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Most of the time, using the screening criteria that are characteristic of good dividend growth companies weeds out the bad apples. When you buy companies that have low debt, attractive yield, high return on invested capital, etc., it can feel like you’ll be cashing those dividends forever. However, companies inevitably run into challenges, and you might get a surprise. If you invest long enough, you’ll eventually find yourself with a dividend that’s been cut and a once attractive investment that has soured. The good news is if your portfolio is structured properly, not even dividend cuts get in the way of growing your income every year.
On another note, one factor that greatly influences the security of a dividend is debt. Given everything that has happened in the market recently, and with a liquidity crisis in the banking sector, debt has become a hot topic. It is extremely important to understand how debt functions for a company, especially in an environment with rising interest rates.
In this month’s episode, Greg takes you on a deep dive into Intel ($INTC). He looks at why we originally bought it, the problems they ran into, and why they recently cut their dividend. He even lays out why it may do better in a couple of years. Later, He uses a couple of different examples to show how debt can be good, bad, or indifferent.
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This is Greg Denewiler, and you're listening to another episode of The Dividend Mailbox, a monthly podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks and make each year's check larger than the last.
Welcome to the 21st episode of The Dividend Mailbox. There's been a lot going on in the markets recently, there's been a lot of headlines, and in this episode, we are going to first look at a dividend cut. One of the things we're going to do is go through how we approached it and how we look at them and how they can impact your portfolio. The good news is they can in fact have very little or even a positive impact on your portfolio. That'll be the first part. And then sort of in connection to that, we're going to look at debt. Debt is a big topic right now, so we're going to look at a few examples of how debt can impact dividends. There's no simple answer to debt, you really have to pay attention to each individual situation, but we'll get into that later on in the podcast.
So you get to hear about a historic event at The Dividend Mailbox. We've been focusing on dividend growth investing since August of 2010, and we created the model portfolio. It's a live portfolio. The only thing in it is dividend-growing stocks. We don't own anything else. One of the stocks that went into it was Intel, and we've held it for the last 13 years. Intel has been a fairly substantial dividend-paying stock. It was up to around 5%. It was moving into the gray area that we've talked about before where it was becoming a high-yield situation, and that's because the market just wasn't confident in it. Basically, the stock price was coming down, which made the yield go up, but we continued to hold it and last week they cut the dividend – or two weeks ago. So, we've finally hit our first dividend cut. You obviously try your best to avoid a cut, but sooner or later you're going to run into one of these things. As a dividend growth investor, since they have cut it, at this point, we have to make a decision. What are we going to do with it? So we sold it out of the model portfolio because there we have to maintain the discipline of dividend growth. As I've mentioned in the past, the model portfolio is to really kind of gauge how this whole dividend growth strategy works, and it's isolated specifically towards just dividend growth stocks.
We sold it last week at around 25. It's one of the original positions that we've owned. We've owned it for 12 and a half years, and we originally bought it at a little over $18 a share. So with the dividend income that we have received on it, our total return for Intel was a hundred percent. A decent gain but when you compare it to the S&P 500, it has lagged considerably. If you look back a few years ago, the stock had actually hit $60, it was doing relatively well. Now that the stock has come back down, it's not performing that well. But besides that, the bigger issue is of what we originally paid for it, we've received two-thirds of our money back in dividend income.
One thing I want to point out is that we do not automatically reinvest our dividends back into each individual stock. We don't use dividend reinvestment programs. We let the dividends accumulate in the account, and as the cash builds, we deploy the capital really wherever we think the best opportunities are. It may be more of the stock we own, or it likely is going to be something completely different. I will tell you, you know, looking back on our portfolio, if we would've had everything reinvest, we probably would've made a little bit more money. But in the case of Intel, it's definitely better. We didn't, because we would've had a lot of reinvested shares up in the $40 to $60 range. The decline in value over the last year or two would've been a lot more than what it is now. As it stands, we still have a pretty good gain in the stock because we didn't buy any at higher prices. You also have to look at the fact that as we redeployed capital, we bought some new positions, it diversified the portfolio and we've gotten returns off of those. So it's not a simple answer. However, personally, I like to have the option of deploying the capital when I think it makes sense.
