Cabot Dividend Investor Issue: September 13, 2023

Easy Pickin’s Where It’s Still a Bear Market

This has been a surprisingly good year for the market. While most pundits predicted more bear market ugliness in the first half of the year, the S&P 500 defied the gloom and rose 18% YTD. I hope the good times last.

It’s all about the soft landing. Investors are increasingly confident that we can get through the Fed’s steepest rate hiking cycle in decades without a recession, or much economic pain. So far so good. Inflation has fallen. The Fed is nearly done hiking. And there is no recession in sight. It looks like a graduation to the recovery and bull market stage without paying the usual economic price first.

Of course, there are risks, as is always the case. Oil is a red flag. It’s trading at the highest level since last fall. Oil is part of almost everything and higher prices could reignite inflation. That could prompt the Fed to prolong the rate hiking cycle with interest rates already near a 15-year high.

There has historically been a lag time before high interest rates bite and slow the economy. The economic pain that the market seems to have dismissed might just be a little further down the road. There could be a comeuppance in the quarters ahead.

It’s a delicate balancing act between possible renewed inflation and a still-hawkish Fed or an economic slowdown significant enough to hurt the stock market. So far, the market is pulling it off. But we might not be out of the woods of this rate hiking cycle yet.

Anything is possible. And the market tends to surprise most pundits. But I don’t want to get into the business of trying to predict what the market will do over the rest of the year. Even if you get things right, some stupid headline can come out of nowhere and foul everything up. There’s a much better way than market timing.

Buying good stocks cheap is perhaps the best way to assure good returns over time. Different market sectors go in and out of favor all the time. Technology stocks were out of favor at the beginning of this year. No one wanted energy stocks at the beginning of 2021.

You may not think there are a lot of bargains anymore. Sure, it’s a bull market for the indexes. But it is still the darkest days of the bear market in certain places. Defensive stocks in utilities and other sectors are wallowing near the lows of last October while the indexes are whooping it up.

In this issue, I highlight three defensive portfolio positions. These stocks are all selling near 52-week lows and, in some cases, multi-year lows. But operational results at these companies have been as strong as ever. And all these currently out-of-favor stocks have long histories of superstar performance that blows away the returns of the overall market.

Forget the Fed, and inflation, or the velocity of the landing. Buying some of the very best dividend stocks on the market near the lowest valuation at which they ever sell should be a money-making strategy regardless of what happens with all that other stuff.

Featured Action:

The three highlighted BUY stocks below are all selling near the 52-week low. They are defensive dividend stocks that have been out of favor this year for a couple of reasons. Interest rates near a 15-year high make fixed-rate alternatives more attractive. Investors perceive defensive dividend sectors as low growth and providing little more than a dividend.

It’s also true that the market has embraced growth stocks this year, which were out of favor last year. Also, the excitement surrounding the artificial intelligence craze has further propelled technology stocks over everything else.

But things change. The stocks below are in defensive businesses. And stocks of such companies tend to outperform the market on a relative basis during times of recession or a slowing economy.

There’s also something else to note. These aren’t just historically boring and stodgy stocks that might have the additional benefit of good timing. These stocks have long track records of significantly outperforming the overall market on a consistent basis.

Here’s a breakdown of the total returns of these stocks over various periods versus the S&P 500 returns prior to this past down year.

Buy NextEra Energy, Inc. (NEE)

Yield: 2.8%

Different stock sectors go in and out of favor all the time. Right now, utility stocks are in the dumps. Utilities are the worst-performing S&P 500 sector so far this year. There are a couple reasons for the poor performance. Interest rates are near a 15 year high. High rates bolster fixed-income alternatives. It’s also true that technology stocks have driven the market this year and investors haven’t been in a mood for defense.

But things change. Interest rates may be near the peak. The economy could slow later this year or next year. Sectors rotate. Technology stocks were the worst-performing sector last year and the best-performing this year. Nobody wanted energy stocks a couple of years ago. NEE is near a multi-year low price, and not because of operational performance, which has been solid.

How could a utility stock more than double the returns of the market over five- and 10-year periods? It’s not an ordinary utility.

