Cabot Dividend Investor Update October 19, 2016
Chloe Lutts Jensen, Chief Analyst
Two of our stocks—Reynolds American (RAI) and U.S. Bancorp (USB)—reported earnings this morning (details are below). So far, earnings season is off to a good start, with the big banks and Netflix (NFLX) beating estimates in recent days. However, the market is still weighed down by numerous worries, and big selloffs last Tuesday and Thursday dragged all three major indexes back to the bottom of their three-month trading ranges.
On the interest rate side, Janet Yellen surprised investors by suggesting last week that the Fed could let the economy run “hot” for a while, intensifying a selloff in bonds. (Higher inflation reduces the value of existing low interest rate bonds.) But her comments only brought the odds of a December rate hike down slightly (futures markets are putting 60% odds on a quarter-percent raise, down from 64% from last week.)
I still advise managing your portfolio relatively conservatively today; the stock market’s intermediate-term trend is down and sector rotations remain somewhat arbitrary. When buying, stick to stocks and sectors that are acting well, like our latest dividend growth tier addition, Prudential Financial (PRU). Cut losses before they become intolerable, prune underperforming positions (we may sell Reynolds American later this week) and don’t be afraid to take profits when you have them.
HIGH YIELD TIER
HOLD – General Motors (GM 31 – yield 4.8%) – GM got hit hard by Thursday’s selloff, but recovered quickly. However, the stock pulled back again yesterday, influenced by the news that Ford (F) is idling some plants because of slowing demand. Ford is seeing significantly larger sales declines in the U.S. than GM, which continues to gain market share. I recommend holding the stock through earnings, out before the market opens on October 25. Analysts are expecting EPS of $1.44, 4% lower than in the same quarter last year despite 1.1% sales growth, to $39.26 billion. GM has beat estimates in each of the last four quarters.
Next ex-div date: December 8, 2016 est.
BUY – Mattel (MAT 31 – yield 4.9%)
– Mattel is reporting earnings after the market closes today, October 19. Analyst estimates have risen slightly in the past week, possibly influenced by Hasbro’s (HAS) earnings beat. Analysts are now expecting Mattel’s earnings to be about the same as last year, around $0.71 per share, while revenue is expected to decline about 1% to $1.77 billion.
Next ex-div date: November 21, 2016 est.
BUY – Pattern Energy (PEGI 22 – yield 7.1%) – The selloff in bond yields this week has provided a bit of a respite to high yield names like Pattern. As usual, we don’t recommend overreacting: these cycles are both fickle and unpredictable.
Next ex-div date: December 27, 2016 est.
BUY – Pembina Pipeline (PBA 31 – yield 4.7%) – Oil prices remain strong thanks to OPEC’s latest agreement to manage supply, and energy stocks are perking up. PBA rose above 31 for the first time in six weeks yesterday. The pipeline company will report earnings on November 3 after markets close and hold a conference call the next morning.
Next ex-div date: October 21, 2016
DIVIDEND GROWTH TIER
BUY – AbbVie (ABBV 62 – yield 3.7%) – Biotech stocks were among the worst performers during last week’s selloff. The sector is seeing some negative effects from Hillary Clinton’s growing lead in the polls, connected to her campaign promises to crack down on high drug prices. Specific political action is still uncertain and far off though, and ABBV began rebounding yesterday, revealing plenty of buyers at this level. AbbVie will report earnings on Friday, October 28, before the market opens. Analysts are expecting EPS to rise 6% to $1.20 on 10% sales growth to $6.54 billion.
Next ex-div date: October 12, 2016
BUY – Amgen (AMGN 163 – yield 2.5%)
– Amgen also pulled back last week, though not as far as AbbVie. The stock has found support just above 160, where it paused before starting its latest rally in July. Amgen is reporting earnings on October 26. Analysts are expecting the biotech company’s EPS to rise 2.8% to $2.80. I’ll keep AMGN on Buy for aggressive investors.
Next ex-div date: November 10, 2016 est.
HOLD – Costco (COST 149 – yield 1.2%)
– COST continues to muddle along around 150. Consumer sentiment dipped in October, but retail sales continue to grow. We sold half our COST position earlier this year, so we’ll Hold for now. Costco won’t report earnings until early December.
