All Eyes on Inflation
It’s been a good month in the market, so far. The S&P 500 has regained all the dip from April and is now within a whisker of the all-time high. The driving forces have been an improving interest rate story and solid earnings.
With 92% of S&P 500 companies having reported, earnings increased an average of 5.4% over last year’s quarter. But it’s better than that. If you take out the report of Bristol-Myers Squibb (BMY), average earnings growth would be 8.3% for all the other stocks on the index. That’s a strong gain.
There has also been good interest rate news. The Fed indicated that the next rate move would likely be a cut rather than a hike. That assuaged the fears of investors. Also, slower GDP and jobs growth combined with the Fed speak led investors to expect the first Fed rate cut in September with another one likely before the end of the year.
The interest rate optimism has led to a very good month for the interest rate-sensitive stocks for a change. In fact, the best-performing S&P 500 stock sector over the past month is utilities, with a double-digit gain. Portfolio position NextEra Energy Inc. (NEE) is now up 38% since early March.
But this better interest rate prognosis hangs in the balance and could turn on a dime with this week’s April CPI. It is highly anticipated and will be closely watched. Higher-than-expected inflation means it is less likely that the Fed will start lowering the Fed Funds rate in September. The market would hate that. A bad number could end this rally fast. Of course, if the number is as expected or better, stocks will likely rally. We’ll see.
Recent Activity
April 17th
UnitedHealth Group Inc. (UNH) – Rating change “HOLD” to “BUY”
May 8th
Purchased FS KKR Capital Corp (FSK) – $19.40
Realty Income (O) – Rating change “BUY” to “HOLD”
SOLD Xcel Energy Inc. (XEL) – $54.93
Current Allocation | |
| Stocks | 59.4% |
| Fixed Income | 19.5% |
| Cash | 21.1% |
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 5.3%) – It’s been a wild ride on the current interest rate narrative for this infrastructure company. It was an awful first half of April as the stock fell about 20% in the first two weeks. But Brookfield reported strong earnings and the company has rallied to make up just about all of that dip since. It’s also up 20% since April 16th. Funds from operations grew 11% over last year’s quarter as new assets came online, the transportation segment was strong, and inflation indexation kicked in for a lot of its contracts. The company also raised the next quarterly dividend by 6%. Solid earnings and a dividend raise are indicative of a company that is operationally strong. (This security generates a K1 form at tax time). BUY
Enterprise Product Partners (EPD – yield 7.2%) – This midstream energy partnership has pulled back a little bit from the high of early April as the energy market cooled off and beaten-down dividend stocks rallied. Enterprise reported solid earnings with profits per share in line with estimates and revenues a lot better as new projects came to fruition. Distributable cash flow was solid with 1.7 times distribution coverage and justified the recent 5.1% distribution increase. Overall, the earnings didn’t reflect much change in an already solid story with good stock performance. The massive payout is well-supported, and the energy sector still looks good (This security generates a K1 form at tax time). BUY
FS KKR Capital Corp. (FSK – Yield 14.4%) earnings - The ultra-high yielding Business Development Company reported solid earnings that were roughly in line with estimates. FS also announced a second-quarter regular dividend of $0.70 per share and supplemental dividend of $0.05, reflecting confidence in the BDC’s ability to cover the payout and support shareholders. The market seems to have liked it and the stock has been up about 3% since the earnings report on Friday. I’m hopeful the position will provide not only a fantastic dividend income but modest capital appreciation as well. BUY
Main Street Capital Corporation (MAIN – yield 5.8%) Earnings – This Business Development Company reported stellar earnings last week that handily beat estimates. It paid a regular monthly dividend of 0.72 per share in the second quarter, marking a 6.7% increase year over year, as well as a 0.30 supplemental dividend in the quarter. But the stock has pulled back a couple of percent since the report. Perhaps there is some selling on the good news. MAIN has also shown resilience in tough markets. The safe and high yield pays dividends every single month with a strong possibility of supplemental dividends over the course of the year as well. BUY
ONEOK Inc. (OKE – yield 4.9%) – The midstream energy company reported earnings that missed estimates due to higher costs incurred as a result of higher operating costs and capital expenditures. However, the company also raised guidance for 2024 and analysts still expect 30% revenue growth and 29% earnings growth for this year over last year. The higher costs in the quarter aren’t expected to be a problem that lowers earnings beyond this past quarter. The stock has rallied 5% since the earnings report early this month and is again within pennies of the high. BUY
