This time I am sharing you my 5 bullets from the week a day later. Yesterday was Easter Sunday and on holidays I tend to keep my laptop closed so that I am totally present with my family. It was definitely worth it. It was great weather and in such cases having a garden during a lockdown is truly a luxury.
Last week was also a very interesting week again. The market keeps climbing higher and higher and I just wonder when it will stop again. It acts like if COVID-19 belongs to the past again. Does the market know more than we do at this moment in time? I doubt it, so please invest carefully!
Having said that, enjoy the read!
#Bailout #Chapter11 #Bankruptcy $LEVI #QuarterlyEarnings @JourneyMillion @Accidental_Fire #BillGates #COVID_19
5-Bullet Sunday is a weekly blog post with 5 topics that were on my mind this week related to Financial Independence and Dividend Growth Investing or something that just fed my curiosity. An overview of other earlier posts can be found here
🌟 Bailout vs Bankruptcy
What has happened to our capitalistic system? Didn’t companies with poor performance and bad practices ought to get bankrupt so that the system cleans itself from bad actors? Why are we suddenly bailing out all these companies? Does it mean that a large part of the company is “too-big-too-fail”?
I am really astonished by this reality. Most of us know that we need to build up an emergency fund which covers at least 3 to 6 months of expenses so that we can weather any kind of short storm in an unforeseen event. How is this different from any kind of company?
I have never been a fan of share buy-backs in the form as how it’s typically done by corporations: buying at the high. Companies should have a sound balance sheet, are expected to be honest about their earnings growth potential without financially engineering and should use the left-overs to return money in the form of dividends to their shareholders.
Therefore I suggest to let those companies that need a bailout to file for a chapter-11 bankruptcy. Effectively this means that the company gets to reorganize itself and emerge from bankruptcy as a financially sound company. If you want to know a bit more about it, I would suggest reading the following paper which explains the difference between chapter-7 and chapter-11 bankruptcy pretty well. The following quote also strenghtens my believe that this is the right option:
By letting companies file bankruptcy, we get the shareholders to pay for it by losing their investments. This means not the tax-payer. What the government can do in this case is to reserve funds for providing proper guidance and legal support to employees so that they get the most out of it. At the same time they could take an equity stake when it effects a whole supply chain so that the tax-payers also benefit from any uptake after the bankruptcy. This is how I would suggest doing it instead of giving all those CEO’s an out-of-jail-card.
What’s happening now is unprecedented and I am affraid that this will have a longer term consequences in society and the political climate. Ray Dalio shared his point of view the other day and he compared it to the 1930 – 1945 period where the increasing wealth-gap led to more and more populism.
Are we going into the same direction?
🌟 Take-away from Levi Strauss earnings
Earnings season has started and Levi Strauss and Delta Airlines reported their earnings. In no way I am interested to own any of these companies, but I am really interested to learn early on already how company earnings are being impacted by COVID-19 and how they respond to that. I believe that this gives me a better feeling of how severe the upcoming Economic downturn might be.
Initially I thought that the first quarter results from Levi Strauss ($LEVI) would be about January until March. When I really looked into their earnings I found out that their fiscal quarter runs until the end of February. Hence it’s no wonder that they still reported a decent growth of 6% revenue growth for Q1.
Nevertheless, both the quarterly earnings report and the related conference call give a good inside in how the company is dealing with it. For instance, no surprise here, but Levi Strauss dropped their 2020 guidance and included the following statement in their quarterly report:
“Since mid-March, in response to the pandemic, the company has temporarily closed all its doors, both company-operated and franchise, in the Americas and Europe, as well as most doors in Asia outside greater China, Korea and Japan. Accordingly, the adverse impact to the company’s second-quarter net revenues, earnings and cash flows is expected to be materially significant.“
This is very severe. Levis gets 43% of their revenue from the US and their revenue from those stores just got “wiped out” overnight.
The conference call transcript gives a very interesting view on how they respond to this:
- Our focus is to balance cash preservation and profit protection. To that end, we are ensuring adequate cash flow and liquidity to navigate the choppy waters, including suspending our share buyback program and drawing down on our revolver.
- On cost management, we’re substantially reducing advertising spend and we are pulling SG&A levers available to us to cut cost in our business operation. Such as the compensation cuts and furloughs Chip mentioned. Freezing travel and headcount, significantly reducing variable expenses and negotiating with landlords to abate rank for the period stores are closed.
- I would say that China may not be a perfect model for everything that we might expect to see in the West. And that’s for a whole host of reasons but it’s quite possible here in the West we’re going to see a much bigger economic impact, more job losses.
So what am I taking away from this? Based on Levi’s earnings release and least the following:
- I definitely don’t want to invest now in REIT’s with a relative large exposure to the consumer discretionary sector. I will wait until they have reported their bottom-line impact of rent suspension and proof that they can weather the storm financially.
- Watch out with the big traditional companies that are depending a lot on advertising revenue. Especially the traditional ones, because I expect that the advertising dollars that are left will be spend more and more online.
Personally I will be interested to see how this impacts Google and Facebook. I am very curious how it will impact their revenue if this is the global trend that we will see. Besides that I am wondering what Realty Income ($O) will report out based on this situation. It’s a stock that I really wanted to own pre-COVID-19, but I need to see Q1 earnings results and their guidance first.
🌟 Upcoming Earnings
The following companies will report their earnings this week.
- Tuesday 14 April: Johnson & Johnson ($JNJ), JP Morgan Chase ($JPM), Wells Fargo & Co ($WFC),
- Wednesday 15 April: United Health Group ($UNH), Banc Of America ($BAC), Citigroup Inc ($C), Goldman Sachs ($GS)
- Thursday 16 April: Abbott Laboratories ($ABT), Morgan Stanley ($MS)
- Friday 17 April: Schlumberger Ltd ($SLB)
As you can see, a lot of banks. I’m sure that they’re the best in counting money 😉. Luckily also the first business that I own will report its earnings and I am really looking forward to it (($JNJ)!
The first European companies will start reporting a week later, so I am actually looking much more forward to the week of 20 April.
🌟 Recommended Reads
Today I would like to share two blogposts from the community that I really enjoyed reading.
- Dave from Accidental Fire wrote a nice piece on how to act when a bear attacks you. It serves as an analogy to the current bear market. A very interesting read. There are also some interesting comments in the comment section.
- Tony from One Million Journey gave a portfolio update in which he mentions that shit has hit the fan for him. I very much appreciate his honesty and transparancy. He has a total different portfolio than I have with much more diversification, also in riskier assets. However, he also has some part of it invested in a dividend growth portfolio.
🌟 Recommended video
Bill Gates is probably one of the smartest people on this world and I am very glad that he is trying to make this world a better place with his foundation. He has been investing a lot already in fighting a future pandemic so he’s very knowledgeble about this topic. To me this means that when he speaks, I listen. I found the below interview very informative and especially when he describes how society might get back to normal again.
This was it for the week!
I wish you a lovely remainder of 2nd Easter Day 🐰🐇🥚⛪. Enjoy your time with the family and please avoid the temptation of going out. We are all in it together to fight this pandemic.
I hope that you enjoyed this week’s 5-Bullet Sunday, Easter Monday edition. If so, feel free to hit the like button or leave a comment 🙏.
For now, have a great remainder of the Monday!
— European Dividend Growth Investor