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We’re all about the dividends here at Contrarian Outlook. Often we take it for granted that we’re not looking to lose 17% in just just+1.9% a few weeks while we collect income! The share-price chart for Bank of America BAC (BAC) may appeal to dividend dumpster divers. And heck, it may work, as BAC stands to gain as more people pull their savings from regional banks and plunk them into “too big to fail.”
Why deal with this nonsense? This is exactly why we’re fading “cardiac” price charts like BAC’s and shifting toward the smooth and steady growth of dividends. That’s more like it! What you’re looking at is the strong upward growth (nearly 500% in a decade!) of dividends from health insurer UnitedHealth Group UNH (UNH), a stock I’ve recommended in my Hidden Yields dividend-growth service.
Record-Setting Year for Dividends = A Rich Hunting Ground for Us
The good news is that it’s never been easier to shift your return to dividends: according to S&P Global Indices, S&P 500 payouts jumped 10.8% last year—despite the manic market. Payouts are poised to set another record this year, which would mark the 12th in a row.
Find me a stock that rises every year for 12 straight years. Impossible, right? That’s another reason why we put dividend growth at the top of our list when picking stocks. And as we’ll see below, when you buy dividends that grow at UNH-like speeds, they tend to send share-prices into the stratosphere, too.
You’ll go one better if you add share buybacks to the mix. Repurchases get a bad rap from the press, but the truth is, when a company’s shares are cheap, there are few better ways for management to create value for us! There’s also a nice knock-on effect for us here, as buybacks leave fewer shares on which to pay out, setting the stage for bigger dividend hikes in the future.
Our play here, then, is pretty simple: buy companies with fast dividend growth and smartly executed buybacks. When we do, we can set ourselves up for some truly outsized returns indeed.
How Surging Payouts—and Buybacks—Sent Our TXN Buy Soaring
We’ve benefited from this trend many times at Hidden Yields. One of my favorites came in June 2017, when we bought semiconductor giant Texas Instruments TXN (TXN). The stock popped onto our radar thanks to CEO Rich Templeton, whose brilliant 13-year reign at the company had driven free cash flow flow+0.6% (FCF) per share up an astounding 586%.
That translated straight into a dividend that had nearly tripled in just the preceding five years. Meantime, Rich and friends took advantage of the company’s reasonable price-to-FCF ratio, which averaged around 16 over this period, to buy back 12% of TXN’s shares.
Check out what happened next. The dividend/share price link link+4.1% couldn’t be clearer:
Dividend/Buyback “Twofer” Drove TXN’s Gains Before Our Buy …
So we climbed aboard Rich’s dividend (and buyback) train and happily enjoyed 130% dividend growth over the next four-and-a-half years, plus 120% share-price growth, for a 148% total return! TXN is just one case of a company’s “Dividend Magnet” delivering the goods. Our buy of aforementioned UNH for Hidden Yields back in January 2020 is another.
During our nearly three-year holding period, UNH’s share price rode its rising payout higher (with a buyback assist!)—straight through COVID lockdowns, soaring inflation, rising rates and, of course, last year’s stock-market mess. The end result? A 73% price gain and 53% dividend growth, which combined for a quick (and low-drama) 83% total return.
The nice thing about this strategy is that it can tell you when to sell, too. With UNH’s share price getting a bit too far ahead of its payout, we sold the stock on December 16, 2022, sidestepping a 4.7% decline before taking another swing at UNH in February of this year—essentially buying back in for 95 cents on the dollar.
These are just a couple examples of the Dividend Magnet’s power. Sad thing is, most investors only pay attention to share prices when they invest. That’s too bad, because share prices tell (at best) half the story. But we’ll leave these folks to it and happily pick up the cheap—and accelerating—payouts they’re leaving on the table.
March 2021 marked the one-year anniversary of the first Covid-19 lockdowns. The world was, to put it mildly, tired. People needed hope, and so, they looked back into history, with many storied publications drawing parallels to the last major disruptive global health event: the Spanish Flu Pandemic of 1918.
Although similarly disruptive as Covid, this moment led to the so-called Roaring Twenties—a period of economic growth, liberation and creativity. Many hoped that Covid would lead to an equally energetic and prosperous period.
Suffice it to say, things didn’t work out that way. For investors, particularly those in the capital-hungry world of technology, times have never been tougher. The 2010’s tech bull run was largely driven by the post-2008 interest rates, which incentivized institutional investors into making more ambitious bets and pushed company valuations into the stratosphere. That bull run is now over.
