June 28, 2023

Looking Good at the Halfway Point

Note: With next Tuesday being the Fourth of July holiday, your next Cabot Dividend Investor update will arrive in your inbox next Thursday, July 6. Enjoy the holiday!

Things are looking up. Inflation is falling. The Fed is almost done hiking. And there is no recession to be found.

The market has surprised just about everybody in the first half of the year. The S&P had risen 13% as of days before midyear and over 24% from the October low. This new bull market is not what was expected.

After an abysmal 2022, most pundits were expecting more ugliness in the first half of this year and a recovery somewhere in the second half. But investors sensed that we could get through this Fed rate hiking cycle with minimal pain. Then artificial intelligence (AI) gave stocks a further boost.

We’ll see what happens in the second half. It would be just like the market to have a great first half when everything looked so crummy and then have a bad second half now that things look better. If the rally does continue it will have to broaden. as only a handful of large-cap technology stocks account for almost all the YTD gains.

A continuing and broader rally should favor the defensive, dividend-paying stocks that have underperformed YTD, especially considering overall market earnings have been contracting for two straight quarters. Companies that can continue to grow earnings should be at a premium. If the market struggles in the second half, defense and dividends should be the best place to be as well.

Recent Activity

May 31
AbbVie Inc. (ABBV) - Rating change “HOLD” to “BUY” and “BUY 1/3”
SOLD ½ Broadcom Inc. (AVGO) - $807.96

June 21
ONEOK Inc. (OKE) - Rating change “HOLD” to “BUY”

June 28
Realty Income (O) – Rating change “HOLD” to “BUY”

High Yield Tier

Enterprise Product Partners (EPD – yield 7.5%) – Enterprise is slowly and quietly getting the job of a high-income security done. It returned 15% last year in a bear market and it’s up over 11% so far this year. The partnership also increased the quarterly distribution by 5.4%. Business is solid while most companies’ earnings are shrinking. That massive payout is rock solid and growing. Enterprise should be a solid holding in the aftermath of the recent rally. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 6.5%) – OKE has had a tumultuous six weeks since the market hated its purchase of Magellan Midstream Partners (MMP). The deal will turn ONEOK from a natural gas operator to a diversified midstream company that services oil and refined products as well. The deal is a longer-term positive that could hurt performance in the near term. OKE did have a strong move off the recent bottom earlier this month, but it’s been floundering again over the last two weeks. OKE should still hold up relatively well because it has a high and safe dividend and reliable earnings in an environment where overall market earnings are contracting. HOLD

Rating change “HOLD” to “BUY”

Realty Income (O – yield 5.0%) – In a tough market for both defensive stocks and real estate, O has been floundering. It still sells well below the pre-pandemic high, despite having higher earnings, and the stock is now near the lowest point since last summer. But income and safety may be at a premium in the second half of the year. Either investors will crave defense again or the rally will broaden out to include this year’s lagging sectors. O is a great long-term hold with a phenomenal track record. But the track record is even better when it has been purchased when it’s down. BUY

The Williams Companies, Inc. (WMB – yield 5.8%) – This year has not been kind to defensive stocks or energy stocks so far. Natural gas prices have fallen largely because of the unusually warm winter temperatures throughout the country and the world. But it isn’t affecting the bottom line. Williams once again delivered on earnings and beat expectations for the fourth straight quarter. Earnings per share grew a whopping 36% over last year’s quarter as natural gas volumes remained strong and growing. WMB has pulled back from the early-June spike but has since been clawing slowly higher. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.3%) – This has not been a good recent phase for the pharma powerhouse. The stock fell from the recent high to a new 52-week low. And it continues to flounder. ABBV is a notoriously bouncy stock and the downward move started with disappointing earnings where its new drugs grew below projections in the long-awaited Humira patent expiration year. Eli Lilly had a similar issue years ago. The company has a phenomenal pipeline capable of replacing lost Humira revenues in the next couple of years. BUY

Broadcom Inc. (AVGO – yield 2.2%) – This semiconductor and software infrastructure stock has pulled back from the high. But it’s still hanging tough at a much higher level after the big surge last month. It is no doubt a great company and returns should be good over the next couple of years. But AVGO is also at the mercy of the AI frenzy. If the market cools off on such stocks it will likely pull back. We’ll see. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.4%) – The infrastructure company stock has pulled back from the recent high and is down in June. But BIP is still around the higher levels of the recent range. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The stock had been suffering from the lull in defensive stocks, but it shouldn’t stay down for long. A pullback from the recent spike higher is typical for this stock. BIP is still reasonably priced with a good dividend ahead of a promising second half of the year. (This security generates a K-1 form at tax time.) BUY

