Recently, some companies have reduced or suspended their dividends in the wake of the COVID-19 crisis. So far, we estimate this sums to ~$18-$20 billion of annualized dividend payments with Boeing and Ford accounting for 20% and 10% of aggregate amounts (aggregate R3000 LTM dividend payments were $540b, of which ~$100b was in the Financials sector).
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One of the automatic stabilizers that kicks in during a recession is that budget deficits expand. The automatic portion is driven by falling revenues. This is often exacerbated on the spending side as well, as fiscal policymakers introduce stimulus measures to attempt cushion the blow for businesses and workers. To us, the current goal should be to attempt to limit economic damage, so that the economy can rebound once lockdowns and other COVID-19 headwinds begin to fade.
Our sense is that both buy-side and sell-side consensus has quickly shifted back into the bullish camp. Put differently, most investors that we’ve spoken with over the past couple of days believe that the bottom is in. One of the key reasons cited has been that stock prices have ripped back extremely hard, with many of the most damaged names up +30%, +40%, or more.
The Senate unanimously passed the $2 trillion ‘Phase 3’ fiscal stimulus plan late last night. There’s tremendous pressure on Speaker Pelosi to get the bill onto the president’s desk quickly. In our view, this package will help improve consumer, business, and, especially, investor sentiment. However, we’re not that optimistic about the fiscal program’s ability to boost GDP growth. In fact, we believe that the transmission to GDP growth will be far below 1-to-1 (0.5 would be shockingly good, in our view).
Over the past few days, we’ve received many questions on framing the potential downside risks to the S&P 500 from a valuation perspective. To that end, a few metrics we’re following to assess potential future downside is historical % drawdowns during the past few recessions and price to tangible book valuation.
Both NEC Director Larry Kudlow and President Trump recently supported the idea that the U.S. government may take equity stakes in companies to which it provides substantial assistant (a.k.a. bailouts). We expect many Republican congressman and senators to push back against this plan. To counter this opposition, our sense is that the president will tout the fact that Treasury’s equity stakes taken during the Financial Crisis were net moneymakers for the U.S. government.
As we wrote about this morning, we continue to recommend being defensively positioned for more near-term downside ahead. To that end, with investors increasingly focused on balance sheet strength and liquidity to withstand further headwinds, we highlight companies in net cash positions.
More details emerged this afternoon of the proposed “stage three” ~$1.3 trillion fiscal stimulus plan, which would be equivalent to roughly 5.5% of nominal GDP. This proposal is substantially bigger than what we were initially expecting. The proposal includes direct payments to Americans of $500 billion split in two rounds (occurring on April 6th and May 18th), as well as $50 billion in aid to the airline industry and $150 billion for other distressed sectors of the economy.
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