The first earnings season under coronavirus is upon us. Kim Parlee talks with David Sykes, Head of public equities, TD Asset Management about how companies will make it through the shut–downs, when will profitability return, and outlook on equity markets.
- Hello, and welcome to the MoneyTalk COVID-19 bulletin for Monday, April 20. I'm Kim Parlee. In a few moments, we're going to be talking to TD Asset Management's David Sykes about the earnings season and what he is watching, but first, the news.
Crude-oil prices are collapsing, hitting their lowest levels in 21 years. WTI prices dropped to below $12 a barrel while the Western Canadian Select oil price briefly traded in negative territory, all on concerns of weak demand, oversupply, and lack of storage. The US is close to passing another stimulus program worth as much as $500 billion targeted to small business. That's after the first loan program ran out of money last week. The Canadian government plans to strengthen its oversight of foreign investment in companies that are related to public health or those that supply critical goods during the pandemic. And finally, Disney says it plans to stop paying over 100,000 of its employees, namely cast members, in an effort to save cash during the coronavirus lockdown.
And that is a wrap of today's news. Now as promised, TD Asset Management's David Sykes.
Dave, we're about to get a whole lot of earnings out, and we'll talk about that. But I know there are a number of what you call go-to economic indicators that you've used over the years trying to figure out what's happened with the economy. The first one is something called the TSA. What is that, and what does that tell you?
- Yeah, good morning, Kim. So there are a lot of numbers and stats that we look at. There's no one silver bullet, but I look at the TSA, which is the Transportation Security Administration. These are the people that clear you to fly in the United States.
And so last week, if you look at the TSA numbers, there were 87,000 people cleared to fly in the United States. But if you look at that number one year ago, it was 2.2 million. So from an economic perspective, air travel is down 96% in the United States. So it's a very, very large, massive number.
- Another one you look at are jobless claims, and we all know those. It's another ugly number.
- Yes. Initial jobless claims, they came out every Thursday for the United States, and these are people filing for first-time unemployment benefits. And in the last four weeks, that total has been 22 million. Normally, you might see 200,000, 250,000. But the cumulative effect over a four-week period has been 22 million, which is just a staggering number.
- A lot of these numbers are quite unfathomable, quite frankly, as we try and figure out what they all mean. But Bank of Canada has come out, and they see that-- they've at least put out some initial estimates on what this could mean for contraction on the economy.
- Yeah, and it's a very difficult thing to try and triangulate and get right, but the Bank of Canada statement last week did talk about Q2 GDP being down somewhere in the order of 15% to 30%, which is an absolute staggering number.
- Let's shift to the earnings. As we kind of look at this news cycle, economic data comes out. Commodity prices are out there, but earnings are going to start to come out. What have you seen? What are you paying attention to?
- Yeah, so earnings season kicked off last week. It's early. We've only seen about 10% of S&P companies report so far. But I would say normally the market is laser focused on earnings. But I would say right now, given all the economic uncertainty, it's very difficult, I think, for any company to accurately forecast what their earnings are going to be for this year.
And if you think about when, really, the lockdown measures hit in North America, that was in March. So we're getting Q1 earnings, but really we've only had one month of an impact.
So a few things just to note. So so far, 86 companies in the S&P 500 have withdrawn their guidance. And I think what that tells you is they really don't have a good view on what the guidance for 2020 will be. But, frankly, I don't think the market nor myself are focused on 2020. I think the big issue is when do we come out of this? What's the duration? How long does it last?
And so I'm not trying to buy stocks in the next eight months. I'm trying to buy stocks, you know, for the next eight years. And so I'm trying to look at the commentary on those calls to see how business is.
- Let's talk about one sector. Some of the commentary out of the banks and financials-- people seem very focused on credit losses, obviously trying to understand what those numbers are, what they mean, and what they mean for that duration you talked about. What are you seeing?
- Yeah, so clearly banks, financial institutions are at the heart of the storm in any type of recession, let alone a COVID-19 shutdown. We had a number of large US institutions report last week, and the amount of money they've set aside for bad loans and added to the reserves is staggering. It's very, very, very high. And again, you've only had that one month, really, of the lockdown.
And so it is a huge number, but it's all about watching those credit trends. How much do banks have to add to reserves to ensure that we can get through this? But I think there is a bit of a silver lining there.
- What about the Canadian banks?