Realty Income (O – yield 5.7%) Earnings – The floundering income REIT reported solid earnings last week with 33% revenue growth due to a recent acquisition and adjusted funds from operations growth of 5%. Metrics were pretty solid across the board with high occupancy rates and about 105% recapture on renewed leases. O didn’t get much of a bump so far from the report but it has been trending higher since the middle of April. HOLD
The Williams Companies, Inc. (WMB – yield 4.8%) Earnings – The midstream energy company reported excellent earnings last week and the stock is again within pennies of the 52-week high. It soundly beat estimates on both net income and earnings per share and guided to the upper half of 2024 guidance. Williams also posted stellar 2.6 times dividend coverage. WMB broke out in the middle of February and the energy sector is still strong. It’s a stable, high-yield stock and the company should deliver solid and dependable earnings in just about any economy. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 3.8%) – The biopharmaceutical company reported earnings earlier this month that beat expectations. But the market wasn’t too excited because the company also slightly lowered earnings per share expectations for next year, and the stock has dipped slightly since the report. Beyond the short-term noise, the good story is intact. Although Humira sales fell 35.9% after losing patent exclusivity, it was less than expected. Meanwhile, the other immunology drugs, Skyrizi and Rinvoq, grew at torrid paces with revenue of $3.1 billion for the quarter. The company is well on track to replace Humira revenues and return to robust growth in the years ahead. BUY
American Tower Corporation (AMT – yield 3.5%) – This cell tower REIT is having a good month of May amid the improved interest rate narrative and strong earnings. American Tower rallied strongly after the REIT beat estimates on both revenue and earnings with 9.8% adjusted funds from operations per share growth over last year’s quarter. The REIT also raised guidance for 2024. Hopefully, the strong operational performance along with the better interest rate news will last and AMT can muster a sustained rally in the weeks and months ahead. BUY
Broadcom Inc. (AVGO – yield 1.6%) – The stellar chip and software infrastructure company stock has leveled off since late February. That behavior is consistent with past performance of the stock since it’s been in the portfolio (and returned 223%). It tends to level off after a big surge, as it did this past June through October, before its next surge higher. Earnings could be a catalyst to get the stock moving again but it doesn’t report until next month. Things look good as several technology giants reported increased spending on AI-related products and services in their earnings reports which should benefit Broadcom. HOLD
Digital Realty Trust, Inc. (DLR – yield 3.4%) – The data center REIT reported mixed results from earnings as profits slightly exceeded estimates and revenues lagged somewhat due to higher costs. DLR moved down slightly after the report but is still up about 8% so far in May. The report was mostly uneventful except for a statement by management that the REIT is seeing accelerating demand for AI-oriented opportunities. A big reason the stock was added to the portfolio was the additional growth catalyst provided by AI. The statement indicates that this is happening. BUY
Eli Lilly and Company (LLY – yield 0.7%) – The pharmaceutical company stock jumped more than 6% after reporting earnings. Although the company missed slightly on revenues, earnings per share were much better than expected and, even more importantly, Lilly significantly raised guidance for this year. The main reason is that its weight-loss drug revenues obliterated forecasts with $517.4 million in revenue for the quarter versus an expected $373 million. The company is also aggressively expanding production for future quarters and raised its 2024 revenue projections by $2 billion. The weight-loss drug is a monster and looks like a mega blockbuster and the Alzheimer’s drug should get the FDA nod in the next few months. HOLD
McKesson Corporation (MCK – yield 0.5%) Earnings – The wholesale pharmaceutical giant reported mixed earnings last week. Revenues were up 11% over last year’s quarter but adjusted earnings per share fell because of a higher tax rate and other adjustments. The company also indicated earnings growth of 14% to 17% for this year, and the stock has trended slightly higher in the week since the report. MCK just continues to forge quietly higher while no one seems to notice. The pharmaceutical supply chain goliath dominates a market that grows all by itself because of the aging population. BUY
Marathon Petroleum Corporation (MPC – yield 1.7%) – The country’s largest refiner fell significantly after reporting lower earnings amid record maintenance shutdowns. MPC has fallen 14% since the report. But things aren’t nearly as bad as they seem. The company actually beat earnings and revenue forecasts. Earnings are down because of reduced crack spreads versus last year’s near-record first quarter but profits are still historically high. The maintenance shutdowns are necessary and set the company up well for increased volumes ahead of the driving season. The stock was red-hot and now it’s ice cold. Refiners are that way sometimes. But the energy market still looks solid for now. HOLD
