Motley Fool Hidden Gems Investing - 2 Dividend Stocks To Watch

Episode Date: January 4, 2023

Salesforce is laying off 10% of its workforce. Is it a sign of things to come in the tech industry? (0:21) Tim Beyers discusses: - How Salesforce's recent acquisitions are the reason layoffs shouldn't be surprising - Why HubSpot's next move is one of the most interesting things in tech - One tech business bucking the trend by increasing its hiring (8:22) Matt Argersinger previews the year for dividend stock investors, discusses why the payout radio is a key metric to watch, and shares two dividend stocks he believes are looking more attractive these days. Stocks discussed: CRM, HUBS, ASAN, MNDY, SCHD, VIG, MTN, SWK, EXR, LII The Motley Fool's top stock-picking service, Stock Advisor, is open to new members for just $99 a year! To join now visit www.fool.com/intro to access this special introductory offer. Host: Chris Hill Guests: Tim Beyers, Ron Gross Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Big tech is cutting jobs, and we've got some dividend payers you might want to put on your watch list. Motley Fool Money starts now. I'm Chris Hill. Joining me, our man in Colorado, Motley Fool Senior Analyst, Tim Byers. Thanks for being here. Happy New Year. Fully caffeinated, ready to go. Happy New Year to you as well, my friend. Let's start with this. In what he called a very difficult decision, Salesforce CEO Mark Benioff told employees the company plans to reduce head count by 10%. And given the workforce at Salesforce, that nets out to between 7,000 and

8,000 jobs. We'll get to the ripple effects of this in a second. But I guess my first question is, Tim, were you surprised by this news? Because when I think about big tech companies considering layoffs, I did not have Salesforce at the top of my list. Yeah, not on the bingo card. I'm not super surprised, but I am surprised. I didn't think 2023 was going to start. I didn't think we were going to start off 2023 with the purge. that wasn't on my bingo card either. So the reason I'm not surprised, Chris, is because Salesforce has made quite a large number of acquisitions. And in the most recent earnings report, they signaled that sales cycles for enterprise software were running longer. And

that is a message we have heard from other companies that as we are exiting 2022, coming into 2023, enterprise sales, meaning just plain language here, a big piece of software. It takes a long time to sell. A lot of salespeople are involved. It takes a lot of implementation. So it's just a multi-month process. There are fewer companies that are wanting to write really big checks to companies like Salesforce. So in that sense, it's not a huge surprise. in the announcement, essentially, Mark Benioff, who's the co-founder and CEO, said that they overhired, they overbuilt in 2020. And that also is not something that is unique. We've heard that message before. So, surprising, but not surprising.

You went exactly where my brain went this morning. We have heard this before, but we've heard it from the CEOs at places like Alphabet and Amazon, which makes me wonder if in the coming weeks and months, we're going to hear similar announcements from them. The reaction from Wall Street is often the case with large profitable companies announcing layoffs. It's a positive one. Depending on the time of the morning, shares of Salesforce up anywhere from 3% to 6%. Again, you hinted at the length of the cycle, how long it takes to make these large enterprise sales. Unwinding a workforce similarly takes a decent amount of time as well. We can put Alphabet and Amazon aside because

they are the biggest of the big, or certainly on the shortlist of the biggest of the big. Are there other companies in the tech realm that you think are watching this closely, and maybe this is giving them even more license to cut back their workforce as well? I don't think they need it anymore, license, Chris. There is a tracker called layoffs.fyi that you can check out for yourself. And it includes everything from small companies and startups to the largest of the large tech companies, public tech companies. So we've seen a lot of them. If you look at this, you are going to see quite a large number of companies that have laid off staff. So as of the current number, I'm quoting this now, Chris, 1,013 tech

companies tracked in layoffs.fyi, and that has accounted for 153,160 job losses, according to that site. So I don't think they needed any more license here, Chris. However, to answer your question, does this give some air cover maybe to some larger companies? I think unequivocally, it does. I think it sets an expectation amongst investors, particularly institutional investors, saying, okay, when are your layoffs coming? And there may be some activist investors who say, hey, you know what? You have a bloated company. You've got to lay some people off. And so you may have maybe less executives feeling free to lay some people off and more executives feeling under pressure from large institutions with money at stake saying, hey, when are your layoffs coming?

