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Forget ‘Earnings’ — Declining Revenue and Dividends the Real Story in Q3

Too many companies are cutting their way to growth

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I really am not a pessimist by nature, and I admittedly get a little tired of the “triple top” as an indicator of doom and the crap about how stocks are dead. I am a long-term investor, and right now I am almost fully invested.

However, there’s no denying that there are significant problems ahead for the global economy. As I wrote recently in a recap of PMI stats, manufacturing around the world is in ugly shape — and where there are signs of life, there still aren’t any jobs. The eurozone debt crisis and American “fiscal cliff” are serious obstacles to overcome.

But I don’t want to get lost in the headlines of policy and macoeconomic data points. The biggest concern for investors should be the individual companies they own and their unique risks and opportunities even in these troubled times.

And right now, it’s important to look at two factors above all else: dividends and top-line revenue. Because these two numbers — to me — are the figures that will make or break an equity in 2013.

Dividends As an Indicator

 According to Political Calculations, the momentum behind dividend increases has waned and dividend cuts are becoming more frequent. In fact, dividend cuts are at their highest level since 2010, passed only by the horrific period of late 2008 and early 2009 where the financial crisis gutted quarterly distributions at a host of stocks — most notably financials like Bank of America (NYSE:BAC) and Citigroup (NYSE:C), which now pay a mere penny per share per quarter.

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There is a clear correlation between an absence of dividends and a hard economic environment. Anyone watching distributions dwindle in 2008 should have heard alarm bells going off that companies were hunkering down for hard times.

Consider recent dividend cuts. J.C. Penney (NYSE:JCP) suspended its dividend amid its rather painful reinvention as a retailer. Much-maligned strip mall store RadioShack (NYSE:RSH) killed its payout, too, as did battered grocer SuperValu (NYSE:SVU). All of these businesses have different stories, but share one thing — there aren’t a lot of profits to come by in the current environment, so they are hunkering down to save cash.

Revenue As an Indicator

A host of stocks this quarter have met or exceeded earnings expectations. But profits matter only slightly — the big story right now is the fact that most corporations are seeing bigger profits as they squeeze workers and customers for more cash and cut out costs from their employees and operations.

As InvestorPlace writer Dan Burrows puts it bluntly, the bottom is about to fall out of those earnings as the top line fails to grow. You simply can’t cut your way to growth.

Consider both Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL). Both are in the middle of big cost-cutting moves to offset continued slides in revenue.

Maybe you want to blame that on the disruptive nature of mobile technology or mismanagement at the dumpster fire that is HP. After all, the company has spent well more than $40 billion in buybacks across the past five years, and the current market cap of the company is only $35 billion right now as the stock hovers at 2005 levels.

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