Qualcomm Inc. (QCOM – yield 1.8%) – QCOM is up over 19% since late April. The mobile device chip king reported earnings that beat estimates and the company raised earnings guidance for 2024. The market was thrilled, and QCOM has risen since the report to a brand-new 52-week high. The earnings growth was expected as a still somewhat weak smartphone market is getting better. But the enthusiasm is mostly about the rapid approach of AI-enabled smartphones and PCs. One analyst contends that an AI-driven super cycle for smartphones is coming next year. Qualcomm is at the leading edge of chips that enable AI for smartphones and PCs and should benefit mightily if such a cycle comes to fruition. BUY
UnitedHealth Group Inc. (UNH – yield 1.5%) – Things have been good since earnings put fears about the hacking to rest. UnitedHealth reported earnings last month that soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. UnitedHealth appears to have absorbed the costs while maintaining strong growth in the quarter and future quarters. With recent troubles behind it, the company has solid and defensive earnings and is well-positioned going forward. BUY
Visa Inc. (V – yield 0.8%) – This payment processing global goliath again reported stellar earnings. It reported a 10% jump in revenue and a 20% increase in adjusted earnings per share over last year’s quarter. It is still thriving from cross-border transactions and benefits from the recent better-than-expected economic news. Visa also reported upbeat guidance for the rest of this year. Although performance has leveled off over the past few months, V should be solid as long as the economy holds up. HOLD
Safe Income Tier
Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – This one-of-a-kind life science property REIT tends to bounce around with the current interest rate narrative in the near term. That’s been a good thing this month. The REIT also reported strong earnings earlier this month that beat expectations. Adjusted funds from operations grew at 7.3% over last year’s quarter and the company raised the quarterly dividend by 5%. Occupancy and the rate of acquisitions reflected a solid business, and the dividend hike showed confidence. ARE is a great income stock selling at the low end of historical valuations while the company is consistently growing revenues and profits from its niche properties. BUY
NextEra Energy (NEE – yield 2.8%) – The combination regulated and alternative energy utility reported earnings earlier this month that slightly missed on revenues but beat significantly on earnings. The stock has continued to move higher since. It was a solid report and NEE is now officially turning things around big time. NEE has been trending higher since the beginning of March and is up 38% in that time. It’s also up 59% from the low in October. NEE had been a superstar performer before inflation and rising interest rates. It provides both safety from its best-in-class regulated utility business and growth from its considerable clean energy business. BUY
USB Depository Shares (USB-PS – yield 5.7%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 15% since being added to the portfolio. I believe it is unlikely that rates eclipse the high of this cycle. Even if they do, this security can handle it well. It’s also quite possible that rates fall from here and stock behaves very well. BUY
Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.1%) – Ditto for VCLT. It doesn’t like rising rates. But that’s okay unless rates rise to new levels beyond what has been seen in this cycle. I believe that VCLT is still well positioned after the worst two years for fixed income ever. BUY
High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on Close 05/13/24 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Brookfield Infrastructure Ptnrs. (BIP) | 6.75% | 31 | 49% | 5.30% | BUY | |||||
| Enterprise Product Partners (EPD) | 7.14% | 29 | 52% | 7.20% | BUY | |||||
| FS KKR Capital Corporation (FSK) | 14.40% | 20 | 3% | 14.40% | BUY | |||||
| Main Street Capital Corp. (MAIN) | 6.24% | 49 | 8% | 5.80% | BUY | |||||
| ONEOK Inc. (OKE) | 7.47% | 81 | 83% | 4.90% | BUY | |||||
| Realty Income (O) | 55 | 6% | 5.61% | HOLD | ||||||
| The Williams Companies, Inc. (WMB) | 8/10/22 | 33 | Qtr. | 1.9 | 5.80% | 40 | 32% | 4.79% | BUY | 1 |
| Current High Yield Tier Totals: | 6.30% | 36.20% | 5.70% | |||||||
Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 161 | 166% | 3.84% | BUY | ||||||
| American Tower Corporation (AMT) | 185 | -11% | 3.50% | BUY | ||||||
| Broadcom Inc. (AVGO) | 1338 | 223% | 1.60% | HOLD | ||||||
| Digital Realty Trust, Inc. (DLR) | 143 | 25% | 3.40% | BUY | ||||||
| Eli Lilly and Company (LLY) | 758 | 422% | 0.70% | HOLD | ||||||
| McKesson Corporation (MCK) | 555 | 22% | 0.50% | BUY | ||||||
| Marathon Petroleum Corp. (MPC) | 178 | 25% | 1.90% | HOLD | ||||||
| Qualcomm (QCOM) | 184 | 141% | 1.90% | BUY | ||||||
| UnitedHealth Group Inc. (UNH) | 512 | 0% | 1.50% | BUY | ||||||
| Visa Inc. (V) | 12/8/21 | 209 | Qtr. | 2.08 | 1.00% | 279 | 36% | 0.74% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.20% | 64.10% | 2.00% | |||||||
Safe Income Tier | ||||||||||
| 121 | -2% | 4.20% | BUY | |||||||
| 75 | 91% | 2.80% | BUY | |||||||
| U.S. Bancorp Depository Shares (USB-PS) | 10/12/22 | 19 | Qtr. | 1.13 | 6.10% | 20 | 15% | 5.70% | BUY | 1 |
| 4.50% | 75 | 0% | 5.10% | BUY | ||||||
| 4.80% | 35.30% | 4.50% | ||||||||
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