We just saw Salesforce do this. You're bloated. When are you going to cut some people? And it seems like that may have been the case with Salesforce. If you look at Starboard Value and their stake in the company and their potential role in nudging Benioff in this direction, there are absolutely investors, institutional investors, and probably retail investors as well, who are sitting on the sidelines with some of these large tech companies. And one of the things they are looking for that is going to trigger their buy signal is an announcement of layoffs. As someone who has looked at this category for a long time, is that what you're looking for? Or are you looking for companies that are still actually doing some hiring out there?

Yeah, it's the second. I like looking for companies. I think one of the most interesting things to look at now that Salesforce is laying so many people off is, what does HubSpot do? Because HubSpot is in the small business CRM, so they're at the lower tier of the market, but they're trying to sort of scale up so they can serve, say, like a Salesforce-like customer. But they've traditionally been sort of the smaller player underneath the larger player. Salesforce, the big brother, HubSpot, the little brother.

But HubSpot's not laying anybody off, Chris. And so what's interesting to me, I'll be interested to see if HubSpot maybe increases some of its hiring. To me, I think it's an interesting signal when a company starts hiring when its peers are laying people off and putting up good numbers at the same time. So a good recent example of this would be Monday.com. So Asana, which is its peer, its direct peer, announced a layoff. And almost at the same time, Monday.com came out with its earnings results and said, hey, our operating margins are getting better and we're still hiring people. And they talked about it like they are still hiring people. They haven't been like crazily overbuilding, but they're still hiring people.

That to me is an interesting signal when the results are getting better and you're still hiring. So, I'm going to be really interested to see what HubSpot does in, say, the next three to six months. Do they ramp up their hiring a little bit? Do they announce some new initiatives? It would be fascinating to see. I like to see the companies doing well amidst the downdraft for everybody else. Definitely going to give us things to be watching over the next few months. Tim Byers, always great talking to you.

Thanks for being here. Thanks, Chris. Matt Argersinger. Today, we're continuing our series on previewing the year for different categories of stocks. On Tuesday's episode, it was growth stocks. Today, we're taking a closer look at dividend stocks. Here to do just that is Motley Fool senior analyst Matt Argersinger. Matt, thanks for being here. You bet, Chris. In my memory, my fading memory, 2022 wasn't quite as bad for dividend investors as it was for, say, growth investors. How should they be feeling this year?

Well, your memory is good because yes, dividend-paying companies held up very well in 2022. In fact, if you look at some of the largest dividend ETFs, like the Schwab U.S. Dividend ETF was down just 3.3% in 2022. How many of us would have loved to be down just 3% last year? I certainly would because I lost many times that amount. You can also look at the Vanguard high dividend yield ETF, which almost broke even in 2022. How about that? Dividends in 2022, they did what they've done historically, which is they tend to lose less, far less during bad times or bear markets than the average stock. That's one of the reasons you them in your portfolio, and I think they should be a meaningful part of your portfolio.

If you look back through history, and S&P Global has done some great research on this going back about 50 years, dividend-paying companies, but especially dividend-growing companies, have been the best performers by a wide margin. No matter what happens in 2023, I think you want to have exposure to dividend-paying companies. All that said, if you're expecting a big rebound in the markets this year, I would expect dividends to lag, because what will tend to outperform in a rally year are the things that were so beaten down last year. Your technology companies, your software companies, your high growth, high beta stocks, they're the ones that are probably going to lead the charge. But if you ask me,

I don't expect 2023 to be a barn burner of a year for the market. It's rare to have two back-to-back bad years in the stock market. It's actually only happened a few times over the last 100 years. I think stocks may still struggle this year. I think it's probable that we still have some degree of economic slowdown, earnings estimates probably come down. So, I wouldn't be surprised if at best, maybe we have another challenging year, hopefully not as bad as last year. You and I are old enough to remember, there was a good stretch of time where a company starting to pay a dividend was almost like, I don't want to say it was a stigma, but it was almost like Wall Street is going to put you in

