Cabot Dividend Investor Update October 5, 2016
Chloe Lutts Jensen, Chief Analyst
The stock market continues to chop around as the bulls and bears fight for dominance. For now, they’re fairly evenly matched, evidenced by the lack of progress in the market in recent weeks despite big daily moves in both directions.
Both have plenty of evidence to support their case. Oil prices are at their highest level in three months, and consumer confidence is at its highest level since the recession. But the situations at Deutsche Bank and Wells Fargo are worrisome, and economic data on durable goods, wholesale inventories and new home sales all missed expectations last week. Monday brought a miss on construction spending as well, although auto sales and manufacturing data beat expectations.
Today brings some non-manufacturing and factory orders data, followed by the all-important September jobs report on Friday. Economists are expecting 170,000 new jobs to have been added since last month. The jobs situation will be a big factor in whether the Fed raises rates in December, which is currently driving the action of several of our stocks. We never try to predict what the Fed will do, but if you want to adjust your portfolio based on what the market is telegraphing today, I recommend you lean towards growth names and underweight high yield and ultra-conservative names.
In our portfolio, we sold our remaining half position in CVS Health (CVS) in a Special Bulletin yesterday after the stock broke through its last remaining support level. We’re also updating our bond ladder ahead of the end of the year. We’ll sell the BulletShares 2016 High Yield Corporate Bond ETF (BSJG), which is maturing at the end of the year, and replace it with the BulletShares 2020 High Yield Corporate Bond ETF (BSJK), which yields significantly more.
HIGH YIELD TIER
HOLD – General Motors (GM 32 – yield 4.7%) – U.S. auto sales declined last month, as anticipated, but beat expectations slightly, according to data released Monday. GM’s sales were among the best in the industry: sales fell 0.6% year-over-year, but rose 0.3% excluding fleet sales (which the automaker is tapering down because they’re lower margin). In contrast, Ford’s sales fell 8%. GM picked up market share (the company says it rose by 30 basis points) and the company’s average transaction price rose 3.4% year over year. GM will report third-quarter earnings before the market opens on October 25. Analysts are expecting EPS of $1.44, up 2.8%.
Next ex-div date: December 8, 2016 est.
BUY – Mattel (MAT 30 – yield 5.0%)
– MAT slid this week, and is now back near the bottom of its eight-month trading range. Friday’s weak consumer spending numbers may have played a role; the consumer discretionary sector overall had a strong week, but peer Hasbro (HAS) also traded lower. MAT remains on Buy for now.
Next ex-div date: November 21, 2016 est.
BUY – Pattern Energy (PEGI 22 – yield 7.4%) – We’re seeing another selloff in high-yield names this week, affecting utilities, REITs and yieldcos like Pattern. Odds of a December rate hike have risen to 55%, with the case for higher interest rates most recently bolstered by Monday’s strong U.S. manufacturing report. We may see a little more weakness in PEGI and its peers ahead of the December rate hike, but there aren’t many 7%-yielding alternatives out there—and won’t be for some time at the rate the rate hikes are going. Risk-tolerant investors whose priority is high income can buy PEGI on weakness.
Next ex-div date: December 27, 2016 est.
BUY – Pembina Pipeline (PBA 30 – yield 4.8%) – No news.
Next ex-div date: October 21, 2016 est.
DIVIDEND GROWTH TIER
BUY – AbbVie (ABBV 63 – yield 3.6%) – On Friday, the FDA granted AbbVie’s new hepatitis C treatment breakthrough drug status, speeding the candidate toward its approval. The good news was slightly tempered by an announcement on Monday that a new psoriasis treatment from Janssen, a subsidiary of Johnson & Johnson (JNJ), is more effective in treating the condition than AbbVie’s Humira. ABBV isn’t the strongest stock in our portfolio, but it’s not displaying much selling pressure either. In his update for Cabot Stock of the Week subscribers yesterday, Cabot President Tim Lutts wrote: “ABBV is building a bottom in its current correction at 63, and is an attractive buy for growth-and-income investors.”
