13% Canadian Unemployment, Insolvencies, Dividend Cuts

This week's trading was broadly positive, with most major indexes consolidating the rapid gains they made after the March 23rd lows. The Dow Jones Industrial Average is over 24,000, and the S&P 500 has actually gained over the last year.

Source: Bloomberg, May 8th

This positive performance in the equity markets comes against a backdrop of grim economic and financial data. Canada released its April employment figures, which marked unemployment at 13%, and the US's jobs report listed 14.5% unemployment with 20 million jobless in April alone. Poor financial performance in the retail space saw names like J Crew and Nieman Marcus declare insolvency, and trouble in the energy market saw Canadian energy producer Suncor follow Royal Dutch Shell's lead and cut dividends. 

We're beginning to see the economic damage of the COVID-19 pandemic take shape, and we expect to see more unemployment, insolvencies, and dividend cuts in the future.

13% Canadian Unemployment, 14.5% US

Today we saw the release of the Canadian and US job reports, both of which contain some of the most remarkable economic data we've ever seen.

The Canadian report relays the loss of more than 3 million Canadian jobs in March and April, in addition to 2.5 million people who saw their hours cut by more than half. The total unemployment number does not include some people who were not counted as unemployed for specific, COVID-19 related reasons, and if they were included, the total unemployment rate would be 17.8%, the highest figure since data became available in 1976.

Bloomberg has a great visual breakdown of the US report, which lists the hardest hit sectors of the economy. Unsurprisingly, tourism and recreation led the way, with over 60% of jobs in Scenic and Sightseeing Transportation being cut in April. Perhaps the best illustration of the state we're in: one of the fastest growing job categories in the United States is "central bank employee."

Source: Bloomberg

The gain in "other general merchandise stores" is what you'd expect: Walmart and other department stores are seeing historic demand right now.

Insolvencies in Retail Begin With J Crew, Nieman Marcus

We're starting to see insolvencies and bankruptcies in big, established names. Some of these might surprise you, but the first wave of failures usually hits companies that were the furthest out on the rocks.

Take for example J Crew, which announced its insolvency earlier this week. The retail giant has obviously been hard hit by COVID-19, but brought its own troubles into this crisis. The company had been struggling with significant debt for years now, and even transferred its intellectual property to an entity in the Cayman Islands that licensed the J Crew brand back to J Crew.

Some of the insolvencies in the months ahead will surprise you. Nobody expected Lehman Brothers to go to zero, but it did. Some, on the other hand, won't surprise you at all, as struggling companies with less-than-ideal financials fold under the pressure of COVID-19. We hate to keep harping on it, and it doesn't make for exciting investing strategies, but times like these highlight the value of well-managed companies with strong balance sheets and durable cash flow.

Suncor Cuts Dividend, Announces $3.5B in Losses

Canadian oil producers have been hit hard by the COVID-19 pandemic and accompanying price war, but today we got our first look into exactly how hard. Suncor, one of the two largest energy producers in Canada, reported a $3.5B loss in the first quarter of this year. That's compared to $1.5B in earnings in the same quarter last year, a total difference of over $5B. Suncor also announced that it would be cutting its quarterly dividend from 46 cents a share to 21 cents. That brings the dividend yield on Suncor stock to 3.5%, significantly less attractive than the 8.2% Suncor was paying before.

We expect similar losses and the possibility of dividend cuts for other energy producers, including Canadian Natural Resources. Analysts are projecting a smaller loss for CNQ, and while Suncor and CNQ are very different companies with different assets and operations, the core of their business is very similar.

In the basket of large, dividend-paying companies that we recommend, Enbridge Inc. is the only energy company. Enbridge, which announced first quarter losses this week, has maintained its dividend for this quarter. Enbridge does not produce crude oil or sell its products, so it is far less geared to the price of oil or the demand for fossil fuels, but still obviously vulnerable to historic changes in the sector.

The other names in our basket are banks, which have been asked by their regulator not to raise their dividends , and BCE Inc., which announced a small profit in the first quarter of this year.

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