Cabot Dividend Investor Update October 12, 2016
Chloe Lutts Jensen, Chief Analyst
Yesterday’s sharp selloff turned Cabot’s intermediate-term market timing indicators negative, so it’s time to get a little more conservative.
We already let go of our worst performer—CVS Health (CVS)—last week, so we have no portfolio changes today. But in your own portfolio, consider trimming your worst performers or riskiest positions, and respect your loss limits. Keep new buying small, and focus on stocks that are acting well.
Despite the uncertainty in the stock market, futures markets are still indicating a 64% chance that the Fed will raise rates in December, the same odds we saw prior to yesterday’s selloff. Financials are rallying in anticipation, while utilities and other yield stocks remain weak.
Lastly, many of our stocks will be reporting earnings in the coming weeks, so be prepared for some volatility. Earnings dates and estimates, where available, are below.
HIGH YIELD TIER
HOLD – General Motors (GM 32 – yield 4.8%) – GM’s sales rose 16% in China last month, the automaker reported Monday. China is GM’s largest market, and the company is selling more and more cars there while also gaining market share at home. GM will report third-quarter earnings before the market opens on October 25. Analysts are expecting EPS of $1.44, 4% lower than in the same quarter last year, but GM has beat estimates in each of the last four quarters.
Next ex-div date: December 8, 2016 est.
BUY – Mattel (MAT 29 – yield 5.2%) – Mattel will report earnings next Wednesday, October 19, after the market closes. Analysts are expecting the toy company’s earnings to slip about 1%, to 70 cents per share. However, MAT’s EPS beat estimates by a whopping 66% last quarter. MAT has decent support here, near the bottom of its eight-month trading range, and is a Buy for high yield investors.
Next ex-div date: November 21, 2016 est.
BUY – Pattern Energy (PEGI 22 – yield 7.3%) – Pattern, a wind power yieldco, won’t report earnings until early November, so interest rates remain the dominant influence on the stock. Even though the direct effect of interest rates on Pattern is minimal—the company is primarily equity financed—yieldcos are seen as a bond alternative, so rising rates can cause selloffs. Of course, long-term bond yields actually fell after the last time the Fed raised the benchmark rate, and investors are increasingly anticipating that rates will stay “lower for longer” regardless of what the Fed does. For now, I’ll keep PEGI on Buy for investors whose priority is high yield, but keep new positions small while interest rate anticipation is high.
Next ex-div date: December 27, 2016 est.
BUY – Pembina Pipeline (PBA 30 – yield 4.9%)
– Oil is trading above $50 per barrel for the first time since late June, having risen 12% since OPEC announced an agreement to limit production. Pembina, a Canadian pipeline operator, is chugging along right around 30, a level it has stuck to tightly since the beginning of May. I’ll keep the stock on Buy for now for investors whose priority is high monthly income.
Next ex-div date: October 21, 2016
DIVIDEND GROWTH TIER
BUY – AbbVie (ABBV 62 – yield 3.7%) – AbbVie will report earnings on November 4; analysts are currently expecting EPS to rise about 6% to $1.20. AbbVie is a higher risk stock, but has good potential for capital gains if the company copes with the loss of patent protection on Humira better than expected. After a decent-sized pullback at the end of August, ABBV is now trading sideways on declining volume, a sign that selling pressure is drying up. The stock trades ex-dividend today.
Next ex-div date: October 12, 2016
BUY – Amgen (AMGN 164 – yield 2.4%) – Amgen is reporting earnings on October 26. Analysts are expecting the biotech company’s EPS to rise 2.8%, to $2.80. Like AbbVie, Amgen has made no progress in two years, pressured by a selloff in biotechs, and has the potential to impress once that pressure lifts. The stock pulled back with the rest of the biotech sector yesterday, which could be a good buying opportunity for investors with medium risk tolerance.
Next ex-div date: November 10, 2016 est.
HOLD – Costco (COST 151 – yield 1.2%)
– Costco’s September sales results, reported last Wednesday, showed another deceleration in comp sales growth. Net sales rose 3%, but comp sales rose only 1%, even excluding the effect of changes in gas prices and foreign exchange. While the news is sub-par, the stock is holding up well to the market’s gyrations, suggesting most sellers got out in the August-September selloff. COST is a Hold.
Next ex-div date: November 9, 2016 est.