But moving on, as we look at Intel, the reason we originally bought it was, it met the three thresholds that we were looking for. It had about a 3.5% dividend yield. It had a really strong balance sheet. They basically had no debt back then, and they had strong profit margins, extremely profitable. They spent a lot on R&D. They continue to do that. They pretty much controlled the semiconductor space, especially on the personal computer side. And most semiconductor companies just design their chips, they do not manufacture them while Intel actually does both. So it definitely clicked all the boxes: profitable, had a growing dividend, and had a nice dividend yield. But we tend to stay away from tech as a rule, unless it's one of the big major players, just because of the potential volatility. Tech is a tough place to invest in because technology does change rapidly. There's always a risk that a company's product will become obsolete or just not as competitive. There's just continuous innovation occurring. The other thing is most tech doesn't pay a dividend except for the larger names, you know, Apple, and Microsoft, but they were paying a dividend back then. It was paying 16 cents a quarter. In the five years prior to when we first purchased the stock, the dividend had grown by 14% a year. So it was a great dividend growth story. That was the reason we originally purchased it. And now, so you fast forward 12 years later, gotten a lot of dividend income out of it, and the last really two years they've started to run into some problems.
They're fairly well known. They've had multiple product delays. Competition in some areas has actually passed them. But then in 2020, Apple ended its partnership and Intel hired a new CEO as well. Then recently you've had some inflation in cost of goods and the semiconductor industry has been notoriously volatile. They tend to overproduce, technology changes, but the problem is, you can't just flip a switch and make more or less of them overnight. So in 2020, you had demand spike dramatically for PCs as people started working from their home, and then a pretty dramatic decline in PC sales after that. And then now you've also had the big challenge of Intel trying to really reinvent itself on some level by building more chip fabrication plants, and these things are very expensive. That basically went along with their cash flow — free cash flow starting to decline and recently it has gone negative. So Intel has had to navigate some challenges, and they had a strong balance sheet as they went into this several years ago. But what you've got is, in a relatively quick period of time, the sustainability of the dividend started to come into a little bit of question. These manufacturing plants are taking a lot of capital. Debt costs are going up. It's been a tough market, it's been cyclical, and they just decided that for them it was better to cut the dividend. They're still paying one, but now it only yields about 1.5% percent. So at this point, what are we going to do?
The problem you always run into is the yields become more attractive as the stock prices decline. One of the hard parts of this whole strategy is the sell side. This is where it gets a little complicated. As I've mentioned, we sold Intel out of the model portfolio, but we still do own it in individual client accounts.
The reason we sold it out of the model portfolio is we have a dual mandate, and that mandate is that we have to have dividend growth and we also have to have total return. They really go hand in hand, but we're not going to own one without the other in the model portfolio. In our other portfolios, we can allocate things that don't pay dividends. All of our other portfolios have other investments in them, but we have limited space there, so we can't have too many over there. Right now, Intel is taking up one of those slots, but there are a couple of reasons why we held it up to this point and we continue to hold it. They are going through, a major transition.
