The market has rallied like crazy over the past seven weeks. It’s up over 30% from the low in March. The market is already looking beyond the coronavirus to a strong economic recovery.
But stocks are trading on a rosy scenario that may not come true. While the market is always difficult to predict in the near term, there is at least a good chance of disappointment going forward. The overall market may have gotten ahead of itself and it is prudent to prepare for the possibility of more turbulence ahead.
For those reasons, the Cabot Dividend Investor portfolio is only buying very selectively. While the overall market may be shaky at this point, certain companies are thriving during the pandemic. There are niches where business is actually booming.
In this issue I highlight two stocks that are selling at bargain prices, have businesses barely affected by the pandemic, and stand to thrive in the post-Covid-19 market as well.
Cabot Dividend Investor 520
Maybe Too Far Too Fast
Don’t look now but we are in the midst of a huge rally, and technically a bull market. The S&P 500 has soared more than 30% from the lows of March 23rd in just 50 days. The index is now down just over 13% from the all time highs and is at the same level as it was this past October.
Meanwhile, back on planet earth, the economy is enduring the worst crash in our lifetimes. Business activity has contracted during the shutdown to a level that is light-years beyond what we have seen during any recession. There are 33 million new unemployed. Major banks are predicting a 40% fall in GDP for the second quarter, which ends at the end of next month.
Why is the market booming while the economy crumbles?
In short, the market tends to anticipate. It lives six to nine months in the future. And the market sees a huge recovery complimented by trillions in Fed stimulus and rock bottom interest rates by then.
Sure, the economy is a disaster now. But it will likely be a very short term aberration. The economy didn’t break. It has been artificially and temporarily shuttered by the government. It can be restarted again as the virus passes. It may be the deepest economic contraction of all time but it isn’t real. And once the government gets out of the way it will spring back to form. At least that’s what the market seems to be thinking.
I have been skeptical of the market rally in past issues and updates. Even looking ahead six to nine months, the economy will not be as strong as it was this past October, yet that is where the market is priced. And that’s with the optimistic scenario. There is also a risk of setbacks.
The spread of the virus could significantly increase as the economy restarts, and the restart could be delayed. The market wouldn’t like that. Everything could go great and then the virus could reignite in fall, prompting another at least partial shutdown.
I hope those things don’t happen. And I don’t mean to be negative or gloomy. It is very possible that the market never looks back. I just want to emphasize that many risks remain in this market despite the rally. And I stand by last issue’s strategy of targeting great stocks at cheap prices in the event of another steep decline in the market.
To be clear, I don’t doubt the economic recovery. I believe we will overcome this and the economy and the market will come back strong. I’m just saying that it might be prudent to prepare for some turbulence along the way.
Due to the elevated level of risk to the market after a 30% rally, I am only very selectively buying into the market at current levels. The few portfolio positions that are BUY rated are ones that are only minimally affected by the virus economy, still cheaply priced, which should thrive in the post virus market as well.
What to Do Now
The S&P 500 is an index of 500 stocks. It’s a good reflection of the behavior of the overall market or stocks in general. But the index is composed of 11 different sectors. Sometimes the behavior of individual stocks or sectors doesn’t reflect the performance of the overall market.
In this pandemic economy some stocks are getting creamed. Energy and Financial stocks are particularly hard hit and may take longer to come back. Other stocks are minimally affected by the situation and earnings are only slightly disrupted. The Utility and HealthCare sectors are good examples of that. And other stocks are thriving in this economy including online retailers and companies that offer technology benefitting the stay-at-home situation.
Earnings matter—and will ultimately be reflected in stock performance. Some companies deserve to be trading at the low point of the range and others deserve a high price. This divergence will likely become more pronounced as the market normalizes. There are winners and losers in this pandemic.
The companies in the portfolio with suffering businesses are Enterprise Product Partners (EPD) and Valero Energy (VLO). Energy is in the crosshairs of this recession. EPD is still in the portfolio and rated a HOLD because the stock price already reflects an awful situation and the dividend is safe. Valero’s business is suffering but that business and stock can turn around fast. In fact, the stock is already up 100% from the low.
Most of the portfolio positions are rated HOLD. That’s mostly because of the high degree of probability that the market will go lower and those stocks will be cheaper in the future.
For the reasons mentioned above, I‘m reluctant to buy into this market right now. While these stocks can well endure another down market and be quick to recover, the bear market has made me picky about an ideal entry point.
The BUY rated stocks are those that have businesses that are minimally affected by the economy and/or are in a unique position to thrive in the post Covid-19 market.
Brookfield Infrastructure Partners (BIP)
Bermuda-based Brookfield Infrastructure Partners owns and operates infrastructure assets all over the world. The master limited partnership (MLP) 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.