a different category. That was the big debate around Apple as they built up their cash reserves. It's like, well, if they start paying a dividend, we're going to put them over in this other category. They broke the mold in that regard. I don't look at companies paying a dividend or starting to pay a dividend as having that same black cloud over them. That being said, are there, if not black clouds, red flags that investors should be on the lookout for? Yes. I think when it comes to most dividend-paying companies, you're tending to look at companies in the industrial sector, consumer discretionary sector, financial sector, basic materials and commodities companies. These tend to be cyclical businesses

that can be highly sensitive to any economic slowdown. As I mentioned earlier, if we're heading into a situation where earnings estimates are going to come down, these companies might be more susceptible than others. Dividends, of course, are paid out of earnings. If earnings come down, dividend growth is likely to slow, especially case for companies with poor balance sheets. It could mean dividends get cut or even suspended. I would pay attention to things like payout ratio, which is, of course, dividends per share as a percentage of earnings per share. If you're looking at a company and the payout ratio is above 60%, which means that the company, of course, is paying more than 60% of its earnings out as dividends, and it's an industrial business

or a retail company that's built up a lot of inventory on its balance sheet, susceptible to an earnings slowdown, that dividend could come under pressure. That's a bit of a red flag. An example of a business I own in my own portfolio that's really struggled lately is Stanley Black & Decker, a well-known tools and machinery brand. They had a huge earnings miss late last year. They actually slashed their earnings from over $10 a share to $4. They also announced a big restructuring. They had simply built up too much inventory, business slowed, they had to slash prices, they face big challenges now. The thing is, though, they haven't cut the dividend yet. That's because even with that

big earnings drop, their payout ratio was so low that it was enough to protect the dividend, at least for now. That's not going to be the case for a lot of companies, especially if we get into an economic slowdown. Some just won't be able to afford to keep paying the dividend with any earnings drop. Just as we've seen with a lot of companies over the last six to 12 months, cutting back on their marketing spends because that's a relatively easy lever to pull. I understand if someone looks at a dividend and says, well, just cut the dividend and that's an easy lever to pull. In theory it is, but companies really hate doing that. It's almost a last resort. They do, totally. Especially you've got the dividend achievers

and dividend kings, the ones that have been paying a dividend for so many consecutive years. It does, I would say, you mentioned earlier, there's a stigma as a company starts paying a dividend. There's definitely a stigma when a company stops paying a dividend. It almost gets put into the dustbin. There are times when it's smart to cut the dividend. I remember Vail Resorts, which has a great track record. They cut the dividend shortly after COVID started. Of course, makes sense. They didn't know if anyone was even going to show up at their ski resorts that winter. They resumed the dividend the next year, all was good. But there are times when that happens and the market really doesn't like it. Are there, if not specific stocks,

are there areas of the market that you think dividend investors should take a closer look at because maybe they're looking a little bit more attractive right now. Yeah, I've got a couple, Chris. I'm still seeing a lot of value in REITs. I know people who listen to me on the show, I know I talk a lot about the real estate sector. One REIT that I'm excited about lately is Extra Space Storage, the ticker is EXR. It's one of the leading owner-operators of self-storage facilities. If you think about it, self-storage can have some counter-cyclical aspects to it. If people move or downsize in a recession, that can lead to needing more temporary storage. There's also this big trend for baby boomers

who are retiring and downsizing and finding out that their children don't necessarily want to inherit all their stuff. But either way, you have a very well-run company with a great track record and a 4% dividend yield. Then outside of REITs, one that I've become interested in lately is one called Lenox International. The ticker is LII. Again, another boring company. It produces HVAC and refrigeration appliances. Super boring, but that's what I love. It's been a killer stock. They've slowly taken market share from larger companies in their industry. While the dividend right now is just about less than 2%, so the yield is not that exciting, they've actually grown that dividend by more than 18% a year for the last 10 years. I'd say one caveat with Lenox, because it's

industrial because it's cyclical. I might wait a few weeks until the company reports its Q4 earnings. I'm not trying to time the market here, but I think they'll likely disappoint, especially when it comes to their guidance, as we see with a lot of companies. Residential HVAC is a big share of the business. Housing market can slow down, construction is already slowing down. If you can buy the stock for closer to $200 a share, which I would like to do, I think it could be a home run. Matt Argersinger, great talking to you. Thanks for being here. Thanks, Chris. As always, people on the program may have interest in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.