These tech companies, sometimes they turn around and sometimes they don't, but they can have some pretty dramatic turnarounds. And there's also, I think, political leverage there potentially. China's not going away, obviously, and we're going to continue to do trade with them pretty much no matter what happens, both countries rely on each other. But Biden and the administration have clearly indicated that they would like more production over in the US to help protect our national security. The government has introduced the CHIPS bill to ramp up US production, and they've also been putting restrictions on chips that are made overseas. And Intel, most of their production is in the US but some of it’s — it's pretty much all in what I will call safe environments. They do have a little bit of an assembly plant over in China, but what ends up happening is semiconductors very well may be a leverage, I hate to say this, but a leverage chip, to put pressure on China. And Intel is going to be a big beneficiary from that, but exactly how that plays out, we don't know. I call it kind of a free option here that you don't pay anything for, and that's why they have started a huge CapEx program to build more fabrication plants in the US. I mean, they've had some significant jumps. If you go back five years, , they were spending about $11 billion. The latest number out, the end of the fourth quarter, it's jumped to $25 billion, and that's going to run for another couple of years. It takes a while to build these plants and it's affected cash flow. You know, the good news though, is that money is going into an asset that's going to produce a return on it in the next few years, but we're not there yet. I think it's supposed to mainly be finished in 2025 and debt is starting to climb. They're now up to 40% debt to equity, which is not huge, but the number's going to keep going higher temporarily. But in the end, Intel has a $182 billion asset base. They only have, at the moment, $42 billion of debt, so there is flexibility there with their assets. There is room there, but they save about $4 billion of cash flow a year by cutting the dividend. One issue is I think Intel saw the higher debt interest rate environment and they decided to take a little bit more of a conservative approach. But with kind of the long-term political option embedded in it, producing chips in the US could be a big advantage for them down the road, and at some point they're probably going to get a great return from that.
But another reason why we continue to hold Intel is because they have a substantial R&D budget, more than any other chip producer out there. And in the past, they have been relatively successful. They've had some great returns with their R&D budget. So just to put this in perspective, the revenue of Intel last year, and keep in mind it was a down year, was $63 billion, and of that, their R&D budget is over $17 billion. Five years ago, they spent $13.5 billion. They have spent a lot of money on R&D, really forever. That's a different number than CapEx. R&D is just where they're working on product development. CapEx is where they're building plant and equipment. Well, just comparing it to AMD, AMD spends $5 billion, and five years ago they spent $ 1.5 billion. Nvidia, they spend $7.3 billion currently. Five years ago they spent $1.8. Texas Instruments, $1.7 billion, five years ago, $1.6 billion. And then you look at Micron, they're spending $3.1 billion, five years ago, they spent $2.1 billion. Qualcomm, which is a bigger competitor, they have $43 billion in revenue. But Qualcomm is not just a pure semiconductor company. They do some other things, they're big on wireless and 5g. Qualcomm spends $8.2 billion, five years ago they spent $5.6 billion. So the first thing is they spend more on R&D than all of their competitors. You have to combine several of them to get to the same amount of money that Intel spends. Now, obviously, this is not always the case, but you would think that they'd be able to do something right here. Well, in the last few years, they've had numerous problems bringing out new chips. They've had a lot of product delays and they've continued to struggle there. Our thinking is, you know, with all of that R&D budget, there's a reasonably good chance that they can get this thing back on track, and they still are major players in the semiconductor chip markets.
So between Intel's R&D and CapEx, and the fact that management has made a clear goal that shareholders should see them return back to being a premier chip company by the year 2025., you would think that they're going to get some return off of that. Of course, I know that it's debatable and there's, you know, a lot of controversy out there. It's just a simple assumption that they are going to get a return off of some substantial investments that they're making currently. And one great example is Microsoft.
About 15 years ago, Microsoft had really lost their way and they were getting beat by Apple. Windows was being challenged. Linux was coming up as a competitor in the network and on the server side. Now, I know these are not completely apples and apples, but everything Microsoft did there for several years, basically, they were getting almost zero return on some huge acquisitions they made. Nokia is one of the big ones. They wrote that off a year or two later, and they really struggled with reinvesting. And even though it was a dying dinosaur, it was a cash flow machine that was very cheap. They had a core product. The business was there. If anything went right for them, it was going to do reasonably well. The moral of the story is a lot went right for them, and it's been a huge winner. I'm not implying Intel's going to do that, but there's a chance there that if they just get the ship competitive again, it has substantial upside, which is why I continue to hold it.
Another interesting note, there's the infamous Moore's Law, which just describes how fast technology changes. And Moore's Law was created by one of the founders of Intel, which just tells you that in the past, Intel has really been on the front lines of innovation. It's a challenging industry, but one thing that you do know or you can be virtually 100% certain of, which is not something you can say in most industries is five years from now, 10 years from now, three decades from now, there are not going to be fewer semiconductor chips. There’s only going to be more.
