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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor 119

In this issue I identify a fast-growing biopharmaceutical company that will benefit as the changing population demands better healthcare than ever before. It is well established with a high dividend yield and poised in front of the wave at the cutting edge of medical innovation.

Cabot Dividend Investor 119

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Profit from Our Great Societal Transformation

Markets go up and down. It happens. There will be bull markets and bear markets. Different administrations will come into power. Change is one of the few constants in life and investing.

But certain powerful and ascendant trends will persist regardless of temporary gyrations in the market and economy. It’s like the weather. No one knows what it will do in a week or a month, but we can safely assume that in the next six months it will get warmer. The trend of warming toward spring will persist regardless of what happens along the way.

Similarly, a massive societal trend is changing the world.

The population is aging at warp speed. Because of lower fertility rates and longer life spans, the U.S. and global populations are older now than ever before. And the pace of aging is accelerating. While we focus on the latest market swings, the very nature of the human race is transforming right under our noses.

In the U.S., nearly one third of the population is already over 50 years old. The fastest growing segment of the population is people over 65, as an average of 10,000 Baby Boomers turn 65 every single day. The size of that group is expected to grow 65% by 2030. There is a similar trend worldwide.

The shifting demographics of the population will change things. Older people have unique needs. And aging Baby Boomers control 71% of the nation’s wealth. Great profits can be found by following the money. As they age, this massive population bubble will demand healthcare like they’ve never demanded anything before. While the economy grows and slows and markets bounce up and down, the cash registers will keep on ringing in this industry.

Healthcare, traditionally a defensive investment, has now become a rapidly growing industry as well. You can see it in the results. There is a reason that healthcare has been one of the best-performing segments of the market for every measurable period over the past 10 years. The powerful forces driving the sector higher will only accelerate going forward.

And I’ve found a company that is the fastest growing large pharmaceutical company in the market. The company is at the cutting edge of medical innovation with an unparalleled track record of success. It offers the defensive earnings and high dividend yield of a traditional large pharmaceutical company along with the rapid growth potential of a biotech company. It currently sells at a fantastic price, with an eye-popping 5.4% yield.

[highlight_box]What To Do Now: The environment remains cautious. Sure, the market has bounced back nicely from the December lows because of a more sober and correct view of the current state of the economy. However, I still remain unconvinced that we are out of the woods yet. This earnings season will be particularly volatile with the market harshly judging any disappointments. It’s also still very vulnerable to bad news. The slightest negative headlines about trade or economic growth send investors scurrying for the exits like frightened schoolgirls.

Right now I’m favoring the more recession-resistant, safe stocks. There has been one rating change since last week’s update: STAG Industrial (STAG) was upgraded from a HOLD to a BUY. The reason for the change is momentum and performance. The stock is consistently outperforming the market on both the upside and the downside.

In the current late-stage economic cycle the best place to be is in sectors that excel in this stage of the cycle and also tend to outperform in a recession. Those sectors are Healthcare, Utilities and Consumer Staples. Healthcare positions Community Health Trust (CHCT) and Unitedhealth Group (UNH) are both rated BUY and should continue to perform well. As well, NextEra Energy (NEE) is an excellent REIT that not only gets steady cash flow but a high level of earnings growth for a utility and is performing well in a tough market.

These stocks can be bought here as the current environment is their natural habitat and they should continue to outperform the market. New position Altria (MO) was downgraded from a BUY to a HOLD in the most recent update. The reason is not waning faith in the story but rather a precaution taken based on momentum. As soon as the stock exhibits a reversal in near-term movement it will be upgraded to a BUY again.[/highlight_box]

Featured Buy

AbbVie Inc. (ABBV)

“There’s a way to do it better – find it.” -Thomas Edison

The voracity of demand for better healthcare knows no bounds. If you don’t feel well or you’re sick, feeling better or getting well takes precedence over just about everything else. Demand is what fuels innovation. And the center of innovation in this age of technology in the healthcare arena is in biotechnology.

Biotechnology combines advanced medical science and technology to deliver a new age in treating the human body. It is essentially the genetic manipulation of living organisms for the production of antibiotics, hormones and the like. Unlike traditional drugs that use chemicals, biotechnology actually uses biology to solve biological problems. It’s the cutting edge of medical innovation.