HOLD – Equifax (EFX 129 – yield 1.0%)
– Equifax will report third-quarter earnings after the market close on October 26, with a conference call the next morning. Analysts are expecting EPS of $1.36, up from $1.14 in the same quarter last year. Equifax has beaten estimates for six quarters in a row. Hold.
Next ex-div date: November 21, 2016 est.
BUY – Prudential Financial (PRU 84 – yield 3.3%) – PRU took off last week, pushed up by rising expectations of a December rate hike and rumors that the European Central Bank will wind down its bond buying program (also likely to push yields higher). PRU, the latest addition to our dividend growth portfolio, is a Buy for investors looking for dividend growth with capital appreciation potential. The insurer will report earnings after the market closes on November 2, and analysts are expecting EPS to rise about 4%, to $2.49.
Next ex-div date: November 18, 2016 est.
HOLD – Reynolds American (RAI 46 – yield 4.0%)
– Reynolds will report earnings on October 19. Analysts are expecting EPS to rise 18% to $0.65 on 5% sales growth. However, I don’t recommend buying RAI here because it is a likely victim of the ongoing rotation out of yield stocks.
Next ex-div date: December 6, 2016 est.
HOLD – U.S. Bancorp (USB 43 – yield 2.4%) – U.S. Bancorp will report earnings on October 19 before the market opens. Analysts are expecting EPS to rise about 3%, to $0.84, on 5% sales growth. Financial stocks are acting well as interest rates perk up ahead of the Fed’s December meeting, when they are expected to raise the benchmark rate. While interest rate expectations are notoriously fickle, I would consider putting USB back on Buy on a decisive breakout through 44-45, a resistance level that has rebuffed the stock multiple times over the past year.
Next ex-div date: December 28, 2016 est.
BUY – Wynn Resorts (WYNN 98 – yield 2.0%) – Wynn, the resort casino operator, will report earnings on October 20. Consensus estimates call for EPS to fall nearly 6% to $0.81, despite 13% revenue growth. Investors are looking ahead though, to a recovery in Macau, the only place in China where gambling is legal, and its impact on Wynn, which just opened a palatial new resort there.
Next ex-div date: November 9, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 72 – yield 3.7%) – New York area utility ConEd will report third-quarter earnings in early November. Analysts are expecting 6% EPS growth, to $1.53, despite a slight contraction in revenue to $3.35 billion.
Next ex-div date: November 7, 2016 est.
SOLD – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 26 – yield 1.8%)
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.4%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.9%)
We swapped out our 2016 fund—expiring at the end of this year—for the BulletShares 2020 High Yield Corporate Bond ETF (BSJK) last week. BSJK is currently trading below par and yields about 4.9%, vs. the 2016 fund’s 1.8%. Rotating out the maturing fund at the end of each year will maintain our bond ladder—an ultra-conservative income strategy—while gradually increasing our yield over time if rates rise.
Next ex-div dates: all November 1, 2016, est.
HOLD – Home Depot (HD 126 – yield 2.2%) – HD is chopping around between 125 and 130, possibly repeating the bottoming process it completed in June. We’ll keep the stock on Hold for now.
Next ex-div date: December 6, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%) – PGX dropped below 15 during yesterday’s selloff, a good buying opportunity for investors looking to start a position in the preferred stock ETF. PGX is a very conservative income holding, with minimal capital gains potential. But it pays reliable monthly dividends, usually of about seven cents per share.
Next ex-div date: October 14, 2016 est.
HOLD – J.M. Smucker (SJM 132 – yield 2.3%)
– SJM continues to tread water just above 130. Like Reynolds American, Smucker is a classic conservative consumer staples stock, and could get dumped if investors rotate into more growth-oriented names. But with the bulls losing some ground this week, we could also see these stalwarts gaining fans again. Hold.
Next ex-div date: November 9, 2016 est.
BUY – UPS (UPS 109 – yield 2.9%)
– UPS is building a nice tight base right under 110, which we hope to see the stock use as a launching pad for its next rally. UPS will report results on October 27 before the market opens. Analysts are expecting EPS of $1.44 on revenue of $14.71 billion, up 4% and 3%, respectively.
Next ex-div date: November 23, 2016 est.
HOLD – Xcel Energy (XEL 39 – yield 3.4%) – Xcel Energy will also report earnings on October 27 before the market opens. The Minnesota-based utility is expected to see revenues rise 15% to $3.33 billion, boosting EPS 4% to $0.87.
Next ex-div date: January 2017
Closing prices as of October 11, 2016.
