38 BARRON’S March 16, 2020
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INCOME INVESTING
Coronavirus Could Pinch
Dividends in Some Sectors
F
or investors and companies, divi-
dends are often considered sacro-
sanct. The coronavirus pandemic
has challenged that assumption.
While the fallout from the new corona-
virus is fast-moving and still playing out,
certain industries stand to be particularly
hard hit and could face a cash crunch that
would make their dividends vulnerable.
“There’s every reason to believe there
will be some dividend cuts out there,” says
Tobias Levkovich, chief U.S. equity strate-
gist at Citigroup. He points to the energy
sector as being at the epicenter of that
trend, citing falling oil prices and relatively
high debt levels. Other vulnerable indus-
tries include airlines and cruise operators,
which could face reduced travel demand
even after the coronavirus outbreak abates.
Consider the scenario put forth by
United Airlines Holdings(ticker: UAL).
While the airline doesn’t pay a dividend
like many of its peers, United this week
outlined a “dire scenario planning as-
sumption” in which its revenue drops by
60% in April and May alone, due to the
coronavirus fallout. “There will be some
cuts in dividends due to business condi-
tions changing drastically due to abrupt
demand reduction,” says Pankaj Patel,
head of quantitative research at Cirrus
Research.
One company already cutting its divi-
dend isOccidental Petroleum(OXY),
which took on a lot of debt when it ac-
quired Anadarko last year for about $38
billion. The exploration and production
firm announced it was slashing its quar-
terly payout by 86%, to 11 cents a share
from 79 cents, effective in July, and slash-
ing its capital spending as well.
Another energy producer facing head-
winds isEOG Resources(EOG), which
has been a big player in fracking. During
the company’s fourth-quarter earnings
call on Feb. 28, CFO Timothy Driggers
said that the company has never cut its
dividend—but that was before Saudi Ara-
bia launched an oil-price war.
He said that in 2020, $4.1 billion of capi-
tal expenditures to maintain output plus the
dividend could be funded at an oil price of
$40 per barrel. U.S. benchmark crude was
trading around $32 Wednesday.
“EOG Resources prioritizes both the
dividend and the balance sheet, and we
are evaluating our activity given the cur-
rent commodity environment,” a com-
pany spokeswoman said Thursday.
Still, despite some pockets of turbulence
for dividends in the first quarter, the
broader market looks healthier, says David
Chalupnik, head of U.S. portfolio managers
at Nuveen. “We think that dividends overall
are safe,” he says. He notes that S&P 500
dividends per share grew 8% last year, and
the expectation had been around 7% for
this year. However, he now expects that to
come in at around 4-5%.
Chalupnik expects dividends to face
pressure in the energy and travel sectors.
But excluding those industries, he says,
“companies in general have good cash flow
to pay the dividends” and “are very com-
mitted to their dividends and dividend poli-
cies.” But he adds a caveat: “Where we
could be wrong is if we go into an outright
recession. Then you would see lower-qual-
ity names cut their dividends. But in terms
of the high-quality large-cap names, we
don’t see any dividend cuts.”
In a March 6 note, Citi’s Levkovich and
his colleagues compiled a list of 20 com-
panies that seem to have safe payouts and
are rated Buy by the firm. All have above-
average yields and relatively low spreads
on their credit-default swaps. Those
stocks includeTarget(TGT), which
yields 2.4%;Johnson & Johnson(JNJ),
2.7%;Bristol-Myers Squibb(BMY),
3.2%;Caterpillar(CAT), 3.9%; andBank
of New York Mellon(BK), 3.6%.
These dividends certainly beat many of
the alternatives in the bond market—one
being the 10-year U.S. Treasury’s recent
yield of 0.82%.B
By Lawrence C. Strauss miracle to change public confidence.
Andras Szell
Piedmont, Calif.
Tech Is the Answer
To the Editor:
Technology is the answer to the coronavirus
outbreak (“Here are 2 Tech Stocks That
Are Worth Buying After the Coronavirus
Selloff,” Tech Trader, March 6). Google,
Amazon.com, Netflix, and Facebook have
no significant Chinese exposure, and if peo-
ple stay at home, they will be using their
services. Why are people selling them?
Farid Ullah
On Barrons.com
Pension Funding
To the Editor:
I read with some interest “State Treasurers
to the SEC: Don’t Undermine Investor Pro-
tections” (Other Voices, March 4). While the
authors raised some good points, what I
found most interesting was the states that
the authors represent. A quick search dis-
closed that these states rank 48th (Illinois),
47th (Connecticut), 45th (Rhode Island),
and 42nd (Pennsylvania) in pension fund-
ing. Maybe their time would be better spent
working with their elected officials to solve
this very serious problem.
Leon Graifer
Syosset, N.Y.
MAILBAG
To the Editor:
Even in this ultralow interest-rate environ-
ment, high-quality bonds serve an impor-
tant purpose in most investors’ portfolios
(“Yes, Bonds Could Still Rally, Even With
Yields Below 1%,” March 9). They provide
the psychological benefit of minimizing
volatility to get investors to stay the course
through market turmoil. They are a safety
factor, allowing investors to withdraw
funds from assets that didn’t plummet in
value during a market correction. Finally,
there are rebalancing opportunities when
stocks fall in price and the highest-rated
bonds appreciate.
Jonathan I. Shenkman
West Hempstead, N.Y.
78 and Can’t Wait Longer
To the Editor:
As an investor in the stock market for
more than 55 years, I can truthfully say
I’m nervous (“When Will the Stock Market
Recover? The Pain Isn’t Over,” The Trader,
March 6). These big swings in the markets
are giving me much to worry about and
causing me sleepless nights. Being diversi-
fied is not helping—even my bonds and
preferred stocks are falling. When ana-
lysts say to wait for the markets to return
to normalcy, I am 78 years old, and I can’t
wait any longer.
Martin Blumberg
Melville N.Y.
Peak Hysteria
To the Editor:
Paul Hickey expects that “peak hysteria
over this virus will be measured in weeks
and months, not longer” (“11 Stocks and
ETFs for a Post-Virus World,” Interview,
March 5). Unfortunately, in weeks or
months, an effective vaccine against
Covid-19 is not expected to be widely used,
or used at all. That leaves us to expect a
Bonds Have a Place
In Most Portfolios