Growth in biotech has been staggering. Just about every year most of the year’s top-performing stocks are biotech companies. In a four-year period earlier this decade, the iShares Nasdaq Biotechnology ETF (IBB), which holds a portfolio of over 200 biotechnology and pharmaceutical companies, soared 275%. But most of the individual companies are small and unpredictable and can be a wild ride.

There is a company that combines the earnings predictability and high dividend yield of a large pharmaceutical company with the high growth of a biotech company. AbbVie (ABBV) is a Chicago-based biopharmaceutical company formed in 2013 when it was spun off from Abbott Laboratories (ABT). The spinoff has already eclipsed its old parent in size and is now the eighth-largest pharmaceutical company in the world.

The stock has been a fantastic performer. Since coming public on December 21, 2012, it has provided a phenomenal average annual return of more than 20% (with dividends reinvested). An initial $10,000 investment would now be worth about $31,000.

AbbVie’s success so far is mostly attributable to its blockbuster drug Humira. The biologic autoimmune drug is by far the world’s number one selling drug, with about $20 billion in annual sales. However, such success is cause for concern. The drug currently accounts of 61% of net revenues. That’s a lot of eggs in one basket. And, with $20 billion in sales, a lot of competitors are trying to grab some market share.

Humira is facing tougher competition overseas from biosimilars (a generic copy of a biologic drug). In fact, the stock plunged over 6% last week when fourth-quarter earnings reflected greater competition than expected. That said, there are some good reasons why I’m not worried about Humira’s competition.

About 74% of Humira sales are generated in the United States, where it won’t face biosimilar competition until 2023. AbbVie expects U.S. Humira sales to grow by $1 billion in 2019. While the 26% of sales overseas will gradually decrease, Humira is expected to remain the world’s top drug until the middle of next decade. But, more importantly, AbbVie has a huge pipeline of new drugs that should more than compensate for slippage in Humira sales.

According to market research firm EvaluatePharma, Abbvie has the second most valuable clinical pipeline across all of biopharma. It has 20 new products slated for launch by 2020 and 15 drugs and treatments that are already in Phase 3, the last step before the approval process.

Sales of blood cancer drug Imbruvica increased 42% in the fourth quarter to just under $1 billion and two Hepatitus C drugs increased sales by 92% in the U.S. and 56% overseas, to $865 million for the quarter.

Though the stock tumbled 6% on the results, fourth-quarter earnings grew 28.4% from last year’s quarter and revenues were up 7.3%. For 2018, revenue growth was over 15% and earnings per share improved more than 40% from the prior year. The company also announced another $5 billion in planned stock repurchases.

The dividend has more than doubled since 2014 and ABBV now yields a stellar 5.3%. The dividend payout has grown by an average of 17.5% per year for the last five years and it should continue growing in the future. Analysts project that average annual earnings growth rate over the next five years will be over 17%.

The stock is more volatile than other big pharmaceutical companies, as well as most of the other stocks currently in our Cabot Dividend Investor portfolio. But that’s a good thing right now, because ABBV just had a bout of downside volatility and is now selling 36% below its 52-week high and near the low. Most of its current valuation metrics are below that of the five-year average, during which time the returns have been phenomenal, and the 5.4% yield is quite appealing.

AbbVie Inc. (ABBV)


Security type: Common Stock
Industry: Healthcare, pharmaceutical
Price: 80
52-week range: 77.50-124.15
Yield: 5.4%
Profile: AbbVie is one of the world’s largest biopharmaceutical companies, employing advanced biotechnology to produce therapies that treat some of the world’s most complex and serious diseases.

• The company is widely regarded to have one of the very best pipelines of potential new drugs and therapies in the industry.
• AbbVie sells the world’s top-selling drug, Humira, which won’t face competition in its biggest market, the U.S., until 2023.
• The company has a strong track record of growing earnings at a much stronger pace than the industry average.

• One drug accounts for most of the revenue and any bad news on that drug could roil the stock.
• Future performance is dependent largely on new therapies that are yet unproven.
• The stock is much more volatile than other positions in the portfolio.