Next ex-div date: November 2, 2016
HOLD – Equifax (EFX 130 – 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 strong EPS growth of 19% to $1.36 from $1.14 in the same quarter last year, and revenue growth of 20% to $801.73 million. On top of the already high expectations, Equifax has beaten estimates for six quarters in a row. However, the stock’s lack of momentum—EFX has traded sideways since the beginning of August—means Hold is the appropriate rating for now.
Next ex-div date: November 21, 2016 est.
BUY – Prudential Financial (PRU 84 – yield 3.3%) – PRU suffered a one-day selloff on Thursday but recovered quickly, confirming the strength of investor support for insurance stocks today. Prudential will report earnings on November 2 and hold a conference call the next morning. Analysts are expecting revenue to climb 5% to $11.66 billion and EPS to rise about 4%, to $2.50. PRU, the latest addition to our dividend growth portfolio, is a Buy for investors looking for dividend growth with capital appreciation potential.
Next ex-div date: November 18, 2016 est.
HOLD – Reynolds American (RAI 47 – yield 3.9%)
– Reynolds reported earnings that fell short of estimates this morning. Adjusted EPS of $0.61 were four cents shy of the consensus estimate, and revenue of $3.21 billion fell short of analysts’ $3.31 billion target. RAI is about 2% lower pre-market. We’ve been considering selling the second half of our RAI position, and will probably pull the trigger if the stock fails to find support this week.
Next ex-div date: December 6, 2016 est.
HOLD – U.S. Bancorp (USB 43 – yield 2.6%)
– U.S. Bancorp is set to report earnings before the market open today. Analysts are expecting EPS to rise about 4% to $0.84 on 5% sales growth, to $5.35 billon. USB is a Hold.
Next ex-div date: December 28, 2016 est.
BUY – Wynn Resorts (WYNN 93 – yield 2.2%)
– Wynn will report earnings after the market closes tomorrow, October 20. Consensus estimates call for EPS to fall nearly 6% to $0.81, despite a 12% increase in revenue. 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. The number of visitors to Macau during China’s “Golden Week,” a seven-day holiday spanning the country’s National Day in early October, hit a 10-year high this year.
Next ex-div date: November 9, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 73 – 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.
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%)
These four funds make up our bond ladder, a conservative strategy for owning fixed income that preserves capital and can create a growing income stream over time (if interest rates rise). We recently swapped out our 2016 fund for a 2020 fund, so our bond ladder is now set to continue generating income until around this time next year (when we’ll exchange the 2017 fund for a 2021 fund). Guggenheim offers two series of BulletShares funds for each year—one that holds investment grade corporate debt and one that holds high yield (or “junk”) debt. We’ve alternated the high yield and investment grade funds in our ladder, to create a nice mix of safety and yield, but if you have a lower or higher risk tolerance, feel free to adjust your own bond ladder accordingly. Note that the last letter in each of Guggenheim’s ETFs corresponds to the maturity year, so if you’re constructing a four-year ladder starting in 2017, your funds should end in H, I, J and K, whether you’re using high yield or investment grade funds.
Next ex-div dates: all November 1, 2016, est.
HOLD – Home Depot (HD 126 – yield 2.2%)
– Home Depot will report earnings on November 15. Analysts are expecting 16% EPS growth to $1.58 on 6% revenue growth to $23.09 billion. Retail sales data released Friday showed solid growth in the building material and garden equipment sectors, although it didn’t affect Home Depot’s stock. Hold.
Next ex-div date: December 6, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%) – PGX, a preferred share ETF that pays monthly dividends, is a Buy for investors whose priority is safe income. The fund offers little to no capital appreciation potential.
Next ex-div date: October 14, 2016 est.
HOLD – J.M. Smucker (SJM 132 – yield 2.3%)
– J.M. Smucker will report earnings on November 17. Analysts are expecting EPS to rise 19% to $1.93, despite a slight contraction in sales from $2.08 to $2.00 billion. Lower coffee prices are the primary contributor to the revenue decline, and are more than offset by lower raw coffee costs. However, all eyes will be on pet food sales this quarter, after the segment disappointed three months ago. Hold.
Next ex-div date: November 9, 2016 est.
BUY – UPS (UPS 108 – 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 41 – 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 18, 2016.
