A message from the Ceredex Value Advisors Investment Team
The phrase “unprecedented times” can seem overused these days, but it seems appropriate to describe the current state of financial markets. At year-end 2019 when investors were celebrating a spectacular run in stocks worldwide, who could have foreseen the dramatic scenarios currently unfolding in global financial and economic markets and the painful negative effects on businesses and consumers? In this time of uncertainty, we wanted to offer an update on our thoughts about today’s investment environment and its impact on our portfolios.
Consistency Through Crisis
Since the inception of our strategies, Ceredex Value Advisors has applied the same three disciplined investment tenets in our investment process when searching for the most compelling stock opportunities for our investors:
- Does the stock pay a dividend?
- Is the valuation attractive?
- Are fundamentals improving?
Our dedication to this approach has not changed or wavered in the current crisis. What has changed are the investment data inputs, modeling and multiples we are now assigning to securities to reflect the new market realities, just as we have done in past difficult investment periods.
The Importance of Dividends
While the playbooks from prior pandemics, such as SARS, MERS, and H1N1, offer some investment guideposts, they have proven to be largely ineffective and faulty in the current climate, given the stealth-like nature and speed with which the COVID-19 virus has spread. This is one of the reasons we have remained sharply focused on the dividends paid by the stocks in our portfolios.
Why? History has repeatedly shown that companies with the financial strength to navigate major market dislocations while continuing to pay a dividend have tended to emerge out of difficult market periods in relatively solid financial shape. In today’s scenario, we expect these companies should also be well positioned to leverage and adapt their business models to thrive in the new normal.
We have always submitted that dividends signal a management’s confidence in the outlook and earnings power of its company. This has become manifest, as many corporations have eliminated share buybacks while stridently posturing to protect their dividends. Intel, Bank of America, and AT&T are a few examples.
Dividend payouts for many corporations are likely to come under intense pressure in the weeks and months ahead, particularly in extremely hard-hit segments such as the restaurant, hotel, and cruise ship industries. Consequently, we are concurrently conducting internal financial statement stress tests and reviews for all of the stocks in our portfolios, using economic assumptions more severe than during the 2008 financial crisis, in order to identify the companies we believe will be dividend survivors of the COVID-19 crisis.
However, the fact remains that a change in any one of our three criteria—a dividend elimination, a weakening valuation, deteriorating fundamentals—still results in a stock’s removal from the portfolio, just as it has for more than two decades. This strict discipline has served our investors well over the long term in the past, and we expect it to continue to do so during this recent market turmoil.
Although it remains unclear how long the current market volatility may continue, we believe this unfathomable period should provide investors with medium- to long-term horizons an opportunity to invest in high-quality companies selling at levels not seen since the great financial crisis of 2008.
With this in mind, we continue to closely analyze the holdings across all of our value equity portfolios to assess the potential short- and long-term effects of the coronavirus, recognizing our job is to select stocks using our time-tested investment process and own the securities we believe have the best opportunity to weather this storm. Our investment team has been working together for more than 25 years and is experienced at navigating extreme volatility. Indeed, this is the fourth “black swan” event many of us have experienced in our careers, and these insights will continue to help guide our investment decisions as we move through this most recent crisis.
The commentary is the opinion of the subadviser. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.