So as far as earnings estimates, it's kind of interesting. The stock is acting now like it— well, it's Microsoft 15 years ago. Maybe they'll make it, maybe they won't. But the earnings estimates— and this stock is, you know, fairly well followed, covered by a lot of analysts. Estimates are $1.87 for 2024 and for 2025, they're $2.72. If they earn $2.72 in 2025, I'm pretty confident the stock's going to be higher than it is now, and the dividend will be reinstated at that point. That will be a recovery in earnings, which quite likely will lead to a little higher multiple on the stock. Plus if they earn $2.72 and with the current dividend at 50 cents, that's only a 20% payout ratio, so they easily could start growing the dividend again. But not to overplay this, we just can't own it in the model portfolio because it's a dividend cut right now. At the moment, we're keeping it in the other portfolios because we see two substantial upsides to the stock.
One, it's really cheap right now. The price to book is basically just a little over one times book. The past five-year average has been 2.6 times book value, and in the last few decades, it's never been this low. Price to sales, which is a little bit more, tends to be a little bit more reliable, that right now is 1.7. The low was in September of 22, it got down to 1.4 times. The five-year average is three times, so it's almost half of where it was valuation-wise there just in the last five years. It's trading cheap, but it's obviously cheap for a reason. From an investment standpoint, really the only thing you need is just to see signs of stabilization and they're beginning to get back on track again.
And two, the other reason, is they continue to spend a lot of money on R&D and they have a substantial CapEx program. Unless this is a total disaster, which does happen occasionally, (that's the risk of investing), you have to think they're going to get a return when they start getting production out of those fab plants. Cash flow is going to change dramatically, but this is something that is not certain yet, and that's why the stock is currently cheap. There are times when a dividend cut can actually help a company, and that may be the case for Intel, we don't know yet, but we think it's, it's worth taking the risk to see if they can get back on track.
So, to recap on Intel, the first point I want to make is, we still own it, but that does not imply that we're suggesting in any way that you should go out and buy it because this podcast is not about value investing, it's about dividend growth investing, and that automatically assumes that it has to be some form of a growth stock to grow earnings, to grow the dividend. So, Intel does not fit that model anymore. It has become speculation. They cannot continue the way they currently are. Something has to change to get back to profitability and to get back to sustainable dividend growth. We think it's possible. It's quite possible they're going to be able to turn that and we think there is value there that, you know, it could still become a good investment. So we continue to hold. But it's a different investment than it was a few weeks ago, and it's even a little different than it was a few years ago.
But to me, this is an even more fascinating thing. If you get very few points off these podcasts, this is one of them that should really stick. So, Intel cuts its dividend by 66%. The stock dropped by, I don't know, maybe 10%. Well, it's our smallest position. It was only about roughly 4% of the portfolio. So our dividend income basically is not going to really change at all. And even with Intel's cut, well, the reality is, last year we got all the dividends from Intel and we haven't lost anything there yet because we haven't gotten a lower dividend from the new dividend rate and we just sold it. That money gets redeployed at a higher rate. Even the money market fund right now pays 4%. The idea will be that the next thing we buy is probably going to be back down around 3%, give or take, but there we're back on the dividend growth side. With all the other companies that have already raised their dividends at the end of last year or this year, even with Intel's dividend cut this year, if we do nothing else in the portfolio and leave it exactly the way it is right now, after selling it last week, we're still on track to have dividend growth of about 7%. And the only thing that takes a small hit is the total return component of the portfolio. To try to, I don't know, maybe make this a little clearer… What if you just bought it a year ago and let's just say you paid $40 for it and you just sold it at $25? That means it's declined by 37%. If it's a 5% position in your portfolio that really only equates to about a 2% decline in your overall portfolio. It's obviously not fun and to some degree, it's a little bit of a hit to your ego, but it's nothing that you can't recover from. This is really the power of the dividend growth strategy. If your positions are properly balanced, and they're the right size, even a dividend cut doesn't get in the way of growing your income. We try to avoid them, but occasionally they're going to happen. So one of the things that we try to do is structure the portfolio so that the impact is minimal, and at that point you can make a decision. You either have to move it over to what I call another allocation of your portfolio, and you don't want too much of that. Or you have to just completely sell it and move on. But when you have a dividend growth portfolio, you really shouldn't have too many of these because you're screening for sustainability and high debt. All of that, you're trying to weed out, which are issues that can become a problem. And when you start out with a new investment in something, most of those situations should be downplayed, or it's something that you've looked at and you think it's something a company is going to be able to handle and work their way out of.
