As investors, we can get so caught up in looking for the next stock that’s going to skyrocket.
And it is important making sure that we buy at the right time to maximize profits.
It’s equally important to make sure that we’re not holding onto any stocks that could be dragging our portfolio down.
That’s even more important in a time of uncertainty. There’s a time to cut losses and free up cash for more lucrative opportunities.
Right now, there no sector to be avoided more actively than banks.
Wells Fargo & Co (NYSE:WFC) just announced it would cut its dividend for the third quarter citing "there remains great uncertainty" and "our economic assumptions have changed significantly since last quarter".
The truth of the matter is that the company has to cut its dividend to comply with the Fed’s latest stress test.
These additional tests began in 2009 as a tool to help avoid another financial crisis by examining the biggest banks’ ability to weather economic downturns without government bailouts.
This time when the results were released, the Fed capped dividends of the largest 33 banks at current levels. That means JPMorgan, Bank of America, Citi, Goldman Sachs and Morgan Stanley all have to maintain current dividend levels and cannot yet resume share buybacks.
Additional "sensitivity analysis" was added to the Fed’s results in an attempt to predict the durability of banks post Coronavirus. And now the Fed will be restricting payouts using a formula based on earnings.
This is all bad news for Wells Fargo.
Wells Fargo has spent the last four years trying to regain footing after the 2016 revelation that employees opened potentially millions of fake account to meet sale targets.
Just look at the financial results for the first quarter of 2020. Net revenue was 18% lower than the first quarter of 2019. That’s only seeing around 30 days of Coronavirus impact. Profits were already sliding. And unlike its competitors, Wells Fargo doesn’t have a sizable trading operation to benefit from the volatile market.
Shares have lost 50% of value since the beginning of the year.
Wells Fargo will announce its second-quarter results on July 14th. That’s when we’ll know exactly how far the dividend will slide. Right now, it’s paying 51 cents and Bloomberg analysts say it could slide as low as 20 cents.
No matter how far the slide is, it’s bad news. If you’re still holding onto Wells Fargo shares, it’s going to be a bumpy ride that could extend years out into the future.
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Dump shares of Wells Fargo and free up that capital for better opportunities.
When Big Money Only Accounts for a Small Fraction of Revenue
Another company floating around in the news is Facebook (NASDAQ: FB)
Starbucks, Diageo, Unilever, Coca-Cola Co are just a few of the names that have joined the stop hate for profit boycott of Facebook. These companies are cutting their ad spending to push Facebook and peers to limit hate speech and other posts that divide and misinform.
Starbucks spent almost $95 million on Facebook last year.
That might not seem like a lot when you realize that the company generated $17.7 billion in revenue last quarter. If 50% of its top advertisers join the boycott that could mean a loss of $500 million.
Those numbers seem large, but really out of the $70 billion in advertising sales over the course of a year, only a quarter of it comes from large companies. The vast majority of its revenue is derived from small businesses.
When Facebook’s Nick Clegg, Vice President for Public Affairs was questioned about the impact of advertisers boycotting, he wasn’t specific.
Instead, he argued that the social media giant does not benefit from the proliferation of hate speech on its platform.
The company claims that it removes around 3 million items of hate speech content around the world each month. With 90% of that being taken down before being reported.
Facebook can go back and forth with users, the media and the advertisers, but in the end, it will come down to the dollars.
In fact, with big companies stepping out of the way, smaller businesses will have a better chance of their ads being seen. Add that to the fact that people are consuming more screen time as society is only partially open. It means that if these smaller companies can afford it, extra advertising dollars can create more exposure.
We won’t know for sure how the boycott will impact Facebook’s bottom line until the third quarter numbers are released.
This movement might not be enough to put a dent in Facebook’s income, but it’s sure going to jerk share prices around for a while.
That means the news cycle is creating the perfect opportunity to add some shares of Facebook to your portfolio on the dip.
To your prosperity,
Joshua M. Belanger
Executive Publisher & Founder