Portfolio at a Glance


Portfolio Updates

High Yield Tier


The investments in our High Yield tier have been chosen for their high current payouts. These ?investments will often be riskier or have less capital appreciation potential than those in our other ?two tiers, but they’re appropriate for investors who want to generate maximum income from their? portfolios right now.


BUY – Community Health Trust (CHCT 32 – yield 5.1%) – This is an interesting REIT. It operates a portfolio of properties providing outpatient health services in non-urban areas throughout the U.S. It’s a good solid recession resistant business. But unlike most notable securities of this type, CHCT is small and less well established. The downside of that is that the numbers (debt, dividend history, down market track record) are not up to the level I like to see in a security of this nature. The upside is that it has a much higher level of earnings and dividend growth than its subsector peers. It’s expected to grow earnings at a rate of over 20% for the next three years. But its relative weakness was put to the test in the down market and it passed with flying colors, outperforming the overall market as well as the REIT index.


HOLD – General Motors (GM 38 – yield 4.0%) –I used to hate GM, but now I love it! It is actually a very good, well run, financially sound car company now. It’s cranking out high quality vehicles that are no longer inferior to their Japanese counterparts. It also has a management team that now looks further into the future than a week and a half. The company is making impressive strides in the area of electric vehicles and self-driving cars, which bodes well for its future. At the same time, it sells at a cheap valuation with a fantastic dividend that is rock solid. Current earnings and future prospects look great. That said, investors still haven’t forgotten its multi-decade history of sloppy management and poor character. But they will. Numbers don’t lie. Eventually the stock price catches up to the true value.

While I love the company internally, the external environment is lousy. It has big investments in China and is always vulnerable to news about trade. A slowing global economy is bad for sales. As I mentioned earlier, we’re also in the very late stages of this economic upturn. This is a cyclical company that you don’t want to own going into a recession. But the stock bounced back like a champ in the market recovery and has shown resilience even on down days. The momentum is still strong in GM, and I will continue to hold as long as the trend is up.


BUY – STAG Industrial (STAG 28 – yield 5.1%) – There are some good reasons to like this industrial REIT. It has some tailwinds right now. First, this a good environment for REITs in general. Along with renewed volatility comes an investor appreciation for the more defensive dividend payers. As well, STAG deals in industrial properties at a time when they are in short supply and demand is through the roof. The e-commerce boom also helps STAG because it owns a lot of warehouses and storage facilities. Meanwhile, it’s yielding 5.4%, with monthly payouts. The stock is in the right place at the right time and I am therefore upgrading the rating from HOLD to BUY.

Dividend Growth Tier


To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.


HOLD – Altria (MO 46 – yield 7.0%) – Let’s review the story: Because of deeper-than-expected cigarette sales volume declines Altria spent about $14 billion to invest in marijuana company Cronos (CRON) and e-cigarette king JUUL. The goal is to get growth from these other areas that will compensate for increasing volume declines. While Altria has proven itself to be a highly capable company over many decades, it is veering away from its tested and true formula toward the unknown.

Analysts love to hate Altria. To get them to change their minds, the company has to make them. They’ve done it for many years but right now they can’t. Altria won’t get the benefit of the doubt as long as there is any doubt. It will take some time to convert the doubters. In the meantime, the stock has been oversold. It’s being priced as if the dividend is in danger. It’s not. Just like the market overdid it last month by pricing in a recession, investors are overdoing it with Altria. In the meantime you get over 7% on your money to wait around. While I believe the stock will be higher, and perhaps significantly so, later in the year and into next year, it will remain a hold until it builds some positive momentum.


HOLD – American Express (AXP 101 – yield 1.4%) – Credit cards remain good business models. The returns for rivals Visa (V) and Mastercard (MA) over the past 10 years, 1,253% and 1,581%, respectively, are positively obscene. The returns for AXP haven’t been too shabby either: 611%, compared to 284% for the overall market. Morningstar’s Credit Services group averaged a return of 24% per year for the past three years, which is about what AXP did. The problem with AXP is that it’s sensitive to global growth. During the last global slowdown, from 2014 to 2016, AXP tanked and lost almost half its value. Hearing disturbing noises about the global economy, I sold half. We’ll hold the other half for now and see what happens.


