The Copeland Review Second Quarter 2020
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The Copeland Review Second Quarter 2020 “We believe that stocks with sustainable dividend growth consistently outperform the market with less risk. ” (Don’t) Press Your Luck! "Today, these three players are after Big Bucks, but they'll have to avoid the Whammy, as they play the most exciting game of their lives! Big bucks, big bucks, no Whammies, come on!” - Press Your Luck, 1980s, 2019 and ‘20 Game Show One quarter ago, both the S&P 500 Index and are frequently driven by the most impaired, As our country works through this the MSCI World Ex US Index were down -20% lowest quality, highest risk stocks. So far, this period, we would like to express our year-to-date, on a total return basis, while the category has done well, along with thematic continued appreciation of everyone on Nasdaq Composite Index was down -14%. biotech and technology stocks, many of the front lines dealing with COVID-19. Now, having staged a remarkable rebound, the which are not profitable. Going forward, we Our hearts truly go out to you as well S&P 500 Index finds itself down only -4% and believe dividend growers can use their finan- and to those individuals and families directly impacted by the virus. the MSCI World Ex US Index is off only- 10% as cial strength to win the next stage of recov- of the end of June. Even more incredible, the ery while also proving more resilient should Nasdaq Composite Index rallied into positive things go south again, especially considering territory and now stands up +13% as of June that the valuations of dividend growth stocks Chart 1. US Smid Cap Dividend Actions Since March 1, 2020 30! We have journeyed into the abyss and are currently near record relative lows. back, all while facing a very serious global pan- demic and a deep recession. Are we concerned about the size of the Global Dividend Growth Universe? No! With the benefit of hindsight, the sharp market downswing and speedy recovery that followed, We closely monitor every dividend action tracked a familiar, though compressed, market around the world. Contrary to headlines about psychology pattern: an initial period of investor companies eliminating their dividends2 and, in shock transitions to a period of realization, some cases, new government restrictions then to a period of acceptance. Yet, much like around shareholder returns,3 the universe of the game show, investors seeking “big bucks” dividend growers remains robust. In fact, many from here may be haphazardly pressing their companies continue to raise their dividends, luck and hoping that another Whammy is not both in the US and abroad. Chart 2. International Small Cap Dividend Actions Since March 1, 2020 just around the corner. 947 Indeed, at the beginning of March 2020, there In this Review, we emphasize three key points were 1,038 small- to mid-capitalization US supporting the continuity, discipline, and companies in our investable Smid Cap dividend strength of Copeland’s dividend growth invest- growth universe, which we define as compa- 492 ment philosophy: nies having market capitalizations up to ap- proximately $10 billion. Since that time, 16% of 155 112 1. Despite a deep, COVID-induced recession, these companies – largely from the Consumer our investable dividend growth universe Discretionary and Energy sectors – have cut, suffered only modest impairment. We be- suspended, or postponed their dividends. Still, lieve that our remaining sizable opportunity 602 companies have announced higher year- set confirms reason for optimism. over-year dividends, including 88 with sequen- 1. As of 6/30/2020. The US Smid Cap Dividend Growth universe includes 1038 companies, tial quarter-over-quarter dividend hikes. An- while the International Small Cap Dividend 2. Contrary to some pundits espousing that other 208 companies have announced divi- Growth universe includes 1706 companies, dividends do not really matter,1 we submit dends that are higher on an annualized basis that had grown their dividends for at least one year (as of March 1, 2020). Source: that dividends remain more relevant than (See Chart 1). Combined, 810 Smid Cap compa- FactSet, CCM ever. At Copeland, we don’t press our luck, nies remain in our investable universe. 