- Canadian banks we're going to hear from. Their Q2 will end at the end of April. We'll probably hear from them in the second, third week of May. It's a similar story here. Credit is going to be the focus on the market. How much money do these banks have to set aside for bad loans and then provisions? But again, I do think there's a silver lining with the Canadian banks and the US banks.
- Any insight on dividends? I mean, we've had lots of Canadian banks say that we will not be cutting dividends, but the reality is that that's going to be harder to maintain, or is it? What are your thoughts on that?
- Well, I think both for the US banks and the Canadian banks, the silver lining that I spoke of really is the capital that they have coming into this crisis. So we know that their provisions for loan losses, adding to those reserves is very, very elevated. But the good news is unlike 2008 when capital levels were low, capital levels are extremely high. And so the good news here is that they can endure big credit provisions for a number of quarters, I think, before you have to worry about the capital, which really tells me before you have to start worrying about those dividends.
Now there's always political pressure. Maybe United States regulators force the banks, even though they have the ability to pay, maybe they force them to stop paying. You've seen that happen in the United Kingdom. You've seen that happen a little bit in the European countries. But I do think from an ability to pay, both Canadian and US banks can withstand elevated credit reserves for a number of quarters. Therefore at this moment, I'm not particularly worried about the dividends that are going to be paid.
- There seems to be a real bifurcation in the market. There's those that are cutting-- actually a "trifurcation." Excuse me, making up words here. But you've got those who are cutting dividends as expected. You've got the ones that seem to be stable. And then you've got a group of companies that are increasing dividends right now.
- Yeah, and you're absolutely right. There have been a number of companies that have cut the dividends in obvious places in the economy. You think about airlines. You think about retail stocks and apparel companies, anyone who's got a direct link to the economy. Energy stocks have really been hit hard, and a lot of their capital distributions, whether it's in buybacks or dividends, have been cut.
But on the flip side of that, there are some good-news stories, the good old steady Eddie competitive advantage companies that generate free cash flow in good times and bad. We've actually seeing Johnson & Johnson report last week. They didn't have the greatest earnings numbers, but they took their dividend up 6% for the 58th year in a row. You saw Procter & Gamble last week-- you know, Crest toothpaste. You saw them take up the dividend 6% for the 64th year in a row. And good old Costco, where everyone seems to be going these days, they took the dividend up almost 8%.
So amidst all of the chaos, all the economic uncertainty, there are certain companies, certain business models that are really standing that quality test and are surviving and continuing to generate sales and revenues and free cash flow.
- Let me ask you-- you talked about the fact that no one's really focused on the right now. I mean, it's hard because just the data's all over the place, and we're in crisis mode. Looking out, though, as you trying to figure out what's happening, tell me what your bull case might be, your bear case might be, and how you're evaluating.
- Yeah, so I can give you a bull case. I'll give you a bear case, and then there's a huge range in between those two cases. But I think on the bullish side-- and the market has had a significant rebound here. I think the bull case would be, look, we're going to get some type of medical response. We're going to get an antiviral that could perhaps bridge us to a vaccine.
And if that happens-- and there are a number of companies who are doing very rapid trials right now to see if an antiviral works. If that would happen and you sort of got that bridge to a vaccine, wow. Think about how low interest rates are. Think about how much stimulus the federal governments have done in the United States and in Canada. If you start to think about the Fed and their ability to reignite quantitative easing, you could see a significant shot higher in equity markets.
Of course, on the bear side, it's a little bit of the reverse. Sometimes science doesn't happen as quickly as we would like. These things take time, and perhaps we don't get another antiviral. Perhaps a vaccine doesn't come in 12 months. Maybe it comes in 18 or 24 months or longer. Maybe we get a second wave. There's another impact to the economy, another down leg in earnings. So those are two very wide outcomes.
But I think for me, what we always want to focus on is our process, and our process is really about finding companies with a great competitive advantage that can have a really high-quality balance sheet and not a lot of debt. If you have a lot of debt right now, it's a very stressful time, both personally and as a corporation. And companies that can weather this storm-- and I think that's where we're focusing our attention.
I don't expect there to be a silver bullet, and I don't expect that we're going to come out of this quickly. I do expect we're going to come out of it, but I don't believe it's going to be in the next week or two. And so we really want to have a rock-solid portfolio that can withstand the time and pressures that this crisis is going to give us.
- Dave, great to catch up. Thanks so much.
- Thanks so much.