All Dividend Aristocrats Ranked By Bankruptcy Risk And Credit Rating

This article was published on Dividend Kings on Monday, May 22nd.

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So far, the market is ignoring the debt ceiling. That is going to change this week.

I always thought this would go right down to the wire,” Zandi said in a phone interview. “If the rhetoric is dark next week, markets will start to react. We’ll see a lot more red on the screen and dark red by the end of the week.” Zandi warned that if there is still no deal after Memorial Day weekend, markets could face a 2011-style moment where major indexes lose 3% to 5% in a single day.” That would light a fire under lawmakers,” he said.” – CNN.

Why? Time is fast running out to prevent an economic catastrophe.

Bloomberg Economics is even more pessimistic, estimating that a default would likely trigger an 8% GDP recession.

• Pandemic level collapse
• but with negative stimulus instead of record stimulus.

Both sides agree that default is “unthinkable,” but here’s why the risk is literally growing by the day.

One week ago (May 11th), the Treasury’s account had $143 billion in it.

Here’s what it had as of the close of Thursday, May 18th.

• Treasury reports daily accounts with a one-day lag.

Average weekly spending is $120 billion, and Treasury’s policy is to normally have $700 billion, with under $150 billion considered “unsafe.”

This week $33 billion in Social Security is being paid, and next week another $33 billion.

Goldman thinks the X-date might be earlier than the June 1st deadline.

Time is rapidly running out, and here is the bad news.

Negotiations Are Miles Apart

Last Thursday, both sides said they were optimistic that a deal could be struck by Sunday night.

That appears to have been either naïve or politician-speak, because Reuters and Moody’s report that both sides are still miles apart.

According to Moody’s, the bill the GOP House passed included 3% in spending cuts for 2024.

Reuters reports insider leaks as the following.

• White House offer: Increased Pentagon spending and flat spending in 2024
• GOP offer: Even more increased Pentagon spending and 8% cut to 2024 spending (16% cut to non-defense discretionary spending)
• make Trump tax cuts permanent ($3.5 trillion long-term addition to deficit).

Not surprisingly, Democrats are balking at a 16% cut to social programs and $500 billion in spending cuts for 2024.

Ignoring the political implications of what programs should or shouldn’t be cut, Moody’s estimate of the GOP proposal is that it would result in a -2% GDP hit to 2024 U.S. economic growth.

Why does this matter?

Economists historically always underestimate recessions, and the economist consensus for the 2023 recession is a 0.5% peak GDP decline and 1% positive growth for the year.

• the mildest recession in U.S. history.

The most accurate economist in America for the last 42 years is Ed Hyman of Evercore ISI.

• Institutional Investor survey has called him the most accurate economist for 42 of the last 51 years.

Hyman, for one, is expecting zero growth in this (second) quarter, to be followed by three subsequent down quarters. Worse, he thinks unemployment will increase to 5.2 percent a year from now; he calls that a “hard landing.” – The Hill.

Bank of America’s CEO Brian Moynihan thinks a 9-month recession (about 1.5% peak GDP decline, 3X the consensus) begins in July.

That was before all the political drama that is rapidly piling up.

• Debt ceiling hit to the economy: -0.3% according to Joint Economic Committee
• Spending cuts starting in October: -0.4% to 2% (depending on the budget deal) according to Moody’s
• Student Loan payments restart in October: -0.5%, according to the Federal Reserve
• $1.5 trillion in new Treasury bond sales by the end of 2023, according to Bank of America (sucks money out of the economy).

In addition, the Fed is still debating about whether it should pause or continue hiking rates.

Citi thinks the Fed will hike two more times, to 5.5%, and then hold until the end of the year (at least).

The Fed’s plan is to hold rates at 5% through at least the end of the year.

Record QT (reverse money printing) continues at $120 billion per month.

Add it all up and this is what the 2023 recession is starting to look like.

• Best case: -1.7% GDP recession lasting nine months
• Worst case: -3.8% GDP recession lasting 15 months.

The average recession since WWII is a 1.4% GDP contraction lasting six months.

The Great Recession was a 4% GDP contraction that lasted 18 months.

The Pandemic was an 8% GDP contraction that lasted 2 months.

The news isn’t good, and there is a bit more bad news to report.