2. Growers include announced dividends that are up year over year. or stray from our investment approach, rely- 3. Stable includes companies with unchanged ing instead on dividend activity to help iden- Outside the US, while there is some variation or – in international markets – reduced divi- dends, but which are still dividend growers tify winners and losers. Companies raising across countries and sectors, overall dividend on a fiscal year basis. dividends now – during a period of extreme behavior has been similar (See Chart 2). At the 4. Flats and Cutters include dividend cuts, sus- pensions, and companies that announced a economic stress – provide us with a higher beginning of March, there were 1,706 dividend flat year over year dividend on a full fiscal level of confidence in a company’s future growers in the ex-US developed market, small year basis, due to timing. return prospects. cap universe, which we define as companies 5. Haven’t Announced Yet: In international markets, this refers both to companies that having market capitalizations up to approxi- have not announced their dividends yet and 3. The early stages of any recession rebound mately $7 billion. Since that time, 947 have to companies that have postponed their dividend decisions until later this year. Page 2 The Copeland Review raised their dividends. Another 112 have sus- every company in our dividend growth strate- while the S&P 500 Index was down -3%, both tained their prior dividend rate, with their an- gies to pay a higher dividend each year. on a total return basis. Of course, at the behest nualized dividends remaining higher on a year- of government leaders and for profit-seeking over-year basis. Accordingly, more than 1,000 Accordingly, during this challenging environ- motivations, some biotech companies large companies remain investable currently, while ment, we exited a handful of portfolio holdings and small are actively engaged in COVID-19 another 155 have yet to specify their dividend with adverse dividend actions. In most cases, research. While this research effort is praise- intentions, but have NOT left the universe. we swapped into shares of companies on worthy and likely to be profitable for a small Copeland’s watch list that experienced sharp number of players eventually, investors appear Resolved in our Focus, No Exceptions! share price declines but whose dividend to have made little distinction between those growth trajectories, we believe, remain intact. companies that are most likely to succeed and Regardless of economic conditions, Copeland’s We believe that adherence to our dividend those that aren’t focused on this pernicious entire research effort is focused on owning growth philosophy will help guide us through disease at all. only the best available dividend growth com- this very uncertain market environment. panies and avoiding those companies where Amazingly, Biotechnology ETF (IBB) earnings we see potential for negative dividend actions. “The Most Exciting Game” and Market Fancy estimates are -61% lower since year-end 2019 Our rationale remains unchanged: through compared to estimates for the S&P 500 Index complete market cycles, we believe companies On one hand, the quick market resurgence we down only -22%! With strong year-to-date with sustainable dividend growth consistently experienced in the second quarter makes performance (+14%) and significant downward outperform the market with less risk. sense as investors look forward to a recovery EPS revisions, IBB is now trading at 167x ex- in economic activity and earnings power. The pected earnings over the next twelve (12) The strong competitive advantages, balance value of any business is based on underlying months (NTM), up from an already rich 90x at sheets, and cash flows that are typical of these long-term cash flows and dividends to owners. year-end. At the same time, the dividend companies enable rapid adaptation to varied In this context, a short-term hiccup in earnings growth universe is trading near record low economic conditions, such as the recent sharp power should not dramatically impact the long relative valuations (Chart 3). Below we high- drop in customer demand driven by COVID-19. -term inherent value of a business, so long as light the US Smid Cap space, given its relative In fact, this environment should enable health- the business is not fundamentally or perma- underperformance this year and the significant ier dividend growth companies ample chances nently impaired. So, investors might correctly impact of the factors above that have driven to win market share through opportunistic overlook near-term COVID-19 impacts and strong performance in the most speculative internal investment or acquisitions. Also, our instead, focus on 2021 and beyond. This is stocks. experience suggests that management teams sensible. committed to a growing dividend are forced to Winning Over Time pursue more intelligent capital allocation. That On the other hand, people love to play “the is, the rising dividend acts as a mitigating gov- most exciting game of their lives,” making the Our Dividend Growth strategies tend to per- ernor on possibly dilutive capital projects or “market” extremely moody, driven by sporadic form well in most market environments, offer- acquisitions, when managers know a mistake bouts of fear and greed. Sentiment can turn on ing healthy participation in normal, upward could cause the end of a record of hikes and a dime, be fickle and move in herd-like trending markets and meaningful downside disappoint investors. The likely outcome is a patterns, with money rushing into certain protection during market swoons.