Brookfield operates a current portfolio of over 1000 properties in 30 countries on five continents. It is well diversified geographically with roughly 25% in North America, 30% South America, 25% Europe and 20% Asia Pacific. The partnership operates four segments, Utilities, Transport, Energy Services and Data Infrastructure.
- Toll roads in South America
- Telecom towers in 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 great thing about these properties is that they are essential services that continue to generate revenue in any economy. BIP has the reliable cash flow of a utility but with the growth of an asset class that is increasingly in vogue.
The world is in desperate need of updated infrastructure. Developed economies have badly aging systems in need of replacement and have infrastructure that is woefully insufficient to accommodate growing urban populations and more advanced economies. The G-20’s global infrastructure hub estimates that a global investment of $94 trillion will need to be invested in the next several decades.
The private sector is essential as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising billion of dollars a year for infrastructure investments. It’s almost becoming a new asset class.
But Brookfield was early to the party. The partnership has been successfully operating infrastructure properties for more than 12 years. And these people know what they’re doing. Since the IPO in January of 2008, the stock has produced an average annual return of 16.28% (with dividends reinvested), about twice the return of the overall market over the same period.
The solid 4.6% yield is backed by reliable revenues that are holding up very well even during the virus economy. And the payout has grown every year for the last ten years at a better than 10% per year average clip.
This stock has significantly outperformed the utility index and the overall market of the last ten, five, three and one year periods.
Verizon Communications (VZ)
Verizon is the largest U.S. wireless carrier. Of the four major U.S. telecom carriers (Verizon, AT&T, Sprint and T-Mobile), Verizon has by far the most wireless revenues with the largest network and coverage. While the company has ancillary businesses in cable and business services, wireless is by far the main event, accounting for about 85% of adjusted earnings.
Everything is about the coronavirus these days. And that’s a good reason to buy Verizon now.
During this pandemic, cellular wireless service has become an essential consumer staple on a par with food and housing as people rely on smartphones for work, communication and entertainment more than ever. Verizon already was a defensive stock, but this latest crisis has made it even more so.
The company is only being affected by lower handset sales during the pandemic. In the last quarter revenues slid 1.6% over last year’s quarter and earnings were flat. The company also lowered earnings guidance for the year from postitive 2% to 4% to negative 2% to positive 2%.
But that’s a mere drop in the bucket compared to what many companies are facing. And the stock performance is reflecting the resiliency of the business. Since the market highs of February 19th, the stock is down just 1.6% compared a 15% drop in the S&P 500. At the market bottom in March, VZ fell 14% from the high compared to a 34% decline in the overall market.
Meanwhile, you’re getting a rock solid dividend with a 4.3% yield backed by a company with stable earnings and $7 billion in cash. It’s a defensive income-generating investment proven to have far less downside than the overall market. That alone would make this stock a great investment right now. But there’s something else. Something big.
The 5G Opportunity
5G is the next generation of cellular wireless technology. But it’s far more than just an incremental advancement. Much higher speeds and internet connectivity will enable a new generation of technolog like artificial intelligence, self driving cars, robotics, smart cities and much more. The technology is a game-changer that will thrust the world into a digital age like nothing we’ve seen before.
Verizon’s focus on wireless not only enables it to achieve better profitablity than its peers, but it enables the company to focus on upgrading its networks and expanding 5G technology. It is well ahead of its peers as it built 5G mobile services in 30 cities in 2019. It is building the most expansive 5G network and is first to the party in most cases.
Although delayed somewhat by the pandemic, smartphones with 5G will hit the market like crazy this year and next. Apple (AAPL) is projecting to launch its first 5G enabled phones by the end of the year. The technology is just now descending on us. All the new techologies will need a much higher degree of internet connectivity through cellular networks. They will need Verizon, which controls the largest network. Naturally, Verizon will charge for additional services.
The cellular giant will likely be able to charge higher fees per smartphone, as they will offer more and better services. The Internet of Things involving all things connected to the internet like autonomous cars, smart cities, health monitoring services, and a wide range of other things will ring the register as well. And, being first to the party, Verizon can lock in customers..
Here’s the deal. Verizon by the old rules is a great investment in this market. It’s cheap, high dividend-paying and defensive. And business is solid in the worst economic crash we’ve ever seen. But when you also add the likely growth injection from 5G, it makes the stock a brilliant pick.
Portfolio at a Glance
|High Yield Tier
|Indicated Annual Dividend
|Yield On Cost
|Div Safety Rating
|Div Growth Rating
|Brookfield Infrastructure Ptrs (BIP)
|Community Health (CHCT)
|Enterprise Products Partners (EPD)
|STAG Industrial (STAG)
|Verizon Communications (VZ)
|Current High Yield Tier Totals:
|Dividend Growth Tier
|Crown Castle Int. (CCI)
|Innovative Industrial Props. (IIPR)
|Qualcomm Inc. (QCOM)
|Valero Energy Corp. (VLO)
|Current Dividend Growth Tier Totals:
|Safe Income Tier
|Alexandria Real Estate Equities (ARE)
|BS 2021 Corp Bond (BSCL)
|Invesco Preferred (PGX)
|NextEra Energy (NEE)
|Xcel Energy (XEL)
|Current Safe Income Tier Totals:
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.