The Emergency Backups Are Looking Shaky

There are three primary backups to Congress failing to strike a deal over the debt ceiling. And it looks like two of those are off the table.

The first emergency backup was the Discharge petition for a clean increase Democrats prepared back in January.

This parliamentary procedure allows any bill with 218 votes or more (a majority) to be voted on even if the Speaker is opposed to it or has been removed (as the Freedom Caucus has threatened McCarthy with).

As of Friday, this bill has 210 votes, eight short of what is required. The 5 GOP votes required (3 democrats have yet to sign) won’t be coming in time.

That’s because this is an extreme emergency measure, and any Republican House Member who signs the petition would be seen as a traitor for undercutting McCarthy during negotiation.

• effectively political suicide.

And even if the votes were there for the Discharge Petition, it takes nine days for the procedure to work once the votes are collected.

• Monday is the deadline for getting 218+ signatures to use this option.

And that’s just for getting this bill through the House. The Senate would have to pass its own bill or the identical bill in the House that is currently in the Discharge petition (clean raise).

The Senate Republicans have said they will filibuster any clean raise.

The Problem, Solver Caucus framework, could replace a clean raise, but a Discharge Petition is off the table as an option by Tuesday.

The 14th Amendment option is one 11 progressive Senators have signed a letter asking Biden to use.

• Section 4 of the 14th Amendment says, “Validity of the US debt cannot be questioned”
• White House could order Treasury to keep issuing bonds to pay the bills
• ignoring the debt ceiling as unconstitutional.

Biden said he believed he had the authority to continue issuing new debt under Constitution’s 14th amendment unilaterally but did not believe it could be invoked in time before the debt ceiling X-date, increasing pressure for a negotiated outcome.” – FactSet (emphasis added).

The White House estimates it would take two to three weeks for the Supreme Court to issue an emergency ruling on whether bonds sold under this move would actually be valid.

• Supreme Court would have to decide the constitutionality of the debt ceiling.

We don’t have two weeks; we might not even have one week before Treasury is out of money.

Janet Yellen has said that Treasury would know one to two days in advance before it actually defaulted.

In the event that the X-date is this week (say Friday or Thursday), Congress would not have time to prevent default.

In that case, there are two options left to the Government to prevent default and the recession that comes with it.

President Biden could sign an executive order invoking the 14th Amendment, and Treasury could continue selling bonds (at 0.6% to 0.75% higher yields, according to Moody’s).

Everyone would keep getting paid while the Supreme Court rushes into an emergency session and tries to decide whether the U.S. defaulted quickly.

• most likely, they rule the Debt Ceiling unconstitutional
• and the Debt ceiling disappears forever.

If they rule it constitutional, the U.S. has defaulted, and we’re in a severe overnight recession.

For the two to three weeks it would take for them to make a decision (possibly they could do it sooner, but that’s the White Houses’ estimate), financial markets would be faced with the worst financial uncertainty in decades, possibly ever.

Stocks would be crashing, short-term bond yields might be souring, and the recession we’ve been expecting for a year would begin and get slightly worse each day.

The other major emergency measure is the famous $1 trillion platinum coin.

Treasury has the legal ability to mint platinum coins of any denomination.

If they minted a $1 trillion coin and deposited it at the Fed, the Fed could sell $1 trillion in bonds (thus avoiding inflation) and put $1 trillion into the Treasury’s account.

Yellen has said this is a dubious idea because she isn’t sure the Fed would accept the coin, and it could make America seem like a laughing stock.

Defaulting on our debt and plunging the world into overnight recession would be even more silly.

So that’s the bad news and good news.

Both sides are unlikely to strike a deal anytime soon, and even if they agree by Friday, it’s possible there won’t be time to get a final bill to the President’s desk by June 1st.

And the actual default date might be earlier than June 1st.

The government could take two emergency measures in case Congress fails, though for now, the administration claims they are so extreme they aren’t being considered.

The only way we actually default is if Congress fails to raise the ceiling and the Administration decides that severe recession is preferable to “questionable” emergency measures.

Unless our government completely fails us, America will not be plunged into a Pandemic level severe recession or Depression.

We will only have to contend with the average to above-average recession likely coming by the end of the year.

