Utilities and energy were some of the best-performing sectors in the S&P 500 as both traded more than 5% higher, with stock indices heading higher for the third day in a row despite massive jobless claims. This has given a boost to Exchange Traded Funds (ETFs) as well.
U.S. stocks exploded higher Thursday, even after data showed that unemployed Americans rocketed in the past week, soaring beyond the previous record of 695,000 in October 1982, signaling that investors may still be hopeful that a $2 trillion stimulus package will help stem the economic impact of the coronavirus pandemic. A vote there is scheduled for Friday.
Integrated oil and gasoline companies like Exxon Mobil and Chevron were solid performers amid the news Thursday, climbing 3.81% and 8.62% respectively, leading the energy sector higher, and boosting the iShares U.S. Energy ETF (IYE) by more than 6%.
There has been some concern that companies will slash their dividends given the damaging economic effects the coronavirus has had on the economy.
“The spike in dividend yields to all-time highs suggests the market believes a dividend cut for many companies is likely,” said Morningstar in a recent note. “We disagree and think dividends are largely safe, thanks to an ability to increase debt in the near term. Furthermore, companies are likely to slow or stop dividend growth, reduce capital expenditures, sell assets, and if necessary, restore the scrip option to save cash.”
Shares of Chevron rallied on its decision to maintain its dividend despite the suspension of buyback and capital spending, according to a barrons.com article. CVX holds about 2% of the SPDR Dow Jones Industrial Average ETF (DIA) in addition to being a key player in a variety of energy ETFs.
Despite this comment from Morningstar, the service acknowledged that dividend cuts will vary based on the company.
“While we think the probability of a dividend cut is relatively low, it does vary by company, with those with more leverage and higher break-even prices at greater risk,” said Morningstar. “Current futures prices for 2020 and 2021 are below what we estimate break-even levels to be for the integrated oils, implying that each company will be unable to fully cover its dividend with free cash flow at current levels.”
The Utilities Select Sector SPDR Fund (XLU) and Vanguard Utilities ETF (VPU) are two other ETFs that are performing well today, up almost 7% apiece today. Meanwhile, the Energy Select Sector SPDR Fund (XLE) rallied 7.3% and the Vanguard Energy ETF (VDE) climbed more than 7.1%.
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