NextEra Energy provides all the advantages of a defensive utility plus exposure to the fast-growing and highly sought-after alternative energy market. It’s the world’s largest utility. It’s a monster with about $21 billion in annual revenue and a $136 billion market capitalization. Earnings growth and stock returns have well exceeded what is normally expected of a utility.

NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar and a world leader in battery storage. It accounts for about 45% of earnings and provides a higher level of growth.

Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s the best of both worlds. There is also a huge runway for growth projects. NextEra has deployed $50 to $55 billion in the last few years on growth expansions and acquisitions. It also has a large project backlog.

Since 2006, NextEra has grown earnings by an average annual rate of 8.4% and grown the dividend at an average rate of 9.8% per year. That propelled the market returns stated above. The company is targeting 10% earnings growth from 2021-2025 and 10% annual dividend growth through at least 2024. NextEra has a long track record of meeting or exceeding goals.

But NEE is down more than 20% YTD and is trading near the lowest price in three years. Yet, everything that propelled the stock higher in the past is still firmly in place. In fact, things might be better in the future than they were in the past. Sure, the stock could flounder for a bit longer, but it is likely to be a lot higher in six months or a year regardless of what the market does. NEE is well below the target buy price.

Buy Brookfield Infrastructure Partners (BIP)

Yield: 4.8%

Bermuda-based Brookfield Infrastructure Corporation owns and operates infrastructure assets all over the world. The company focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.

Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income generating assets on the planet but infrastructure is rapidly becoming a more timely and popular subsector.

The world is in desperate need of updated infrastructure. The private sector is filling the need as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising billions of dollars a year for infrastructure investments. It’s almost becoming a new asset class.

As one of the very few tested and tried hands, Brookfield is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, BIP has provided a total return of 962% (with dividends reinvested) compared to a return of 290% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.

Brookfield operates a current portfolio of over 1,000 properties in more than 30 countries on five continents. The company operates four segments: Utilities (30%), Transport (30%), Midstream (30%) and Data (10%).

Assets include:

• Toll roads in South America
• Telecom towers in India and France
• Railroads in Australia and North America
• Utilities in Brazil
• Natural gas pipelines in North America
• Ports in Europe, Australia and North America
• Data centers on five continents

The dividend is rock solid with a low 70% payout ratio and a history of steady growth. The payout has grown by a CAGR (compound annual growth rate) of 10% per year since 2009 and the company is targeting 5% to 9% annual growth going forward.

BIP is a good long-term investment anytime, as the above numbers illustrate, but it is particularly attractive now because it’s relatively cheap and can well navigate both inflation and recession.

The infrastructure company reported solid earnings in the first half of this year with double-digit earnings growth even though overall S&P 500 company earnings have decreased over the same period. The company benefited from recent expansions and acquisitions but also showed solid organic growth.

Roughly 85% of revenues are hedged to inflation with automatic adjustments built into its long-term contracts and its crucial service assets are very recession resistant, and earnings should remain strong even if there is a recession. It also helps that the stock pays a solid and growing dividend.

Buy UnitedHealth Group Inc. (UNH)

Yield: 1.5%

UnitedHealth Group (UNH) is a Dow Jones component that is America’s largest insurer and one of the world’s largest private health insurers. It’s a goliath with $348 billion in annual revenues that serves 149 million members in all 50 states and 33 countries. That’s a lot of monthly insurance premiums!

The company operates in two primary groups, UnitedHealthcare and its Optum franchises. UnitedHealthcare provides health insurance and benefits to a wide range including large national employers, public sector employers, mid-sized employers, and small businesses and individuals. It also provides health insurance for Medicare and supplements as well as employers globally.

The Optum franchise provides direct healthcare, technology services, and prescription drug solutions. The direct healthcare includes an alliance with 70,000 physicians in local medical groups as well as ambulatory care systems and other chronic treatments. The technology provides data and analytics to manage complex administrative and regulatory issues with hospitals and physicians. It also provides a full spectrum of pharmacy care services.

The group supplies services for just about every facet of the healthcare process and the full-scale operation provides a powerful alignment of incentives that helps clients control costs better than competitors, which is a massive issue in the industry.