Eli Lilly and Company (LLY – yield 1.0%) – A pullback after the huge surge higher this spring would be historically normal behavior for this stock. But it isn’t happening. LLY has trended slowly higher instead of pulling back. The market has refused to cool on LLY because it has two potential mega-blockbuster drugs up for approval later this year or early next as well as better than 20% annual earnings growth for the next several years. HOLD

Hess Corporation (HES – yield 1.3%) – HES keeps bouncing around in the near term on positive and negative news about energy prices. The more resilient economy is a plus as well as a plethora of factors likely to put upward pressure on prices in the intermediate term. The longer-term supply/demand dynamic favors energy very much and Hess is a special case. It can increase production almost at will with very low-cost production. It should be stellar if energy stocks move higher again. But the stock is also uniquely equipped to deal with short-term turbulence in the industry. BUY

Intel Corporation (INTC – yield 1.5%) – INTC pulled back sharply last week after soaring in the earlier part of June. The stock had surged more than 30% in just a couple of weeks after Nvidia (NVDA) rocked the market with blowout earnings mostly from excitement regarding its expanding chip production capabilities. The Nvidia CEO expressed interest in partnering and the company is continuing to ink new deals around the world. INTC is still at the highest level since last summer and is starting to be increasingly seen as a cheap stock with a bright future. HOLD

Qualcomm Inc. (QCOM – yield 2.8%) – Like INTC, QCOM has pulled back in the last couple of weeks after its initial AI surge. It’s bouncing around as investors fluctuate between confidence in the company’s future and waning AI excitement. Qualcomm describes itself as the “on device AI leader,” and the company should benefit mightily from the increasing shift towards AI and profits are now likely to soar sooner than previously expected. But Qualcomm doesn’t benefit as directly and immediately from AI as some other companies, and it is still vulnerable to lower handset sales in the near term. HOLD

UnitedHealth Group Inc. (UNH – yield 1.4%) – It’s been a rough patch for UnitedHealth. The main problem was a few weeks ago when the healthcare insurer reported rising costs as elective procedures are surging from pent-up pandemic-era demand. It’s a blip that will likely put a dent in earnings for the next couple of quarters. But it shouldn’t change the positive longer-term story. Plus, the rise in procedures may peter as the economy slows down. This is still a great stock to own in a highly uncertain environment. And now it’s cheaper. BUY

Visa Inc. (V – yield 0.8%) – V has been hanging so tough near the high end of the recent range despite a nowhere market in recent days. The payments processing company grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. That’s terrific when the average stock is posting lower earnings. Plus, it can really take off when the market recovers for good. This is a great stock in an up market. The resilience in this market is encouraging and makes the stock easy to hold. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.5%) – This combination regulated and clean energy utility stock is currently at the lower end of that range. It is still more than 20% below the 52-week high. It has not been a good year for defensive stocks and the price is reflecting that. But that could change in a big way if there is an economic recession or a continued earnings recession. This company is targeting earnings per share growth of 6% to 8% annually through 2026 and 10% per year dividend growth through at least 2024. BUY

Xcel Energy (XEL – yield 3.3%) – This clean energy utility stock has been trending lower since the beginning of April and still flounders. Although this stock tends to be bouncy, the recent weakness doesn’t make much sense. Defensive stocks are still a safe and promising place to be as the economy slows and overall market earnings continue to fall. This stock has become cheap ahead of a period of likely market outperformance. BUY

USB Depository Shares (USB-PS – yield 5.9%) – After pulling back in sympathy with the overall bank selloff, this preferred issue has trended higher. This is a preferred stock of one of the country’s largest banks that has rising deposits. The bank is rock solid, and this security should continue to move according to interest rates. BUY

Invesco Preferred ETF (PGX – yield 6.4%) – Longer-term rates are bouncing around again with a bias toward lower since the bank failures increased the risk of recession later this year. This fund is also vulnerable to fluctuations resulting from banking troubles and many preferred issues are those of banks. The fund is only threatened if banking issues reemerge and escalate into a more widescale problem. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.5%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The increased risk of a recession this year bodes well for the near-term total return of this fund. BUY