Altria's third-quarter earnings report highlighted the tobacco category's resiliency during the pandemic. With consumers spending less on gas and entertainment, plus having more opportunities to smoke while working from home, U.S. cigarette volumes increased last quarter for the first time in years. Similarly, Altria's volume declines continued moderating from a 7% loss in early 2019 to a 1% dip last quarter.  Management now expects industry volumes this year to be flat to down 1.5%. For comparison, Altria was projecting a 4% to 6% decline at the start of the year.

Exxon maintained its dividend for the fourth quarter despite reporting another set of weak earnings results this morning. While Exxon's operating cash flow improved from $0 in the second quarter to $4.4 billion last quarter, the firm remained far from covering its capital expenditures ($3.8 billion) and dividend ($3.7 billion). Despite this ongoing cash flow deficit, management's 2021 capital allocation priorities have not changed and include "paying a reliable dividend." In order to support its capital allocation plans and the dividend, Exxon said it expects and needs its businesses next year to get back to the bottom of their 10-year ranges for pricing and margins. As you can see, the pandemic has caused all of Exxon's businesses to uncharacteristically experience pricing and [...]

Omnicom reported earnings on October 27. Organic revenue fell 12% as clients in struggling industries such as auto (10% of sales), retail (7%), travel and entertainment (5%), and energy (1%) reduced their marketing spending. Source: Omnicom Earnings Presentation Omnicom's sales decline was better than the company's 23% slump in the second quarter. But investors were disappointed by management's remarks that a similar pace of sequential improvement is not expected to continue in the fourth quarter. Omnicom usually benefits from a jump in more discretionary project-based business near the end of the year, but visibility is very low due to COVID's effect on many marketing budgets. 

Valero reported earnings on October 22, recording its second straight quarterly loss as the refining industry continues to be upended by the pandemic. Valero's refineries process crude oil into gasoline, diesel, jet fuel, and other products. With fewer people flying and driving during the virus outbreak, fuel demand remains around 15% below pre-crisis levels. Meanwhile, Valero's feedstock costs have lost some of their advantage. Many of Valero's assets are located around the U.S. Gulf Coast where domestic energy production grew faster than takeaway capacity for most of the past decade. Given its close proximity to this abundant source of landlocked supply, Valero could buy oil at a discount compared to benchmark crude oils such as WTI and Brent.

Energy Transfer is the latest midstream MLP to slash its distribution, announcing yesterday evening that it will chop its payout in half. Management will get to explain their rationale for the distribution cut when Energy Transfer reports earnings on November 4, but this action was necessary to address the firm's fragile balance sheet. As we discussed in July, Energy Transfer faced mounting pressure to reduce debt to protect its BBB- credit rating, which sits one notch above junk status. With oil and gas production declining, weak commodity prices hurting shale producers, and litigation threatening the Dakota Access Pipeline, Energy Transfer's credit metrics had potential to weaken.

Intel slumped more than 10% on October 23 after reporting third-quarter earnings results. Sales fell 4% year-over-year as consumers opted for cheaper laptops and companies and governments pulled back on datacenter spending. These unexpected COVID-driven headwinds tilted Intel's mix towards lower-priced products, causing gross margins to surprise on the downside as well. Many of these dynamics are expected to persist in the short term, and management also expects demand from cloud computing providers to moderate as they enter a "digestion period" following several quarters of strong growth. As a result, Intel guided for fourth-quarter revenue to be down about 14% year-over-year with PC-centric businesses declining in the low single digits and data-centric businesses off 25%.

Wells Fargo remains challenged by elevated restructuring costs, ongoing legal and remediation charges tied to its fake-accounts scandal, and low interest rates, which reduce the profits earned by its lending businesses (about 50% of revenue). Unlike its peers, Wells Fargo can't expand its balance sheet to help offset margin margin compression in its loan book. Following its 2016 fake-accounts scandal, the Fed placed a cap on Wells Fargo's assets, preventing it from growing its balance sheet above a certain level. The bank has yet to satisfy regulators that it has the necessary internal controls and risk mitigation systems in place to support removal of the cap. Wells Fargo's revenue restrictions and bloated expenses combined with a pandemic-related spike in loan [...]

AT&T shares rallied 5% in early trading today following the company's third-quarter earnings results. The media and telecom giant's revenue declined 5%, better than analysts expected and an improvement compared to the second quarter's 9% slump. AT&T's wireless business (around 40% of sales) recorded its highest level of postpaid phone net adds and lowest churn rate in years, helping its sales edge higher despite lower roaming revenue due to the pandemic. High-speed internet (5% of sales) and business network services (9%) also grew slightly as these divisions remained insulated from the downturn. This continued stability, coupled with improving cash collection rates and working capital management, led AT&T to increase its 2020 free cash flow guidance from around $24 billion previously to [...]

On September 30, the Federal Reserve extended through the fourth quarter its capital preservation measures on America's biggest banks. Banks with more than $100 billion in assets are not allowed to repurchase shares, and their dividends cannot be increased or exceed net income generated over the past year. Capping the amount of capital that can be returned to shareholders provides more cushion for banks against loan losses and supports lending during these uncertain times. Given the Fed's control over big banks' dividend policies and the uncertain shape of this recession, we have assigned Borderline Safe Dividend Safety Scores to most large banks (including JPMorgan). If the economy tracks towards a worst-case scenario, or political pressure mounts, the Fed could follow the European Central Bank's [...]

Arvind Krishna took over as IBM's new CEO in April 2020 and has wasted no time putting his mark on the company. On October 8, IBM announced plans to spin off its managed infrastructure services business, which accounts for about 25% of IBM's revenue.  The spin-off transaction is expected to be tax free and close by the end of 2021.  Once the separation transaction is completed, IBM shareholders will receive shares in the new public company (to be named at a subsequent date).  From a dividend safety perspective, IBM expects the combined dividends from IBM and the new spinout company to at least equal the firm's pre-spin dividend per share.