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The 3 Most Important Things Investors Need To Know About This Earnings Season

Posted On October 18, 2018 9:21 am
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What Investors Should Focus on

History is very clear on this, long-term buy and holding investing is by far the best way for most investors to get rich. But that doesn’t mean you should ignore steadily deteriorating fundamentals. Earnings are a great way to make sure the fundamentals of a company you own remain intact and the wheels haven’t fallen off the investment thesis. But it’s important to remember that one single quarter, or even an entire bad year, does not an investment thesis break. All companies, even dividend aristocrats and kings (25+ and 50+ straight years of rising dividends, respectively), go through challenging times. Even the bluest of blue chips need to periodically restructure their business models to adapt to changing industry conditions. That’s why I recommend most investors check in on quality dividend companies every year or two, preferably after annual reports are in. This allows you to make sure the fundamentals (and dividends) are safe, and the reason you bought the stock remains valid. What about quarterly results? Well for medium to high risk stocks (meaning greater risk of a dividend cut), you might want to check to make sure the dividend is safe. That means looking at the payout ratio (dividend/cash flow) is under 100% and the balance sheet is sound (debt isn’t posing risk to payout).

But by far the most useful thing about earnings season is that Wall Street’s obsession with company’s hitting quarterly numbers means that you can get immense buying opportunities for even the most time tested and high-quality stocks. For example, last quarter dividend king 3M (MMM)  “missed” on earnings (they were actually very good) and plunged 8%. This quarter BlackRock (BLK), the world’s largest asset manager and one of the strongest names in passive index fund investing, actually beat on EPS but missed slightly on revenue. The stock fell 5% that day, allowing me to open a position in this premium dividend growth stock (20% undervalued and 19% long-term return potential).

This means that you should have watchlists standing buy, packed full of quality dividend growth stocks trading near fair value or better. Because during earnings season market short-term overreactions to “disappointing” results means you might get the chance to buy top quality companies on sale.

Bottom Line: Earnings Season Is An Important Time, BUT Always Focus On The Long-Term Fundamentals

Don’t get me wrong, earnings are important. After all, long-term stock prices ultimately trade purely based on fundamentals including: earnings, cash flow and dividends. But while quarterly earnings can provide useful insight into the state of a company, and corporate profits in general, it’s important to remember that any given quarter’s results are not all that meaningful. Just as with tracking the state of the economy (to estimate when the next recession is likely to start), the absolute figure isn’t nearly as important as the long-term growth rate and trend. And don’t forget that Wall Street’s obsession with short-term “beats and misses” on revenues and earnings puts the cart before the horse.

It’s not the job of a company to meet or beat analyst estimates. Those are merely educated guesstimates based on analyst models. Earnings seasons should be a time when analysts fine tune their models to improve them and make them more predictive. It should not be a time when quality companies, with proven long-term track records of growing dividends and solid total returns fall by 5% to 10% due to missing some arbitrary consensus estimate.

This earnings season is more important than most because it will be providing us an idea of just how big a risk a rising dollar, margin pressure, and tariffs might be in 2019. That has important implications for the entire stock market, specifically how long this bull market is likely to last. But for individual investors remember that time in the market, not market timing, is the most proven method of exponentially growing your wealth over the years. So have your watchlists ready (here’s five of mine), to take advantage of any irrational price drops during earnings season.

 

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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