It’s also a huge company and operation. Scale is hugely important in this industry. It enables UnitedHealth Group to keep costs down by virtue of volume, to have cash for acquisitions, and to wield significant power to adjust rates as prices increase. That’s a huge benefit during inflation.

Although UNH is large in scale, the stock has managed to blow away the returns of the overall market, with more than twice the return over the past three- and five-year periods, and quadruple the return over the last 10 years. UNH has also done this with considerably less volatility than the market, with a beta of just 0.67.

Sure, UnitedHealth has the huge tailwind of the aging population, but so do many other stocks in the healthcare sector. I chose UNH because it has also been a consistently strong performer. It has significantly outdone its peers as well as most large healthcare stocks of any stripe.

Healthcare is a highly recession-resistant business as people tend not to postpone health issues in any economy. UnitedHealth Group is a large, safe business that provides stability in uncertain markets. Aside from that, it has the massive tailwind of the aging population and an ever-increasing number of customers.

Enrollments were up 1.2 million last year and are forecast to grow again by a million this year. Because of a solid balance sheet, reliable revenues, and deep pockets, the company is able to grow through acquisitions. It recently acquired a cutting-edge software company that should give it a further advantage in streamlining processes and saving costs.

Healthcare is one of the most defensive industries but it also provides growth because of the aging population. The stock is much closer to the 52-week low than the high and most valuations are currently lower than the five-year average.

Recent Activity

August 29
Invesco Preferred ETF (PGX) – Rating change “BUY” to “HOLD”

Portfolio Recap

Enterprise Product Partners (EPD – yield 7.5%) – EPD keeps humming along and is within bad breath distance of the 52-week high. After a stellar performance in the 2022 bear market (returned 18.24%), EPD has returned over 16% YTD. Energy stocks have made a strong comeback after a dismal first five months of the year as oil prices have trended higher and are on the rise again. We’ll see how high oil prices go in the fall, but enterprise should continue to have the right stuff going forward as earnings should be resilient in almost any economy. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD)
Next ex-div date: October 27, 2023, est.

ONEOK Inc. (OKE – yield 5.9%) – Energy has perked up again after a lull following the sector’s spring and summer surge. OKE moved sharply higher in the early summer but has since leveled off. The midstream energy company reported solid earnings and raised earnings guidance for the year. We’ll see if OKE can resume the upside rally in light of renewed energy sector strength. Longer term the stock looks solid as the company is expected to grow revenue by an average of 10% per year over the next three years. HOLD

ONEOK Inc. (OKE)
Next ex-div date: October 28, 2023, est.

Realty Income (O – yield 5.6%) – The legendary defensive income stock is in the same boat as the utility stocks right now. Defensive stocks have been shunned by the market. Even though operational performance has been sound as earnings were solid with a stellar 99% occupancy rate for its properties and an additional $3.1 billion invested in the quarter in 710 properties, O is wallowing near the 52-week low. This is now a very cheap and high-yielding stock with an excellent historical track record in a very uncertain market and economy. BUY

Realty Income (O)
Next ex-div date: September 30, 2023, est.

The Williams Companies, Inc. (WMB – yield 5.3%) – The midstream energy company stock moved sharply higher in the summer until leveling off around the middle of August. Perhaps the recent strength in the more commodity price-sensitive energy stocks can reignite further upside from here. The company is in somewhat of a lull period in terms of earnings growth because of tough comparisons after acquisitions came online. But recent quarterly earnings were solid and surprise recent expansion and acquisition activity bodes well for growth in 2023 and 2024 beyond what was expected. BUY

The Williams Companies, Inc. (WMB)
Next ex-div date: December 8, 2023, est.