Yet despite this undeniable adversity, there are still opportunities to be found. Yes, fund sizes are smaller. Venture capitalists must now operate with a level of caution that they didn’t previously. Until tech stocks recover, exits will be inevitably smaller, meaning many businesses are patiently waiting to go public.
All those things are true. But that doesn’t change one unassailable fact: People are still making great products, with the potential for long-term growth and profitability. Rather than hunker down, now is the time for investors to strike deals. We’re in choppy waters, and only those with vision and confidence will thrive.
Invest For Sustainability
At the start of 2022, the top of the federal funds target range was a mere 0.25%. By this February, that hit 4.75%. For investors, that’s obviously bad news. As one study shows, for every additional percentage point increase in interest rates, investors’ ability to raise capital drops by 3.2%.
Naturally, many businesses are delaying their IPOs and waiting for the market to eventually recover. For those institutional and high net worth investors that traditionally fill VC war chests, this means they’ll have to wait longer for a return on their capital—and that return may be smaller than what they were once accustomed to.
With limited capital, VCs must make difficult choices about where to invest. The era of backing high-growth companies—businesses that grow for the sake of growth and pay little concern to profitability—is over.
As the era of cheap money fades, it’s time for investors to focus on sustainability, market fit and businesses with a low cost of customer acquisition. In pitch meetings, investors must strike a more inquisitorial tone. Before they open the checkbook, they must ask tough questions:
• How much capital do you need?
• How long will it take to reach sustainability, and how will you get there?
• How long will it take for you to become profitable?
• What are the features and strategies that will help you reach those milestones?
And founders must have credible answers.
Invest For Solutions
It’s ironic. Inflation is a major factor behind the crisis VC faces. But it also presents genuine opportunities for investors.
Inflation only has two remedies. The first is to raise interest rates. Over time, that strategy works, but it has a terrible cost. Businesses and consumers cut back. People lose their jobs. Companies stop—or slow—hiring.
A better way is to increase productivity. When workers produce more, the human cost associated with a product or service drops, and companies can afford to lower or maintain prices, thus calming inflation.
Naturally, businesses and governments will increasingly look for products and tools that can help them raise productivity. It’s worth noting that some of the most successful B2B companies—like Yammer, New Relic and Expensify—all emerged in 2008 during the global financial crisis, when interest rates reached worryingly high levels.
It’s also worth pointing out that governments are investing heavily in infrastructure that can help productivity. The U.K., for example, offers generous tax cuts for those building gigabit broadband networks. In some cases, startups can supplement their VC capital by taking advantage of tax incentives and subsidies, which is incredibly helpful, given the decline in VC funding rounds.
Don’t Forget The Consumers
During tough economic times, consumers tighten their belts. Mired in uncertainty, they look at ways to cut nonessential spending. That was true in 2008, giving rise to companies that addressed this reality.
Groupon, founded just two months after the collapse of Lehman Brothers, let people buy cut-price vouchers for restaurants and consumer goods. Uber, founded when the U.S. unemployment rate was 8.5%, was a cheaper alternative to traditional taxis and allowed ordinary people to make money in the sharing economy.
Although both companies have made their own missteps in the years since, their original concepts were both valid and timely. Investors should be on the hunt for businesses that serve a similar purpose. Companies that let consumers spend less or earn more will inevitably thrive during this period.
Stay Positive, Even When Silicon Valley Isn’t
Times are tough, but it’s worth looking at the current moment from a historical perspective. Interest rates are high, but they’re no higher than in late 2006. Despite the high-profile layoffs at industry behemoths, the labor market remains strong. Inflation is now easing—particularly in the U.S.
If investors treat this moment as the crescendo before a systemic economic collapse, they’ll miss out on opportunities. And that’s because, it most likely isn’t, in my opinion. It’s a moment of post-pandemic adversity, fueled by unforeseen events such as the war in Ukraine. Like all bad moments, it will pass.
For entrepreneurs still feeling the sting of global supply chain turbulence, there is a new tool coming to market. Amazon Web Services is delving into supply chain management with a new cloud-based application to help businesses manage their inventory and coordinate their networks of manufacturers, suppliers, distribution facilities, and transportation providers.
The machine learning-powered software, which is now available in preview, offers a real-time visual map of a company’s entire supply chain network and aggregates data from other enterprise applications and suppliers into a single system. Based on that information, the application offers automated alerts and recommendations about inventory rebalancing, lead times, and potential risks, such as backlogs or stocks that are running low.