Brookfield Infrastructure Partners (BIP – yield 5.1%) – The infrastructure partnership announced first quarter earnings after the bell on Friday. The market liked what it saw and the stock jumped 4.6% on Monday. Earnings of its essential assets proved resilient and three of the four segments (utilities, energy, and data infrastructure) showed solid growth. The transportation sector showed slower growth from asset sales and reduced traffic on its toll roads and ports due to lower trade volumes during the pandemic. The company posts strong earnings in any economy and has used its position of strength to acquire stock of other infrastructure companies, setting up future growth. The company is delivering as advertised in a bad economy. BUY
Community Health Trust (CHCT – yield 4.6%) – The small healthcare REIT announced earnings that beat expectations and raised the dividend. The stock is down slightly as the market reacted somewhat coolly to earnings. The problem is that growth is slowing as the REIT becomes larger. Growth is still expected to be stellar and much better than that of the average REIT. But the market is adjusting to the lower growth rate going forward. The stock is still solid and earnings should remain strong through the virus. HOLD
Enterprise Product Partners (EPD – yield 10.0%) – The company has one of the largest networks of pipelines, processing facilities and logistics assets in the U.S. While EPD has raised the distribution every year since 1998, payout growth was reduced to a trickle in recent years as it used available cash to pay down debt and self fund expansions. That strategy left it in the strongest financial shape in its history before this crisis. A 10% dividend may sound too good to be true, but in this case it isn’t. Enterprise can easily weather this storm for several more quarters and continue its distributions. It may take a while for the price to bounce back to where it was, but it is also one of the few places to get a safe double-digit yield in the meantime. HOLD
STAG Industrial (STAG – 5.7%) –The stock has performed about the same as the overall market during the downturn. The good news is that its warehouse properties are booming as online shopping is exploding and the need for warehouse storage of properties is surging. The REIT also announced better than expected earnings and few clients having trouble paying rent so far. The high and safe dividend, along with the now reasonable price, makes this a solid holding from here. HOLD
Verizon Communications (VZ – 4.3%) – In this pandemic cell phones are becoming consumer staples almost on a par with food and housing. That said, Verizon’s first quarter earnings report showed some pain from reduced equipment sales and postpaid subscribers during the pandemic. But revenues fell just 1.6% for the quarter and sales were flat. The company also predicted flat earnings for the year. That’s pretty solid considering what many companies are facing. That’s probably why the stock is down less than 3% in the bear market. It’s a rock solid holding through this crisis. But the exciting part of the story lies ahead. This stock will add an element of strong earnings growth when 5G comes out. 5G will also be a big market driver in the post virus world. 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.
AbbVie (ABBV – 5.4%) – The biopharmaceutical giant officially completed the purchase of Allergan on Friday. The deal will further diversify AbbVie from Humira earnings and buy time for the new drugs to pick up revenues Humira will lose. The stock had a huge run before the bear market and seems to have caught fire again as investors realize the value. This stock has been hot stuff. ABBV is up to about 90 and making a run at the old high of over 97. It’s a great company that is selling at a good value and the earnings are little affected by the virus. It’s the perfect stock for the remainder of the crisis and beyond. BUY
Altria (MO – 9.1%) – The cigarette maker announced stellar earnings that grew 18.5% as people smoke like crazy during this crisis. But the stock fell for the week anyway as the news about E-cigarette acquisition JUUL continues to be terrible. JUUL is now exiting several European markets. Let me be clear. Even if JUUL becomes absolutely worthless, this stock is undervalued. It is a rare consumer staple with earnings that grow through this recession. The dividend is safe. Although the stock has been a huge disappointment since being added to the portfolio and the down market performance has been lousy, it is still a resilient company in a recession. Unfortunately, the market hasn’t been agreeing with me so far, but it will come around eventually. HOLD
Crown Castle International (CCI – yield 3.0%) – There’s a feeling that everything has stopped and the only news is about the coronavirus. But the world goes on and 5G is still a game-changing technology that continues to roll out. I believe that 5G will be a huge story in the post virus market. And this cell tower REIT is right in the middle of it as its properties provide necessary infrastructure for the new technology. Unfortunately, the secret is out and the stock isn’t cheap. It’s actually up about 13% in 2020. This is one of the few stocks that doesn’t seem to know it’s a bear market. The performance should continue to be solid but it isn’t cheap while so many other stocks are. And that’s why it is only rated a HOLD. HOLD
Rating change “HOLD” to “BUY”
