Stock Market This Week – 06/01/24

Dividend Safety Still Matters. So, Pay Attention to It.

Dividend safety is a concept almost all dividend growth and income investors understand. However, it’s good to periodically revisit the topic. Lessons learned before are sometimes forgotten, especially in a persistent tech bull market. Paying attention to dividend safety can save some heartache in the future.

A Dividend King rarely cuts its dividend. Once on the list, company management usually tries to stay on it. Most often, a Dividend King drops from the list because it is acquired. That said, at least two Dividend Kings will fall off the list this year. Leggett & Platt (LEG) is the first company, and the second will be the 3M Company (MMM).

Leggett & Platt cut its dividend in April after a 53-year streak. 3M Company is planning a cut restructuring and divesting its healthcare business after 66 years of increases. The firm is also facing multiple legal challenges because of PFAS and earplugs.

It seems surprising that in both cases, management made these decisions. However, people following dividend safety metrics knew both dividends were at risk. The long streaks were important, but the businesses needed cash flow to deal with challenges year in the making.

For many years, Leggett & Platt was giving several warning signals about its dividend. Earnings per share were declining, the payout ratio rose over 100%, the dividend yield was over 10%, interest coverage was low, and the leverage ratio was over 3X. Moreover, the equity was dropped from the S&P 500 Index and lost its Dividend Aristocrat status. Taken together, these signals indicated a dividend cut was probably imminent.

Similarly, 3M’s dividend safety declined because of decisions made years ago. Legal liabilities were mounting for PFAS and earplugs. Moreover, the company’s debt and leverage had risen because of acquisitions and share repurchases. Earnings per share also trended down, and the payout ratio was higher than desired. However, the lawsuits forced management’s hand in announcing a dividend cut. Notably, I highlighted many of these issues in an article about 3M’s dividend safety in October 2021. I also indicated I exited my position because it met some sell criteria, avoiding the dividend cut.

Buy and hold is an excellent strategy for dividend growth investors. However, buy and forget is not. I never owned Leggett & Platt and thus avoided the decline and cut. However, I paid attention to 3M’s dividend safety metrics and challenges and was fortunate. That said, I have experienced three dividend cuts before, with Kinder Morgan Partners (KMP) being the most notable one.

So, the bottom line is to pay attention to dividend safety metrics.

If you are interested in dividend stocks, try the Sure Dividend Newsletter. They provide ten picks each month with easy-to-follow analysis and commentary. Click here to try the Sure Dividend Newsletter* (7-day free trial with credit card information).

Stock Market This Week

Stock Market This Week – 06/01/24

Data from Stock Rover* showed the stock market had a relatively poor week. However, small-cap stocks did well, with the Russell 2000 Index finishing with a very meager positive return. The remaining indexes had negative returns in the following order: the S&P 500 Index, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite.

Seven of the 11 sectors had positive returns this week. The Energy, Real Estate, and Utilities sectors were top performers. However, the Healthcare, Industrials, and Technology sectors were the worst performers. Sentiment has seemingly turned against Technology, with many stocks struggling.

Oil prices fell to ~$77.10. The VIX climbed nearly 9% to roughly 12.9, still well below its long-term average. Gold ended the week at ~$2,347 per ounce.

Despite the recent turmoil, the markets continue to move upward because of the strength of the American economy and the continuation of the bull market. Moreover, geopolitical situations have seemingly stabilized. The Nasdaq Composite leads the way, followed by the S&P 500, the DJIA, and the Russell 2000. Ten of the 11 sectors have positive returns. The top performers in 2024 have been Utilities, Communication Services, and Energy, while the Healthcare, Consumer Cyclical, and Real Estate sectors are trailing.

The dividend growth investing strategy started the year down but has recovered. Larger market capitalization stocks are performing better than smaller ones. The table below shows their performance by category. Dividends and passive income streams continue to grow.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 27.43X, and the Schiller P/E Ratio is about 34.54X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

Despite the recent correction, bear market, and rebound, the market is still overvalued. Based on historical data, earnings multiples of more than 30X are overvalued.

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