AWS CEO Adam Selipsky announced AWS Supply Chain during the AWS re:Invent conference in Las Vegas last week. “The past two years have highlighted the importance of supply chain resilience. From baby formula shortages to ships circling ports unable to unload, the disruptions have been widespread and deeply felt,” said Selipsky during his keynote speech. “AWS Supply Chain helps you mitigate risks and lower costs.”
While congestion in the global supply chain has improved from the worst levels seen during the height of the pandemic, managing logistics remains a pressing problem facing entrepreneurs. In November, the global supply chain pressure index increased for the second straight month. The New York Federal Reserve, which calculates the measure, said that China was the biggest contributing factor.
The manufacturing superpower, which produces nearly 30 percent of products worldwide, spent much of the past month under strict Covid-19 lockdowns, and that nationwide halt has slowed the global supply chain’s march back to normal. Small-business owners have felt the impact. Nearly a third of business owners report that supply chain disruptions have had a significant impact on their business, according to the most recent monthly report from the National Federation of Independent Business.
Of those surveyed, only one out of 10 said that their business had not been impacted by recent supply chain disruptions. Fixing that pain point has become a major opportunity for the B2B market, and AWS is not the first company to make a leap into the sector. Logistics and supply chain management grew into a $20.24 billion industry this year, according to the research and consulting firm Gartner–making it the fastest-growing market within enterprise software applications.
Even Selipsky’s rollout at the AWS re:Invent conference came less than a month after Microsoft unveiled its own supply chain management platform in mid-November. Still, Amazon, which ships 1.6 million packages a day, could be uniquely situated to solve the supply chain crunch for other businesses, because the homegrown tool harnesses Amazon’s own expertise and data.
“It combines nearly three decades of Amazon.com’s innovation and learning and experience with its own supply chain as we’ve modeled and built it over the years,” said Tariq Choudry, manager of new products and strategy for AWS. He spoke during a breakout session at the conference that discussed applying machine learning to the supply chain and detailed more of the functionality of AWS Supply Chain.
Be warned: Business owners should prepare to keep dealing with logistical problems in the new year, because the AWS CEO made it clear that its foray into supply chain management is a long-term play. “This is just the beginning,” said Selipsky in his keynote speech. “We’re going to continue to invest here.”
The International Monetary Fund warned on Tuesday of a slowdown in global economic growth as the world economy continues to take a hit from “increasingly gloomy developments in 2022,” including high inflation, a slowdown in China caused by Covid lockdowns and ongoing fallout from Russia’s war in Ukraine.
The IMF slashed its global growth projections, now expecting global GDP to grow 3.2% this year and 2.9% in 2023, down from previous estimates in April of 3.6% GDP growth for both years.
The group cited a slowdown in the world’s three largest economies—the United States, China and the euro area—as a reason for the revised estimates, warning that the risks to the outlook remain “overwhelmingly tilted to the downside.”
Several “shocks” have hit the global economy as it tries to recover from the pandemic, including higher-than-expected inflation worldwide––especially in the United States and Europe, a worse-than-anticipated slowdown in China caused by Covid lockdowns and “further negative spillovers” from the war in Ukraine.
The IMF also said that high inflation remains a “major problem” as prices have continued to rise in 2022, led by soaring food and fuel costs, arguing that “taming inflation should be the first priority for policymakers” worldwide.
The group now expects global inflation to hit 6.6% in advanced economies and 9.5% in developing economies this year, though prices are expected to return to near pre-pandemic levels by the end of 2024.
The IMF also slashed its growth estimates for the U.S. economy, now forecasting GDP to rise 2.3% this year and 1% in 2023, down from previous estimates of 3.7% and 2.3%, respectively, amid the impact of tighter monetary policy and reduced household purchasing power.
“The outlook has darkened significantly since April,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “The world may soon be teetering on the edge of a global recession, only two years after the last one.”
“The slowdown in China has global consequences,” the IMF said. “Lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners.” The group now sees China’s economy growing 3.3% in 2022—its lowest pace in four decades and down over 1% from previous estimates.
The World Bank similarly slashed its forecasts for the global economy last month, predicting GDP growth in 2022 of just 2.9%, down from an earlier estimate of 4.1%.
I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaires and their wealth.
The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialize. Higher-than-expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions.
China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year. Under our baseline forecast, growth slows from last year’s 6.1 percent to 3.2 percent this year and 2.9 percent next year, downgrades of 0.4 and 0.7 percentage points from April.
This reflects stalling growth in the world’s three largest economies—the United States, China and the euro area—with important consequences for the global outlook. In the United States, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3 percent this year and 1 percent next year.