AbbVie (ABBV – yield 4.0%) – The cutting-edge biopharmaceutical company stock leveled off in the ugly August market after a sharp rise from the bottom in July. The upside momentum has fizzled, but ABBV is hanging tough at the higher range. I like the way the healthcare sector is set up ahead of a slowing economy and perhaps a further correction in the market this fall. Meanwhile, AbbVie reported earnings that beat on both top and bottom lines and raised guidance for the year. The report emboldens the notion that the revenue drop from the Humira patent expiration will be temporary and AbbVie will turn the corner sooner than expected. BUY

AbbVie Inc. (ABBV)
Next ex-div date: October 12, 2023

Broadcom Inc. (AVGO – yield 2.1%) – The AI juggernaut is off the high and has been bouncy of late. But it is still very much in the much higher range achieved after the spring surge. Earnings soundly beat estimates, but the company failed to raise guidance for the rest of the year. The stock fell over 4% the day of the report and gave up a lot of the earlier rally. Results were strong but the stock was priced for perfection, and not raising guidance is seen as an imperfection. But the stock still has a great outlook. HOLD

Broadcom Inc. (AVGO)
Next ex-div date: September 20, 2023

Brookfield Infrastructure Partners (BIP – yield 4.8%) – The tough times for safe stocks continue. Despite strong operational performance in a period of shrinking earnings for most companies, BIP continues to wallow near the 52-week low. But these periods of bizarre underperformance never last. Sure, the stock could languish for a while longer, but it is highly likely to be a lot higher a year from now. Brookfield is targeting 10% average earnings growth and 5% to 9% distribution growth over the next several years. (This security generates a K-1 form at tax time). BUY

Brookfield Infrastructure Partners (BIP)
Next ex-div date: November 30, 2023, est.

Digital Realty Trust, Inc. (DLR – yield 3.7%) – This data center REIT has been firing on all cylinders. It’s up over 30% YTD and hit a new 52-week high. DLR was also immune to the down market in August. Digital reported better-than-expected earnings because of strong data center demand and solid growth. Even more importantly, the company assuaged fears that had driven the stock price down earlier this year by executing capital recycling plans that raised over $2 billion by selling joint venture assets. DLR has leveled off this month but is still hanging right near the high. BUY

Digital Realty Trust, Inc. (DLR)
Next ex-div date: September 14, 2023

Eli Lilly and Company (LLY – yield 0.7%) – Last week I wrote that LLY soared 23% in August, was up over 53% YTD, and had returned 82% over the past year. Then the stock continued to advance for the last seven straight sessions, making a series of new all-time highs. LLY has now returned 309% since being added to the portfolio in August of 2020. There doesn’t seem to be any “let-up” in this stock.

Its new diabetes drug, Mounjaro, was launched a little over a year ago and is already generating nearly a billion in revenue per quarter. But this drug is likely to be approved for weight loss this year. And revenues for weight loss would likely dwarf those for diabetes. Lilly also has a potential mega-blockbuster Alzheimer’s drug up for approval later this year. Institutions are buying heavily into the stock. HOLD

Eli Lilly and Company (LLY)
Next ex-div date: November 14, 2023, est.

Hess Corporation (HES – yield 1.1%) – HES is hot stuff again after a brief pullback following its strong July and early August surge. The exploration and production company moved to a new 52-week high last week. Hess is highly levered to energy prices and prices reached the highest level since last fall. Many are predicting further increases as global production has been cut and U.S. inventories are low amid high demand. We’ll see how high oil prices can take the stock this fall. BUY

Hess Corporation (HES)
Next ex-div date: September 15, 2023

Intel Corporation (INTC – yield 1.4%) – INTC is on a roll and is up over 21% in less than three weeks. It’s also now up 48% YTD. The company struggled in recent years as competitors surpassed them and they had manufacturing problems. But Intel has invested heavily in future chips in high-growth areas and is launching a serious foundry business.

The future could be bright, and investors seem to be warming to the still cheap stock. The stock is higher recently because the company raised third quarter earnings guidance and received a prepayment from a “large unnamed customer” to secure capacity at its foundry for producing semiconductors. It demonstrates the tangible viability of the company’s foundry plans and makes success and higher revenues for the business likely to come sooner. BUY

Intel Corporation (INTC)
Next ex-div date: November 4, 2023, est.

