Debt is Death: Stick With Stocks Like These When Earnings and Dividends Are Disappearing

Earnings seasons is upon us and the reports haven’t exactly been overflowing with joy. Indeed, it’s while we’ve seen several reports such as Google that weren’t nearly as bad as expected, the very fact that we describe them as “not nearly bad as expected” pretty much underscores how bad it is out there.

More to the point though, in just the last five business days, we’ve seen seven companies in the S&P 500 cut dividend some $12 billion in dividend payments. That’s $12 billion that’s not going into the pockets of individuals and institutions whose cash flows will now be $12 billion lighter in 2009 than they were in 2008. And that’s been just the last five days.

We know that business continues to deteriorate and that access to capital remains essentially nil in this environment. Indeed, I figure we can fully expect to see $100 billion or more in dividend payments cut from S&P 500 companies in 2009. Count in the dividend cuts we can expect to see from the thousands of publicly-traded companies not in the S&P 500, and we’re probably talking closer to a quarter trillion dollars in dividends that are going to disappear this year.

Meanwhile, we hear about how the government is going to allocate spending of some $800 billion to the most well-connected companies and states and localities. The bulls and the socialist Republican/Democrat regime in charge want us to believe that the government can, for the first time in history apparently, spend that money well with good transparency and accountability. The same guys told us the same story about the horrific TARP Wall Street welfare bailout and they’ve been so “transparent and accountable” that Fox Business has had to sue the Treasury and Federal Reserve under the Freedom of Information Act just to find out what banks are getting what funds and posting what collateral for those funds. We still are being stonewalled. The only thing that’s transparent around here is the obvious power and money grab going on in Washington.

And that segues us to the market again. I’ve been saying for a while and I continue to believe that we’re likely stuck in a range between 7,000 and 9,500 on the DJIA for the foreseeable future — at least the next two years or so. That means, I’ll continue to get bullish when the DJIA gets below 7500 or so on both a short-term trading basis and as an opportunity for people who want to invest in great stocks they can own forever.

What great stocks? I’m glad you asked. I’m not going to shock you with any obscure names or fancy paired trades here (though you can expect to see a lot of smaller cap investing ideas from this blog in coming months and years). Indeed, I think you want to make sure you only own stocks that have huge NET cash balances. Take a look at any company’s balance sheet on Yahoo Finance or here on Marketwatch.com and add up their “Cash and Cash Equivalents” with the “Short Term Investments” and “Long Term Investments” and then subtract the “Long Term Debt” from that total and you’ll know essentially how much that company has in its checking account.

I don’t want to touch a company that has ANY Long Term Debt of significance in any way, shape or form right now. That means I think Google and Apple and Microsoft — all of which have tens of billions in cash and no debt — are names I would want to slowly but surely scale into over the next couple years every time the market gets close to 7000.

Maybe stocks go straight up from here, including Goog, Aapl and MSFT. Yeah, maybe the market’s already discounted the much lower dividend yields than are currently modeled in by all the buysiders and sellsiders. Yeah, maybe stocks are cheap already.  Then again…

I tend to think this market’s going to overshoot to the downside, just as markets almost always do. And that means we’ll likely have the chance to buy great companies trading much closer to their cash levels or even below their cash levels since cash flows and dividends are going to be disappearing this year. In 2002, I loaded up on a bunch of tech names (and highlighted them for readers) that were actually trading for less than the amount of money they had in their checking accounts. This downturn is worse and I figure the market will overshoot even worse in coming quarters.

All of which means, you’ll want to be very patient and slowly scale into small positions. Even if you pay a bit more at times or a bit less at times, you’ve certainly learned by now that downside risk in stocks isn’t something to be taken lightly.

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