Innovative Industrial Properties (IIPR – yield 5.3%) – This marijuana farm REIT announced earnings last week that missed estimates. And the market didn’t like it. The stock is down over 6% since the announcement. But despite missing estimates the company posted year-over-year revenue growth of 210% and earnings growth of over 100%. It seems a little picayune. Probably the biggest disappointment for investors is that the pace of acquisitions has noticeably slowed as the lockdown economy gums up everything. But this is a stock with better than 100% earnings growth that should continue and is selling nearly 50% below the 52-week high with a 5.3% yield and a rapidly growing payout. This is a REIT with huge growth and the latest weakness presents a buying opportunity. With solid technical support at the 70 level and off the heels of a dumb selloff, the rating is increased to BUY. BUY
Qualcomm Inc. (QCOM – yield 3.2%) – The smartphone chipmaker is an interesting story in this recession and bear market. Semiconductor stocks are cyclical. Qualcomm does a lot of business in China. Phone sales are tanking. Qualcomm expects 30% lower phone sales during the pandemic. Yet, the stock is still down less than the overall market in this selloff. What does that tell you? The reason is that 5G is still on its way and looming huge for this maker of the only good 5G smartphone chip. Sure, earnings may be taking a hit now. But the weakness is temporary. Around the corner is a huge 5G bump for earnings and the market knows it. Expect this stock to soar when things get back to normal. HOLD
Valero Energy Corp. (VLO yield 6.0%) – This stock is in the crosshairs of the recession. Energy is the worst performing sector in the selloff as demand crashes and the industry is experiencing a depression. Refiners are somewhat of a different animal because cheap crude oil prices lower their biggest cost. Although demand for refined product has fallen off a cliff in the lockdown, a strong recovery awaits as the economy reopens. In fact, crack spreads have already soared in anticipation. The market is forward looking and can see demand recovering, which is why this stock has rallied more than 100% from the low in March. This is a financially solid refiner that can weather the storm. The stock is now tethered to the recovery and should continue to move higher as things inevitably improve. It is still a HOLD for the risk of setbacks in the economic restart. HOLD
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.
Alexandria Real Estate Equities (ARE – yield 2.7%) – This defensive life science and research lab REIT has been somewhat of a disappointment in that it has performed on a par with the overall market during this selloff. The reason is because the defensive nature of its business and solid dividend made the stock a superstar of the pre crisis market and the stock got a little pricey. With many stocks now cheap, ARE has lost some of its relative mojo. However, it is likely to hold up well from here as earnings are little affected by the recession. As the financial disaster in the second quarter becomes clearer, this stock will reveal its outstanding qualities and investors will likely gravitate back to it. It’s a nice holding through the rest or this crisis and beyond. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – It’s nice to have something in the portfolio that isn’t affected by stock market volatility. This short term bond ETF has held up well through the crisis because it isn’t in the stock market, the bonds are short term, and they are investment grade rated. It’s a great holding in times like these, and it is delivering as advertised. BUY
Invesco Preferred ETF (PGX – yield 5.5%) – This preferred stock ETF continues to crawl back to the pre crisis price after a rather disturbing selloff in the market panic. It took a sizable hit during the market panic but is returning to form as panic wanes. In fact, the price is down less than half that of the overall market since the market highs in February. The high yield and market outperformance during troubling times makes this fund a nice holding going forward. HOLD
NextEra Energy (NEE – yield 2.5%) – This regulated and alternative energy utility is an ideal company for the current economy. Revenues are highly dependable and unaffected by the lockdown. At the same time, the company owns the future with its world-leading alternative energy business. But it has underperformed the overall market in this selloff. The reason is that the price got too high during the bull market and needed a correction. At the same time, the bear market is producing a lot of cheap values and the relative value of NEE is diminished. But now, the stock price is coming back to earth and the stock remains one of the very best long term holdings for conservative investors. The combination of safety and growth doesn’t go out of style for long. If the market again turns south, I will recommend a BUY on NEE at a cheaper price. HOLD
Xcel Energy (XEL – yield 2.90%) – This smaller alternative energy utility announced earnings last week that missed estimates for both revenue and earnings. Management cited weather as the primary reason and stated that Covid-19 was having a minimal impact on results. As well, the utility reiterated its previous earnings guidance for the year. The main reason for the recent lagging performance is the utility sector, which has been the worst performing sector over the past month. This safe sector usually underperforms during a rally. The sector had been a star performer over the past couple of years before the bear market and stocks had gotten pricey. Also, as many more stocks become cheap and high yielding, the relative appeal of utilities is diminished. But these are short term issues. This is a defensive business with growth that investors will again come to love. HOLD
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.
The next Cabot Dividend Investor issue will be published on June 10, 2020.
Cabot Wealth Network
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President & Publisher: Ed Coburn
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