In China, further lockdowns, and the deepening real estate crisis pushed growth down to 3.3 percent this year—the slowest in more than four decades, excluding the pandemic. And in the euro area, growth is revised down to 2.6 percent this year and 1.2 percent in 2023, reflecting spillovers from the war in Ukraine and tighter monetary policy.
Despite slowing activity, global inflation has been revised up, in part due to rising food and energy prices. Inflation this year is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies—upward revisions of 0.9 and 0.8 percentage points respectively—and is projected to remain elevated longer. Inflation has also broadened in many economies, reflecting the impact of cost pressures from disrupted supply chains and historically tight labor markets.
Alibaba Group Holding’s better-than-expected results may offer only a temporary boost to Chinese technology stocks, as fallout from pandemic lockdowns depresses consumer spending and causes analysts to cut earnings forecasts by as much as 11 per cent.
Alibaba’s shares surged 12 per cent in Hong Kong on Friday after the release of its quarterly report, as the Hang Seng Tech Index rose nearly 4 per cent.
However, major brokerages China International Capital Corp (CICC) and Citic Securities cut earnings projections for the e-commerce giant. They cited the Covid-19 outbreaks that have ravaged about 40 cities in China this year, disrupting supply chains and prompting consumers to tighten their purse strings.
A weak result from Baidu has bolstered the argument. The nation’s biggest search-engine saw its advertising revenue drop 4 per cent from a year earlier in the first quarter, reflecting a tough macroeconomic environment.
The latest brokerage calls reinforce the view that the worst for China’s tech juggernauts is yet to come, as the pandemic takes over from the regulatory crackdown as the factor holding sway over the sector. Alibaba, Tencent soar in Hong Kong as report cards ease earnings concerns
A flurry of high-level government meetings over the last month signal an end to the year-long regulatory storm that wiped out more than US$1 trillion in market cap. Top policymakers have made it clear they want tech platforms to play a bigger role in reviving growth, as the outlines of a consumer-spending slowdown and a “big shock” to industrial profits become clear following lockdowns that started in April.
“Consumer spending and the development of the pandemic are the key to the tech stocks now,” said Dai Ming, a fund manager at Huichen Asset Management in Shanghai. “People won’t spend even online now, with the courier service devastated by the pandemic. The regulatory factor is less of a major concern now.”
CICC reduced Alibaba’s earnings forecast for the financial year by 7 per cent to 131.8 billion yuan (US$19.6 billion) and that for the following year by 1 per cent to 169.1 billion yuan. The investment firm also slashed the price target of Alibaba’s Hong Kong-traded shares by 4 per cent to HK$137, representing 13 times estimated earnings, amid a compressing valuation within the tech sector.
Citic Securities, China’s biggest publicly traded brokerage, also slashed Alibaba’s profit forecast, by 11 per cent to 124.9 billion yuan for this year and by 12 per cent to 147.7 billion yuan for next year. The share-price estimate is set at HK$160.
Alibaba’s customer management revenue (CMR), its biggest source of revenue, will probably decrease by more than 10 per cent for the quarter ended in June as a result of dwindling demand for online shopping and supply-chain disruptions, the brokerage said in a report on Friday.
“Looking to the whole year, investors still need to wait until the recovery in the macroeconomy for the improvement in Alibaba’s earnings,” Citic analysts led by Xu Yingbo wrote in the report. “We estimate that earnings will begin to pick up after the third or the fourth quarter.”
Beijing has reaffirmed its adherence to the zero-Covid policy, which JPMorgan has said the government sees as necessary because of a low vaccination rate among China’s elderly and a fragile healthcare system. The US bank, as well as Swiss private bank Union Bancaire Privee, predict a contraction in China’s growth in the second quarter. Premiere Li Keqiang highlighted the gravity of the situation for the nation’s economy at a meeting this week, saying that it was even worse in some aspects than the aftermath of the Wuhan Covid-19 outbreak in 2020.
Alibaba, the owner of the Post, jumped 12 per cent to HK$90.85 on Friday in Hong Kong. The rally has pared the stock’s loss to 23 per cent this year after a 49 per cent slump in 2021. Revenue for the March quarter rose 9 per cent from a year ago, beating estimates, but the company swung to a net loss in the span on increased investments in new businesses, according to results released on Thursday.
Alibaba’s future earnings may risk trailing the estimate, “given the uncertainty of putting the pandemic under control,” said Tang Jiarui, an analyst at Everbright Securities in Shanghai. “The logistics snarls have reduced consumers’ willingness to spend.”
Human hands exchanging money - closeup shot..getty
