus will again be on earnings next week, but, as always, a small number of companies will be in focus.
There's a lot riding on Facebook, which reports Wednesday, because the stock is up 20 percent in the last month on expectations of a strong report. Investors have piled a lot of money into a small group of big-cap tech names. Good news dramatically boosted Amazon and Google, but even the smallest disappointment hurt Apple.
Traders will also be scrutinizing big international companies for the impact of the strong dollar. Procter & Gamble, for example, gets 65 percent of its business outside the U.S. They'll be reporting Thursday. Other multinationals that have already reported have noted significant impact from the strong dollar.
The two biggest energy companies, Dow components ExxonMobil and Chevron, will report at the end of the week, and we all know it's going to be a disaster. Chevron's earnings will probably be down 55 percent. Still, estimates have been coming up a bit recently for themm and they will be scrutinzed for any indication of when the oil slide may stop.
And remember, it's not so much the earnings, it's the guidance for the third quarter that matters. Earnings growth was expected to be positive in the second half of the year, but the expectations for the third quarter are now also expected to be down 2.4 percent, according to Factset. With 40 percent of the S&P reporting, that number should be stronger.
And revenues are even worse, expected to be down 2.8 percent for the third quarter. That's one reason the markets have had so much trouble this week.
What's the problem? Slow growth in China and Latin America is one issue, but also the dollar strength and weak oil has continued into the third quarter. The Fed told us that a strong dollar and weak oil might be transitory, but that hasn't been the case.
Bottom line: growth is proving to be very elusive this year, particularly overseas.
Aside from earnings, watch the market leaders next week. A lot of money is in a small group of banks and biotechs. Banks are holding up, but today is one of the worst days we have seen in a long time in biotechs on the Biogen disappointment. The NASDAQ Biotech ETF is down 4.2 percent today.
What a difference a day makes. Yesterday, investors expected Amazon report earnings per share of 46 cents this year, which led to a comical price-to-earnings ratio of almost 1,100.
Today, expectations are for a profit of $1.21, a 220 percent increase, and the P/E is now down to roughly 475, even though third quarter operating income guidance is very wide, from a loss of $480 million to a gain of $70 million.
This is amazing, considering Amazon's profitability has been erratic and the company does not appear to have any new product launches (Remember the Fire phone?) scheduled for 2015.
And it doesn't stop there. Expectations are now for a big gain of $4.21 in 2016, which would bring the P/E down to roughly 140.
The source of this enthusiasm isn't hard to spot: Amazon Web Services, its cloud storage business, and Prime membership, the key to its North American retail operations.
Both are growing. Fast. Revenues for Web Services were up 81 percent. Amazon hasn't broken out details for Prime membership, but everyone seems to believe it has at least 30 million members paying $99 a year, and that it will likely exceed 40 million by the end of the year.
1) Slowing economies: China, Latin America
2) dollar strength
The slowing economies are leading to declines in commodity prices and a slowdown in capital spending.
No surprise multinational are feeling the pain:
Multinationals this month
United Tech down 9.1%
Caterpillar down 9.0%
Emerson Electric down 6.7%
MMM down 2.6%
Caterpillar reflects all of the concerns. They are seeing declines in their commodity business (mining), in their oil business, and in construction (China):
(Q2 revenues year-over-year)
Resource: down 12% (mining)
Energy/Transportation: down 12% (oil)
Construction: down 18% (China)
The downbeat commentary is taking some analysts by surprise. For example, 19 of 21 analysts who cover Emerson Electric lowered their full year estimates in the last month.
Sixteen analysts who cover United Technologies—almost the entire universe of analysts who cover the stock—have dropped their full year earnings outlook for the year this month, most in the last couple days.
The largest of the Latin America ETFs, the iShares Brazil ETF, is seeing very heavy volume today and is poised to break through a 6-year low.
Watch for any signs that this is spreading past the commodity and industrial names. For example, food giant Unilever (Ben & Jerry's ice cream, Knorr stock cubes, Hellmann's mayonnaise, etc.) said consumer demand was weak, with what it called "negligible" growth in Europe and North America. Sales were flat in the second quarter.
The main concern of the trading community right now is, how long will the stalwarts remain the stalwarts?
Pimco's new chief investment officer may be starting to show signs of modest success, but it is a long road back.
Disney shares are trading at an all-time high, up nearly 45 percent over the past 12 months.
Oil has now broken below many Wall Street targets and look set to test the year's lows and beyond, before finding a bottom.