Retirement Strategy: A Contrarian, Speculator, And Dividend Growth Investor, All At Once

When was the last time we have seen stocks like AT&T (T), Exxon Mobil (XOM) and Altria (MO) all get slammed at the same time? Each of these companies are now, and for however long they can, paying shareholders extraordinary dividends with unbelievable yields. This should attract dividend growth investors to consider holding right now at the very least. Perhaps a separate basket for just these three stocks can be a not only an income growth play, but a speculative contrarian play as well.

The price-per-share trend is not new. These mega-cap companies have been facing strong headwinds and business issues for several years now. One has to wonder if all the bad news has been priced in as of yet. I certainly don’t know, and if we review some of the basic issues with each stock, we can obviously see why the share prices got hammered.

AT&T: The missteps by management are well documented – but for this article, let me just highlight some of them.

  • The debt level is way too high and must be addressed.
  • The major purchases of DirecTV and The Warner Group has been poorly managed and have eroded AT&T’s overall value as a company.
  • The rollout of HBO Max has been a joke and needs to get organized across all streaming TV applications just like the competition.
  • The cash cow of T is the cellular/wireless business and more emphasis must be paid to this core business. T is not just in the entertainment business, and its wonderful cash flow must be nurtured and grown just as T-Mobile has done. This is what pays the bills.

Exxon Mobil: The price of oil is not the only headwind, but obviously I must note it here.

  • The price of oil has not been XOM’s friend obviously, and if it does not rebound then the company will continue to face cash flow problems that will impact the entire business.
  • The ongoing stockpiling of oil at prices above cost is ridiculous.
  • The continuation of massive drilling efforts at less than breakeven could impact the company for years.
  • The tug of war between dividend income growth and employee value will continue and could become one of the biggest issues XOM will face.
  • Capex has been too high and even eliminating all of it is not a grand idea.
  • The potential move away from fossil fuels into renewables will remain a headwind regardless of “if, when, how and what” are ever actually pinned down.

Altria: Probably the most reviled company right now due to all of the health issues that the core business has caused.

  • Fewer people are smoking now than ever before. How much will a consumer pay to keep MO’s cash flow so strong?
  • The problems with the relatively new vaping business have been well documented and Altria has reduced its value in the Juul (JUUL) share purchase. Regulatory issues continue to face this industry and remains up in the air.
  • Cannabis still faces a U.S. federal legalization battle for the investment in Cronos (OTC:CRON) to become viable on all fronts. MO continues to lose money on this investment.
  • Marketing has been almost completely restricted so the customer base continues to drop.

I am sure that I haven’t mentioned all of the issues. But I believe that they are all so well documented here on Seeking Alpha and everywhere else that I am certain some folks in our readership will detail many other issues and declare these stocks as dead money within our comment stream.

Here’s the thing, though. All of these companies have publicly committed to keeping intact their elite status as dividend aristocrats or kings. That means investors who purchase share right now, at the current share prices, will be getting dividend yields that have been unheard of until each of these companies lost share price value. For growth investors and traders, these stocks have been a nightmare. I wouldn’t have touched them with a 10-foot pole.

That being said, dividend growth investors have continued to be paid (and been constantly given payout increases) by just holding shares. And no matter what anyone says, the decrease in share price is nothing more than an ugly paper loss while dividends are real money – and those who focus on their income streams have continued to be rewarded.

The same goes for gains, by the way. Many longer-term holders purchased these stocks decades ago. Why should they sell now when the income continues to roll in? It does not make sense. In that regard, both gains and losses are meaningless until the shares are sold.

Dividend growth investors are not selling these stocks as this would cause major issues within their own income streams, period. That brings me to why I personally am of the opinion that – given the current share prices and the current dividend yields, as well as their elite status – a unique category of investor might want to consider buying shares, slowly, at current levels, as a combined contrarian, speculation and dividend growth income play.

Look at these dividend yields:

Chart

I am pretty sure I have NEVER seen a chart like this for three dividend superstars at the same time. Obviously with the ongoing dividend increases, continuing payments, elite status, and the pounding of each of their share prices, these stocks have to be difficult to ignore for most dividend growth investors.

The big question is whether these companies will continue paying and increasing their dividends, or not. Will they be cut? Suspended? Stopped completely? Obviously none of us knows for sure, however each company has reported its quarterly earnings in the past week or so, and the earnings conference calls have been very interesting.

Let me highlight each companies quarterly report first:

XOM Earnings Report

Here is the key takeaways of the earnings report:

Exxon Mobil (NYSE:XOM) -1% pre-market after reporting a loss for a third straight quarter but lighter than Wall Street estimates, and revenues fell 29% Y/Y to a below-consensus $46.2B.

The company’s Q3 GAAP loss totaled $680M, or $0.15/share, compared with a profit of $3.17B, or $0.75/share, in the year-ago quarter, as the crude refining business was hit especially hard by weak fuel demand and prices.

Exxon lowers its capital spending plans for next year, now seeing FY 2021 capex of $16B-$19B vs. its prior expectation of $23B.

Exxon also says it is reassessing its natural gas holdings in North America and could impair $25B-$30B, but only if it changes its long-term development plans.