Qualcomm Inc. (QCOM – yield 2.9%) – The chipmaker stock slumped again last week on news that the Chinese government is forbidding government employees from using Apple phones. But QCOM is overcoming that selloff after signing a deal with Apple to provide smartphone chips through 2026. There was concern that Apple’s competing chip would replace Qualcomm’s and the company would lose that revenue. But now that won’t happen for at least a few more years. That’s a major concern to get out of the way. Also, smartphone sales have been hurting but may have bottomed. BUY

Qualcomm Inc. (QCOM)
Next ex-div date: November 30, 2023, est.

Tractor Supply Company (TSCO – yield 1.9%) – The farm and ranch company is a serious retail player. The company has a proven ability to consistently grow earnings and deliver on stock performance. Few retailers have grown earnings every year for 31 straight years. Last quarter, the company delivered 8.5% EPS growth while average S&P 500 earnings were down over 7%, and down for the third straight quarter. TSCO should be solid in just about any environment with a low beta and many products that are considered staples. BUY

Tractor Supply Company (TSCO)
Next ex-div date: November 25, 2023, est.

UnitedHealth Group Inc. (UNH – yield 1.5%) – UNH is struggling along with just about every other defensive stock this year. The high interest rates and soaring technology sector have diminished investor interests. But operational performance is stellar and UNH is a superstar that has blown away the returns of the overall market over the past five- and ten-year periods. Sectors always go in and out of favor. And UNH is dirt cheap ahead of a likely slowing economy, which tends to be a period of market outperformance for the stock. BUY

UnitedHealth Group Inc. (UNH)
Next ex-div date: December 8, 2023, est.

Visa Inc. (V – yield 0.7%) – V is hot again and continues to hover near the 52-week high. The stock remains in a slow uptrend that began way back in October. The company loves the strong consumer and the increasing expectation of a soft landing. It seems like only a serious economic slowdown or recession can stop this stock. And that might not happen. Good economic news could propel the stock to another level. It is also capable of holding its own of the market flounders, as it did last year. HOLD

Visa Inc. (V)
Next ex-div date: November 10, 2023, est.

Invesco Preferred ETF (PGX – yield 6.3%) – Longer-term rates have moved near the recent high again as a recession appears less likely in a still-strong economy. Rates could be near the peak and it’s probably a good time to buy in terms of that dynamic. However, PGX has a lot of exposure to the banking sector and could be under pressure if the high interest rates trigger more bank troubles in the fall. HOLD

Invesco Preferred ETF (PGX)
Next ex-div date: September 24, 2023, est.

NextEra Energy (NEE – yield 2.8%) – The weakness continues. This stock is still wallowing near a multi-year low. But this is a historical superstar performer and the low may already be in. NEE moved above the low last week and may be finally perking investor interest. The utility grew earnings 8.6% in the second quarter and 11% in the first half versus the same periods last year. It also has predictably solid earnings going forward because of a considerable project backlog. It’s a great stock that is just out-of-favor right now and selling near a multi-year low. BUY

NextEra Energy Inc. (NEE)
Next ex-div date: November 29, 2023, est.

USB Depository Shares (USB-PS – yield 5.9%) – This preferred issue has bounced around since being added to the portfolio. It took an unjustifiable hit during the banking issues. But it has mostly moved conversely to interest rates. But this security has outperformed other investment-grade, fixed-rate investments. Interest rates are near the highest level since 2007. This is a good time to buy. BUY

U.S. Bancorp Depository Shares (USB-PS)
Next ex-div date: October 15, 2023

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.6%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The fund is holding up well in the recent rising interest rate environment and should benefit if and when rates come back down. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT)
Next ex-div date: October 1, 2023, est.

Xcel Energy (XEL – yield 3.7%) – This clean energy utility hasn’t fared any better than NEE in a very tough market for utilities. XEL has been trending lower since the beginning of April and is wallowing near the 52-week low. But things change and XEL is cheap and one of the best utility stocks to own. These are dark days for utilities. But things always change and XEL and NEE are selling at 52-week lows in an expensive market and ahead of a likely slowing economy. BUY

Xcel Energy Inc. (XEL)
Next ed-div date: September 14, 2023

Dividend Calendar

Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates are estimated.

The next Cabot Dividend Investor issue will be published on October 11, 2023.