HOLD – CME Group (CME 181 – yield 1.5%) – As long as market volatility is still prominent I will continue to hold CME, as crazy markets are good for earnings. I’ll probably sell some of the position when the market settles down but we might not be out of the woods yet. This is a great stock to own when the horse manure hits the fan. The fourth-quarter earnings report in mid-February should probably help the stock too—expectations are quite high.

Safe Income Tier


The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.


BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.9%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
These boys provide a safe haven in an uncertain market and the market might be dicey for a while. In these days of rising interest rates, most long-term bonds are a risky bet. But these short-term funds should hold strong no matter what happens out there, and are a good safe place to diversify away from stocks in case of a bear market.


HOLD – Consolidated Edison (ED 76 – yield 3.8%) – I’ll repeat what I said in my last weekly update: The stock performance has been underwhelming but not bad. It held steady in a rough year but underperformed its peers. I’m not necessarily expecting great things from this stock, but I don’t expect bad things either. It’s a steady dividend payer in a defensive sector in a market that is unpredictable and could well have more downside. As long as I can’t trust the market I’ll hold ED.


HOLD – Ecolab (ECL 155 – yield 1.2%) – This company is a global leader in cleaning, sanitizing, food safety and infection prevention products and services. It’s a good practical business that never goes out of style and is very recession resistant. Is it just me or should a company this boring pay a higher dividend? The payout growth is good though. It’s paying three times what it paid 10 years ago. The stock also relentlessly climbs higher and vastly outperforms the market over time. It’s a terrific stock to hold in these times. It’s still a hold here because the stock is near the high end of its normal range.


HOLD – Hormel Foods (HRL 42 – yield 2.0%) – Founded in 1891, Hormel is a seasoned, reliable hand in the food business. The stock actually has a negative beta, which means it is nowhere near as volatile as the overall market. Yet HRL has significantly outperformed the market over the past one-, five- and 10-year periods. In the last decade, the stock returned 331%, compared to a 139% return for the S&P 500. That means it’s not only safer than the market, but is more than twice the performer. That’s a pretty good combination! HRL looks great going forward too, as analysts are forecasting 10.5% average earnings per share growth over the next five years.


HOLD – Invesco Preferred ETF (PGX 14 – yield 5.9%) – There really aren’t many places where you can diversify away from stocks and bonds and get a high yield. PGX is one exception. Performance faltered at the end of the year as the market lost its appetite for anything but the highest rated debt. But it has perked up since. I like PGX because it’s a nice fit in an income portfolio and there is a good chance that investors will take another look at this high-yielding and neglected asset class after the recent market turbulence.


HOLD – McCormick & Co (MKC 121 – yield 1.9%) – MKC had a terrible week. I guess it was too good to be true that a food spice company could return 39% in a year in which the market was down, and while most other large packaged food manufacturers fell double digits. The company benefited from the acquisition of R&B Foods and the tax cuts in 2018. But last week McCormick reported fourth-quarter earnings that came in below consensus. Revenues were $1.5 billion versus an expected $1.6 billion, and earnings were $1.67 per share versus an expected $1.70. The stock tanked 13%.

It seems like an overly harsh reaction. Earnings were still about 8% higher than last year’s fourth quarter. The company also projected 4% to 6% earnings growth for 2019. It wasn’t a bad report per se, but the market has no sympathy for earnings disappointments these days. It also looks like the market is turning on the stock now that it realizes it won’t have the boost from the tax cuts from its R&B acquisition in 2019. The stock still sells at reasonable valuations for a defensive business. We’ll keep an eye on it and see if it bounces back this week.


BUY – NextEra Energy (NEE 173 – yield 2.6%) – NextEra reported fourth-quarter earnings last week that were slightly below consensus estimates. The market didn’t really care, as the stock fell just a couple dollars. That said, the company reported a very strong 2018, with earnings up 15% year over year. NextEra is actually two companies in one: Florida Power and Light and NextEra Energy Resources. FPL is a traditional regulated utility while NextEra Energy Resources is one of the largest owners of solar and wind power in the world. Each company accounts for roughly half of revenues. It gets steady performance and cash flow from FPL and growth from NextEra Energy Resources, where fourth-quarter earnings were up 37.5% from the year-ago quarter. The combination is successful. The stock has significantly outperformed other utilities and the overall market over the longer term and it should continue to do so in the future.


