The Market Wrap for October 18: Earnings to the Rescue
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Iuri Struta Jul 06, 2018
Dividend.com analyzes the search patterns of our visitors each week. By sharing these trends with our readers, we hope to provide insights into what the financial world is concerned about and how to position your portfolio.
J.P. Morgan Chase, one of the largest U.S. banks, has successfully passed the first phase of the stress test as part of a broad Federal Reserve examination of the financial sector. J.P.Morgan is first in the list, followed by Starbucks, the coffee shop chain. Technology equipment firm Cisco Systems and pharmaceutical major GlaxoSmithKline close the list.
J.P. Morgan Chase (JPM ), the largest bank in the U.S. by assets, has aced the stress test conducted by the Federal Reserve as part of an all-encompassing assessment of the financial sector. As such, J.P. Morgan saw its viewership rise as much as 115% in the past week.
The stress tests were implemented after the financial crisis in 2008 with the aim of checking the health of the biggest financial actors in the case of a drastic economic downturn. The Fed assesses how a particular bank would fare if the economy dives into a recession, the unemployment rate hits 10% and the stock market loses more than half of its value. Initially, all banks with more than $50 billion in assets were supposed to pass the stress tests, but recent changes in legislation increased that threshold to $100 billion and also set it for a gradual rise to $250 billion.
Investors in J.P. Morgan should breathe a sigh of relief as the banking giant will not face a liquidity crunch if a crisis breaks. J.P. Morgan’s common equity tier 1 capital ratio is 12.5%, nearly triple the required minimum of 4.5%. This means the bank has $117 billion in readily available capital to absorb eventual losses, which – in the case of a deep recession – will not be higher than $18.3 billion, according to the Federal Reserve.
Shares in J.P.Morgan, which yields a 2.15% dividend on a payout ratio of 25%, have edged up slightly in the past five days, but are still down 3% since the beginning of the year despite rising interest rates.
Coffee chain Starbucks (SBUX ) has continued to trend this week, as the stock’s suffering does not appear about to end soon. Starbucks stock has declined more than 2% in the past five days, extending 12-month losses to more than 16%.
Fears that Starbucks is becoming a value trap amid fierce competition from smaller boutique shops have grown after the firm announced plans to close down 150 stores in the U.S. Compounding the jitters, the company’s earnings guidance has disappointed, as the firm struggled to increase sales traffic in afternoons.
To be clear, Starbucks remains a darling of the stock market, paying a dividend of nearly 3%, but the firm badly needs to redefine its strategy to increase the pace of growth and profitability. Expanding in emerging markets and in previously uncharted territories such as Italy could help boost growth. Another solution mulled over by the firm is diversifying its offerings by including food.
Competition, however, in many segments is becoming stronger and Starbucks will have to convince its customers its shops are worth visiting. A recent report by the NAACP Legal Defense and Education Fund rebuked the company for doing too little to weed out racial bias among its 175,000 employees. Failing to fix the issue in the eyes of the advisor may lead customers to boycott Starbucks altogether.
Cisco Systems (CSCO ) has seen its viewership rise 26% this week, as the company went ex-dividend on July 5.
With a dividend yield of more than 3% and a payout ratio of 56%, Cisco is attractive for income investors, particularly given the possibility for growth as the company is storming the cloud market. Shares in Cisco have risen around 11% since the beginning of the year, comfortably outperforming the S&P 500 index, which increased less than 1% over the same period.
However, the company’s stock price has disappointed in the past month, losing more than 2% of its value despite strong revenue and earnings growth reported for the third fiscal quarter of 2018.
The strong results were possible thanks to the company’s launch of Cisco Catalyst 9000 Series, a cloud-based solution, which helped the firm double its customers in enterprise networking in a year.
The company slightly raised its dividend in the second fiscal quarter of 2018 from $0.29 per share to $0.33.
U.K.-based GlaxoSmithKline (GSK ) has seen its traffic rise 21% in the past week, as the company received a boost from analysts. Already up more than 14% this year, GlaxoSmithKline’s stock is expected to continue its upward movement, according to Barclays analysts.
The optimism is based on a potential update on the new pipeline of products by the newly-installed Head of Research, Hal Baron. It is expected that the company will continue its strong growth after it unveils plans for its oncology and immune-inflammation portfolios.
There are issues, however. GlaxoSmithKline Director Judy Lewent is one of the parties being sued by the state of Massachusetts over her role in the opioid crisis. Until 2014, Lewent was on the board of Purdue Pharma, the company accused of creating the opioid crisis in the U.S.
GlaxoSmithKline pays a handsome dividend of more than 5% and its payout ratio is 75%.
J.P. Morgan Chase has easily passed the Federal Reserve stress tests and can now approve capital returns to shareholders. Starbucks’ suffering has lingered on as the company faces growth issues amid accusations that it has failed to do enough to eliminate racial bias in its employment practices. Cisco Systems is poised for strong growth, despite the company joining the cloud networking party belatedly. GlaxoSmithKline is on track to see its shares rise, but a director is facing a lawsuit over her role in the opioid crisis while serving as a director at Purdue Pharma.
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The Market Wrap for October 18: Earnings to the Rescue
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