In Times Of Turmoil Trust Dividend Aristocrats

Dividend aristocrats are companies with 25+ year dividend growth streaks.

• aristocrats: S&P companies with 25+ year streaks
• dividend champions: non-S&P companies with 25+ year streaks
• dividend kings: 50+ year streaks.

These are the most dependable companies on earth, not just keeping their dividends safe for a quarter century or more but raising them every year since at least 1998 through:

• four recessions
• inflation as high as 9.1%
• seven bear markets
• two economic crises
• the worst economic shock in history (8% GDP decline in one quarter).

Historically, the safety and quality of aristocrats tend to result in far lower volatility, especially during bear markets.

But the stock market is currently about 16% overvalued, adjusting for an average recession, never mind a potential 4% severe recession that could be starting in a few weeks in a worst-case scenario.

However, it’s always and forever a market of stocks, not a stock market. Even in an overvalued market and in times of unprecedented economic uncertainty, something wonderful is always on sale.

Dividend Aristocrats Ranked By Bankruptcy Risk And Credit Rating

What is the one thing that matters most in a severe recession that would likely result from a debt default?

Warren Buffett defines fundamental investment risk as the risk of permanently losing your initial investment. In other words, bankruptcy risk.

Rating agencies use over 100 years of default data for companies and over 1,000 fundamental metrics to estimate this risk.

So here are the dividend aristocrats ranked by 30-year bankruptcy risk.

• For unrated aristocrats, we use the bond market’s effective rating based on credit default swaps.

Bottom Line: In Troubled Times, Trust The Strongest Dividend Aristocrats To Keep Your Savings Safe

YORW and ROP have 5% bankruptcy risks due to BBB+ stable credit ratings.

• The glitch has been corrected and will be updated in the Dividend Kings Zen Research Terminal shortly.

Aristocrat/Champion/King Fundamental Summary

• quality: 91% 12/13 Super SWAN
• safety: 92% (1.4% severe recession cut risk)
• yield: 2.7%
• valuation: 7% historical discount (reasonable buy)
• growth consensus: 8.1% vs. 8.5% S&P
• long-term return potential: 10.9% vs. 10.2% S&P 500
• dividend growth streak: 42 years (since 1981)
• S&P credit rating: BBB+ stable
• 30-year bankruptcy risk 4.2%.

Bottom Line: In Times Of Maximum Uncertainty, Dividend Aristocrats Can Help You Protect Your Savings

The debt ceiling will likely dominate investors’ minds this week and possibly the next few weeks if Congress can’t strike a deal to raise it.

Moody’s estimates the risk of default at 10% while betting markets put the odds at 16%. The bond market thinks the risk of default is 1.56%, the highest in history, but still approximately half the risk of nuclear war with Russia.

• 2.5% risk, according to Goldman Sachs.

The good news is we’ll almost certainly avoid an actual default.

It would take a failure of government at every level for that to happen.

The bad news is that even if we avoid a default recession, it is very likely coming this year and will likely be 3X to 8X as bad as economists currently expect.

That’s because our government’s dysfunction is going to create a perfect storm of economic headwinds not seen since 1932. A recession in which:

• the Fed isn’t cutting rates
• the Fed is shrinking the money supply at the fastest rate since 1930
• the government is cutting spending (up to 8% potentially)
• the government is effectively raising taxes ($129 billion in annual student loan payments starting in October)
• the U.S. Treasury is issuing large amounts of bonds, sucking money out of the economic system.

Most of us weren’t alive the last time this consolation of negative economic headwinds converged into Jamie Dimon’s “economic hurricane.”

The good news is that we’re not headed for depression or even another Pandemic level crash.

The bad news is that the market will almost certainly be caught with its pants down when the 2023 recession finally arrives.

But for those trusting their savings and incomes to dividend aristocrats, the world’s most dependable dividend blue-chips, even such an unprecedented fiscal crisis and economic hurricane isn’t a reason to panic.

Unless the world ends, the dividend aristocrats with the strongest balance sheets, credit ratings, and lowest bankruptcy risk are the kinds of companies that will help you through these turbulent times.

In part 2 of this series, I’ll show you exactly how to build the ultimate dividend aristocrat portfolio to survive even the worst-case debt default scenario.