So we've talked about Intel and one of the pieces of the Intel story was their debt situation and the fact that you know, they're having to continuously raise more debt as they finance their building projects and the cost of that debt is going up. Well, now what I want to do is look at a few other situations and look at how debt plays into the equation. It's really important if you're going to look at sustainable dividends and dividend growth and how a company allocates its capital because when debt transitions over to being a real burden, that's when you can end up with a dividend cut. And debt becomes a much bigger factor when interest rates are increasing.
So first, let's start with what's been obvious in the last week and a half, and that's the bank out in California, Silicon Valley Bank, otherwise known as SVB. And just a brief description of what happened to them. The whole business plan of a bank is to earn more than what they pay out in deposits. So Silicon Valley Bank took in a lot of deposits. They were growing extremely fast, and they were actually growing faster than what they could loan the money out at, a pace that they felt comfortable with. So they decided to buy Treasuries, and they thought it was a relatively conservative strategy. But when you buy Treasuries, you have to be careful that when you have deposits, those deposits can come in and out whenever they want to. So when interest rates were extremely low, they bought longer-dated Treasuries. Treasuries don't have any risk of default, but they do have the risk of when interest rates move, which affects bond prices. When you have a Treasury bond that's, let's just say five years out in maturity and interest rates have gone up 2%, you're potentially going to lose almost 10% on the price of that bond. In SVB's case, they had a rapid outflow of deposits. It happened over the space of just a few days, and they had a big run on Thursday, a little over a week ago. But when deposits start leaving, then the bank has to sell some of its assets to pay back depositors their money. And if they're at a loss, they don't have an option. In a matter of just almost literally 24 hours, they had to raise capital to pay back depositors their money. They had to raise more equity, but they couldn't do it fast enough, and that's when they became insolvent. What that's done is spilled over to other parts of the market. Well, it's spilled over into the entire part of the market, and in the end, it's just a big mess.
But I want to make sure that you understand I am not trying to indicate that we're in the same situation as 2008. Currently, it's a liquidity crisis. It's simply depositors are moving money around and banks are having to sell assets to meet depositor demands. In 2008, it was a huge function of credit quality and their asset base was really starting to decline because of that. These are really two different situations at the moment, but debt is never a simple one-answer question. A lot of times the companies, and in this case Intel, they use debt to finance growth or to finance different projects that they may have. In the case of SVB, they were actually out buying debt to earn a return. The debt that they were buying had its own risk to it, even though in this case they were Treasury bonds. So depending on which side of debt you're on, whether you own it or whether you sell it, there's different risk there, and that's why you really have to understand a situation you're in.