The company says planned reductions to its 2020 capital spending program from $33B to $23B and an expected ~15% decrease in cash operating expenses are ahead of schedule.

Q3 production edged up 1% Q/Q to 3.7M boe/day, with liquids output rising 2% and natural gas volumes falling 1%.

Exxon’s earnings release comes a day after announcing it will cut 15% of its workforce in an attempt to protect its dividend.

To my eye, this was more positive than expected although the ship still needs to be turned around. Note the last sentence that once again should be good news for dividend growth investors.

AT&T Earning Report

Here are the key takeaways from the earnings report (emphasis added)

AT&T (NYSE:T) shares gain 1.7% pre-market after Q3 results topped estimates for revenue and wireless subscribers and matched the profit consensus.

Revenue was down 5% Y/Y to $42.3B but still beat estimates by $750M. Non-GAAP EPS was $0.76.

Domestic HBO and HBO Max subscribers totaled more than 38M and 57M, respectively. The HBO figure beats the company’s year-end target of 36M subscribers. Max activations more than doubled since Q2, and the ad-supported service is set to launch in 2021.

“Wireless postpaid growth was the strongest that it’s been in years with one million net additions, including 645,000 phones. We added more than 350,000 fiber broadband customers and are on track to grow our fiber base by more than 25% this year. And we continue to grow and scale HBO Max, with total domestic HBO and HBO Max subscribers topping 38 million — well ahead of our expectations for the full year. Our strong cash flow in the quarter positions us to continue investing in our growth areas and pay down debt. We now expect 2020 free cash flow of $26 billion or higher with a full-year dividend payout ratio in the high 50s%,” says CEO John Stankey.

Mobility net adds of 5.53M came in well above the 2.84M consensus. Prepaid added 245K (consensus: 75K) and Postpaid added 1.08M (consensus: 147K loss).

Broadband reported 158K net adds when analysts expected a 73K loss.

This is a positive report for this struggling company and keep in mind that the debt is being paid down and T’s cash flow and cash reserves are still plenty to cover the debt as well as the dividends while also continuing to prepare for a small increase as well. Free cash flow – cash from operating activities minus capital expenditures – was $8.3 billion for the quarter. Net debt declined by $2.9 billion sequentially in the quarter, and net debt to adjusted EBITDA at the end of the third quarter was 2.66

Here are a few of the key takeaways from the earnings report (emphasis added):

Altria (NYSE:MO) reports smokeable volume fell 0.2% in Q3 to top the consensus expectation for a 4.0% decline.

Cigarette volume was down 0.4% during the quarter, cigar volume was up 10% and smokeless volume was 1.1% lower.

Looking ahead, Altria expects full-year EPS of $4.30 to $4.38 vs. $4.32 consensus. Altria keeps its annualized dividend payout at $3.44 per share. Altria has a long-term objective of a dividend payout ratio target of approximately 80% of adjusted diluted EPS.

The value of Juul was $1.6B on September 30. However, Juul slashed its own valuation yesterday.

Shares of Altria are up 0.90% premarket to $37.20.

With this positive report, MO has declared a consensus that could be higher than the next quarterly report, while also reaffirming that the focus on its dividend remains consistent with previous statements and the dividend is currently safe.

So What Am I Suggesting?

The first thing is that the earnings reports were not awful and they’ve led me to believe that, aside from XOM, the current dividends are safe for now and in the near term. These companies continue to fix their businesses. That said, XOM appears to have a very difficult decision to make about dividends as long as the price of oil continues its current (down) trend.

Of course we can speculate all we want about the XOM dividend. But in my mind the only way for XOM to keep its current dividend, increase it, and hang on to its elite dividend status will either be further cost cutting, taking on added debt, or eliminating even more capex.

The bright side that I see, which for me is a bit unusual, is this: Even if the company were to slash its dividend by 50%-60% the yield would still be a solid 4.25-5.25%! Combine that with the current share price and I am of the opinion that dividend growth investors can still benefit from an income stream perspective as well as capital appreciation.

As a matter of fact, the same can be said for T and MO. However I do believe that their dividends are safe for now and for the near term. So the share price could actually turn into a capital appreciation play for those speculators willing to wait, as well as for the contrarian investors who gravitate towards the beaten-up, downtrodden, and reviled companies who have left a trail of blood in the streets!

My Bottom Line

Obviously please do your own research and due diligence. Read the earnings call transcripts and decide for yourself if any of my opinions are accurate enough for you to consider buying these stocks now. As I’ve stated, for the income stream, dividend growth investors could make a separate basket of these stocks with current purchases to see how they fare without interfering with one’s core portfolio. If things get better and the coast is clear, they can be added to your existing holdings if you own them and if positive income flows continue to be anticipated.

For the contrarian, speculative investors, you will be able to tell if this approach is working for you simply by seeing any capital appreciation from the share prices. Then you will have to decide either to hang on or to pocket the gains in the near term.

Okay, it is now your turn to add your thoughts and opinions of this strategy within what I believe will be a very valuable comment stream!

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author used in his past worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance. One more thing…I have no equities since I divested everything about 2 years ago due to very serious health issues and my personal circumstance…READ MY PROFILE FOR FURTHER INFORMATION.

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