Even though a lot of stock analysts are predicting that the market will soon resume a strong upward trend, reaching 3,500 or 4,000 for the Dow Jones industrial average within the next year or so, many investors are uncertain and nervous. They fear a delay in an economic recovery, thus causing a more volatile and scary stock market.
However, the long-term performance of the market suggests that investors should own stocks -- that it's in the shares of corporations where their enriched future lies. But what stocks?
A conservative position in the stock market these days is to own shares of companies whose earnings have continued to move up, often with decent dividend payouts. Such good earnings and dividends tend to limit stock market losses.
Investors often fail to base their buy and sell decisions on the facts. Nostalgia, hopes, and dreams play a large part in decision making. For example, too many of us remember the glory days of the International Business Machines Corp. and we look at it in its present troubled condition through rose-colored glasses. Surely, it will rebound, we think. Why, the high dividend alone (5.7 percent) will prop it up.
The facts are that earnings have fallen sharply this year, not only because of the recession but also due to stiff competition from smaller computer makers. Over the years, IBM has been a true growth stock -- small dividend yield and high price-earnings ratio. The P-E would be only 10 if one compared 1990 earnings with this week's share price, meaning the price of the stock has tumbled.
Just the other day IBM Chairman John Akers predicted improved profit margins and a secure dividend, but employees are being let go by the tens of thousands and sales will be lower this year for the first time in 45 years. The truth is that the dividend is not a certainty in the foreseeable future and earnings may suffer substantially. This is not currently the kind of strong-earnings stock that investors should own in difficult times.
Investors are captivated by corporate history and they react slowly to industry and company changes. Thus, there is some reluctance to admit that Giant Food of Landover or the Marriott Corp. of Bethesda may be in a longer-term rather than temporary slump, and that the nature of things is different.
TC In reality, the food and hotel businesses have become more competitive and price-conscious, and combined with what could be a long economic slowdown spell the possibility of lower earnings for these companies for some time to come. Competition is also cutting into Giant's drug department business. Even Marriott's modest dividend -- the stock yields less than 2 percent -- could be in jeopardy. Marriott has no earnings at present.
It is wiser in times like this to consider lower-yielding stocks but those whose dividends are well protected.
The idea is to review corporate earnings for the last five or 10 years, and especially to note how the latest quarters compare with previous ones. If one does this homework, he will probably be led to stocks such as Washington Real Estate Investment Trust of Bethesda, or Baltimore-based McCormick & Co., both experiencing a smooth ride during recessionary waters. However, in the event of a major stock market collapse McCormick would be the more vulnerable company because it sells for a premium price-earnings ratio and its dividend yield is much smaller than Washington Real Estate's payout.