So here's where I want to get into a couple of examples of why debt can be both good and it can be bad. First, let's look at the good side of debt. Companies that have a wide moat business and predictable cash flow, like a Procter and Gamble, PepsiCo, Johnson and Johnson, the usual, big mature, consistent dividend growth payers that are sometimes considered to be slow growth, but still they have a consistent cash flow. Well, those stocks have actually held up better in this case for them. If you have debt that costs you less than what your return on the assets you're getting from those assets, then if the debt is long-term and you don't have rollover risk, it can become a huge positive. Sounds like just the opposite of what I was just explaining about the bank, but the big difference is when you have a company that's issued debt at 3% and it has a 20, 30 year maturity, and in some cases even longer than that, that actually can even become what I would consider an asset because you've got the funding costs locked in and we may or may never see rates that low again. And when you have short-term interest rates where you have Treasuries, they hit 5% a week ago, well, that's a huge advantage to them and it helps protect their operating margins. That's where you actually have a positive for sustainable dividend growth. And if a company can't earn 3% on its assets, then you probably have a much bigger problem somewhere else. For most companies, debt is a normal part of doing business and they use it to grow their business. But you have to be careful when you start looking at over-leveraged situations. And in some instances, debt is used to pay a dividend, but that's not a sustainable strategy and you can't do that for very long. So that's something that really needs to be paid attention to. But I also don't think just because you have one or two quarters, or depending on the situation, just because debt is used to pay a dividend, that in itself is not a quick answer: “Oh, this is a bad investment.” In 2008, 2009, companies pay dividends out of debt, but they rebounded.
So now I'd like to take a little different perspective. This actually is a REIT that specializes in farmland. It's called Farmland Partners. Just to be clear, we do not own any Farmland Partners or FPI, but we have casually observed it just to see how the sector has performed. And as a reference, as an asset class farmland has performed very well in the last several decades. In fact, it's one of the top-performing asset classes for real estate. You know, it doesn't have the best income, but the total return for farmland actually has been fairly good. So from that standpoint, I think it's worth just casually observing how these REITs are performing. And they do pay dividends, which is another reason why we observe what's happening here. Now, first of all, I'm not in the least implying that Farmland Partners is going to run into financial stress. However, what I am going to do is basically illustrate where I think there's a real possibility you're going to get a dividend cut in this situation. And currently, the dividend on it is about 2.5%. They have $1.1 billion of farmland and they generate about $65 million of rental income off that farmland. So basically they lease it out. A farmer will plant wheat or depending on what part of the country, they may do vegetables, corn, whatever. But they rent it out and the farmer takes the risk of planting and harvesting and whatever price they get. So basically that works out to a yield of about roughly 5%. It's a predictable business because those rents don't change very much and it tends to be somewhat sticky. They are long-term tied to inflation. But here's the problem that farmland partners is going to run into. 5% on a rental income basis is great when you only have to pay 3.5% for your debt. So you earn the spread. Your debt costs 3.5%, and you're earning 5% (the income from the property), so you keep 1.5%. Well, that leverage actually helps to boost their income somewhat. And in the case of farmland partners, they have a little over $400 million of debt and it all is pretty much short-term basis.
Well, what happens when their debt gets repriced in the next year or so? Before the end of 2024, about 90% of their debt is going to be repriced or rolled over into higher, much higher interest rates in the next 18 months. So, the income statement is going to change fairly dramatically. It almost has to have some impact on their dividend. If you have interest rates that go up by 2%, just say it goes from 3.5% to 5.5%— probably potentially going to go up a little bit more than that, but we'll just use that as an illustration. Well, they have net income of about $12 million and 2% on $400 million of debt is $8 million. So basically what that's going to do is wipe out most of their net income. All that means is that you've got an extremely high probability that sometime in the next 12 to 24 months, that dividend is going to get cut because, you know, the operating model just isn't going to support it. Debt in this case is going to become a big negative.
This is going to impact other REITs, multi-family, which is basically apartments, hospitality, even commercial office space. There's a lot of different asset classes out there that this is going to impact. It also even applies to regular companies. If you look at their debt schedule and they've got a lot of debt rolling over near term, you've had a very low-interest rate environment, and now rates are much higher, it can have anywhere from a little to a dramatic impact on the dividends that some of these companies pay. So this is where you really have to pay attention to what you own.