BUY – UnitedHealth Group (UNH 267 – yield 1.3%) – Did I mention that I like healthcare? There’s a lot to like about UnitedHealth Group. The health insurance giant is raking in the dough, with fourth-quarter earnings up 27% and revenues 12% higher. Growth should continue to be strong as analysts are targeting 15% per-year earnings growth for the next five years. The stock is good to go in any type of market. The biggest risk to UnitedHealth at this point is legislative risk, but with the government hopelessly divided that risk isn’t a factor now. I’d be crazy about this stock if they weren’t so cheap with the dividend.


HOLD – Xcel Energy (XEL 51 – yield 2.8%) – XEL is a strong midsized utility. I like its presence in the alternative energy space and the fact that earnings are expected to grow at 6% per year, which is a good solid clip for a utility. The price is only 6.6% off the 52-week high while it’s selling at about the average price/earnings multiple for the sector. It’s not a great bargain here and I think there is limited upside in the near term, but it’s worth holding onto in this volatile market.

Closing Prices on January 29, 2019

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 estimated.


Where are We Now and Where are We Going?

We may still be in a bull market that is already the longest in history. The recovery is on track to become the longest economic recovery ever in a few months. While these cycles have tended to last longer than historical averages more recently, by any measure the recovery and bull market are both long in the tooth.

It’s that feeling like you’re playing musical chairs and the music has been playing for a conspicuously long time. At some point, the music will stop. When will it happen? The market just grappled with that at the end of last year. It started to price in a recession that isn’t as close as initially thought. And now it’s bouncing back.

Let’s put this in perspective. The economy goes in cycles. Coming out of a recession, the economy recovers. It then expands until it eventually peaks, then starts to slow until ultimately sliding into the next recession. Then the cycle repeats itself. These stages can be referred to as early cycle, mid-cycle, late cycle, and then recession.


Where are we now? While cycles can’t be definitively determined until after the fact, by most accounts, we are past the peak in the late cycle. As the above chart illustrates, that doesn’t look like a great place to be.

The economy trends weaker until we fall into a recession. It’s also worth noting that the market doesn’t move in sync with the economic cycle. It anticipates. The market usually moves six months to a year before the economy. Markets generally start to price in recessions before they occur. The market is currently anticipating and trying to price in where we’ll be in the second half of this year.

There are indeed signs that the economy is slowing. I don’t know one economist forecasting GDP growth near the roughly 3% 2018 pace for this year. So, the economy is likely slowing down in the late stage of the current cycle and the market will be in trouble when we start to get within about a year of the next recession. That doesn’t sound comforting.

But it’s not as bad as it sounds. For one thing, the market historically can be strong for a year or more in the late cycle. After all, the economy is still growing, just a little less so than before. And, since this has been just about the longest recovery on record, it would make sense that the late stage would last longer than normal.

It’s also an unusual recovery. For the first eight years, the recovery had been the weakest on record since World War II, with GDP growth just a little more than half that of the average recovery. That means the excesses that normally build up by this stage of the recovery are behind schedule. On top of that, it’s highly unusual to get such a huge fiscal stimulus in the form of tax cuts and deregulation at such a late stage. That could give the economy new legs for a while.

It’s possible that the market could be strong for years before the next recession. But it still seems inevitable that a recession is looming out there somewhere in the not-too-distant future. It’s also possible that the economy decelerates more quickly than expected. Either way, it’s prudent to exercise some caution at this point.

While more cyclical stocks can still have a great run, longer term the more recession-resistant names should be a better bet. Historically, there are three defensive sectors that perform the best in both the late stage of a recovery as well as a recession: Healthcare, Utilities and Consumer Staples. Hence, those are the sectors that currently make up the vast majority of the Cabot Dividend Investor portfolio.

Your next issue will be published February 27, 2019
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