Midway through earnings season, what are you hearing from companies as it relates to revenue and profit guidance for the remainder of the year?
It varies by industry, but so far, companies in the Consumer Discretionary and Consumer Staples sectors have expressed the most concern. We’re seeing negative same-store sales in a few key restaurant groups and other discretionary areas. Those companies are generally conservative in their guidance, and some are even pulling guidance until there is more clarity on the economic outlook. In other sectors, results have been better. Financials have generally been solid across the board, and some Industrial companies are raising guidance.
How do you assess the impact of tariffs on the companies you’re invested in?
It’s been difficult to assess the full impact because we don’t know the final tariff numbers or what government regulations will be. But this is why we think crafting an all-weather portfolio of stocks that can hold up regardless of the market environment is really important. Companies that we like to own have sustainable competitive advantages, solid balance sheets, and strong management teams. We think these companies will hold up the best in a changing economic landscape.
What are valuations telling you, particularly regarding dividend-paying stocks?
The broad market began the year at historically expensive levels, around 20-21 times earnings for the S&P 500 Index, which had only been reached a few times in history. Dividend stocks, by contrast, are much less expensive on a relative basis. Those stocks didn’t fully participate in the strong rally in 2023 and 2024, and we think that high-quality, above-average dividend stocks are an attractive part of the market today.
Some companies are paying a dividend yield upwards of 7% or 8%. What potential risks should investors be aware of when investing based on high dividend yield alone?
If a company pays out most of its earnings in the form of dividends, it may be unable to sustain those payouts if it (or its industry) encounters economic turmoil. We like to own stocks with payout ratios in the 30-50% range, which allows companies to continue paying dividends into the future and also grow their dividends over time. We think dividend growth is a key attribute for high-quality companies. On average, companies in the Madison Dividend Income strategy raised their dividends 8% last year, far outpacing inflation. So, instead of looking for the companies with the highest dividend yields, we want to own the companies with above-average dividend yields and the ability to increase their dividend yield year after year.
What areas of the market are you finding opportunities right now?
One area I would highlight is the Industrial sector, which we believe the market may have overcorrected. We own Honeywell, a high-quality industrial company that trades near 18x earnings, which is lower than some of its industrial peers. The company recently raised its revenue guidance despite the threat of tariffs, which we believe is manageable for the company as it has the ability to raise prices.