Just the last episode we talked about OakTree specialty lending, and there the situation's a little different actually. The higher interest rates help you as an investor because it means that the companies are going to pay more because their loans are variable. Rates are going up and that means your dividend's going to go up. But there's a point where it starts to impact these companies and they potentially will struggle paying their debt payment. And that reverses into a negative, and it's exactly what's happened since last month when we talked about it. It was at $20.5. It's paid a 55-cent dividend in the last few weeks, so let's just call it $20 from when we talked about it last month. Of course, I had no idea that this was going to happen, the bank crisis that we're in right now, but currently, Oaktree has declined to about $17.75 a share. That's a loss of a little over $2 and you've lost the entire dividend here just in the matter of a few weeks. The point of this is just— you really have to look at each individual situation and determine what's the model look like and how are they going to be able to sustainably grow their cash flow? You know, what impacts are they going to have. And I think this is a great point. Focusing on the debt, it could be a positive, it could be a negative, it could have very little impact. But having the answer to that is really important, and right now the marketplace is going through dramatically repricing a lot of equity out there because the perception has changed. People are all of a sudden starting to pay attention. Well, the goal of sustainable dividend growth investing is to try to figure out what that risk is ahead of time. That's how you stay away from dividend cuts.
So to sum up here, the goal is obviously to not have any dividend cuts, but that's not realistic. Dividend growth investing helps you screen out of a lot of the situations that are not sustainable, but you are going to have a few. Probably the best takeaway is that dividend cuts really shouldn't change the prospect of having a higher dividend income or a higher portfolio income for the year. It's just that you have to make changes and it evolves over time. And another big piece of this that's going to start playing out more now here in the near future is debt and how that impacts dividend growth. And there are some sectors where debt can actually be a positive, where it's a negative. And unfortunately, investing is not simple. There's no silver bullet. There's no simple formula that gets you through this. You really have to pay attention to what you're doing.
Just to remind you, we are giving away a Dividend Mailbox mug if you submit a question that we use for our broader audience. I thought this month's question was relevant because of what's going on in the current marketplace. So the question is: “Bank stocks have had some pretty significant declines lately. What do you think about investing in bank dividends currently? Should I be worried or is this an opportunity?” Well, I'm going to give you the simple answer, and of course, as always, almost everything is more complicated than that.
The problem with banks is, for the most part, they don't totally control their own destiny. One problem you can have is the Fed and the treasury, they can change the rules. They can change capital requirements. They can actually force dividend cuts depending on how stressed the economy becomes. They can actually determine when a bank— some of the major banks have gone through this— when they can actually raise their dividend or not. So consequently, the dividends are just not quite as predictable as what we would like. And I'm going to give you just one simple example. In 2008 and 2009, one of the things that happened was the treasury made it mandatory that all of the major banks had to cut their dividends, even though JP Morgan financially felt like they could confidently continue to pay it, and that it wasn't really a major financial risk for them. 2008, when you had a real all-out panic in the financial situation, they demanded that JP Morgan also cut their dividend because they didn't want the perception of one bank being perceived as stronger than another. And you would have a big run and JP Morgan would pick up all the assets. It would just create another problem in and of itself.
And then smaller banks, they're just a little bit more volatile and they're harder to predict. So as a rule we've tended to stay away from them. Now we do own a few banks, and I will say we are looking at a few of them, and we try to look at conservative culture and what their portfolio looks like. But should you be worried now?
Well, the answer is unfortunately, it depends. The answer is yes if you own a bank that has a somewhat concentrated portfolio or if the balance sheet is not quite as strong. Here, you have to actually— you really have to spend a little bit of time. The larger banks do stress tests. That's one of the reasons why I'm a little hesitant to do much investing in banks, because it's also becomes relatively difficult to figure out what their asset base is, and how they're investing it. A piece of it is you can just look at their culture and start to get some of those answers. But yeah, in times of stress, one of the problems is investors tend to shoot first and then they ask questions later. They can really turn from a perceived, “they were okay” to “they've got a serious liquidity problem” in a matter of hours, and that's pretty much what happened to SVB. So with banks, there are opportunities there, but you definitely need to be aware that you really just can't depend on a name or a reputation. You really have to look at what's going on. So those are a few of my thoughts on bank stocks, and thanks for the question. Thanks for listening, and I look forward to next month. It appears that we're going to have some things to talk about.
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