Next ex-div date: October 12, 2016
BUY – Amgen (AMGN 168 – yield 2.4%) – Amgen also announced some drug news this week. The company’s migraine prevention drug was once again found to be successful in a late-stage study, brining the treatment one step closer to commercialization. Amgen also announced a new collaboration with Arrowhead Pharmaceuticals (ARWR), granting Amgen rights to two cardiovascular disease treatments currently in preclinical trials. However, the company’s stock is lower this week after getting hit hard by Thursday’s selloff. I’ll keep AMGN on Buy but you should keep new positions small.
Next ex-div date: November 10, 2016 est.
HOLD – Costco (COST 150 – yield 1.2%) – Costco’s fourth-quarter earnings, reported on Thursday, beat estimates, although revenue was slightly lower than expected. EPS of $1.77 per share beat the analyst consensus of $1.73, despite challenges including food price deflation and the switchover from American Express to Visa as Costco’s exclusive credit card partner. Revenue of $35.73 billion rose 2% year-over-year, but missed the analyst consensus of $36.89 billion. Comp sales were flat because of lower gas prices, but rose 3% excluding their effect. For the full year, revenue also grew 2%, while comp sales were flat, or up 4% ignoring gas price and exchange-rate changes. Full-year earnings of $5.33 per share fell from $5.37 per share last year. While earnings were mixed, analysts are optimistic about the potential impact of Costco’s new store-branded credit card, which offers better rewards than the last Costco card. The stock’s immediate reaction to earnings was positive, but it has cooled off this week. We’ll keep COST on Hold.
Next ex-div date: November 9, 2016 est.
SELL – CVS Health (CVS 86 – yield 2.0%) – We sold the second half of our CVS position yesterday after the stock broke through support Monday. Volume was only slightly higher than normal, but the lack of buying power doesn’t bode well for the stock’s future. We recorded yesterday’s sale at the day’s average price of 86.71, and will record a total loss of about 8% on the investment. If you haven’t sold yet, I recommend you do so now.
Next ex-div date: October 20, 2016
HOLD – Equifax (EFX 133 – 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 83 – yield 3.4%) – Prudential was added to our portfolio at Monday’s average price of 81.49. The insurer’s stock continues to look strong, doubtless bolstered by the rising odds of a December rate hike. PRU trades at a reasonable P/E of 8.4 and 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%)
– With rate hike speculation picking up again, RAI is back at its September lows. If you haven’t taken profits yet, you should. Despite the market’s September stumble, the rotation out of conservative yield stocks looks set to continue. Hold.
Next ex-div date: December 6, 2016 est.
HOLD – U.S. Bancorp (USB 43 – yield 2.4%) – Well’s Fargo’s troubles haven’t spread to other regional bank stocks, and rising expectations of an interest rate increase this year should be good for financials. Hold.
Next ex-div date: December 28, 2016 est.
BUY – Wynn Resorts (WYNN 96 – yield 2.1%)
– WYNN’s pullback continues, fueled by weak August results from Las Vegas. Gaming revenue on the Las Vegas Strip fell 15% compared to last August, mostly due to a 42% decline in Baccarat revenues. However, the calendar also contributed, as there were two less weekend days in August this year. On a positive—and probably more important—note, Macau saw gaming revenues expand for the second month in a row, with this September’s earnings coming in 7% higher than last year’s. Wynn’s new resort there is finally open, and it looks like the timing couldn’t have been better. Impressive results from the resort’s first few weeks could provide a big boost to Wynn’s stock. WYNN remains a Buy for short- to medium-term dividend growth investors.
Next ex-div date: November 9, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 73 – yield 3.7%) – ED fell on rising interest rate expectations this week. The stock remains a long-term hold for investors whose priority is safe income.
Next ex-div date: November 7, 2016 est.
SELL – 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 5.0%)
We’re now in the fourth quarter of the year, and the yield on our 2016 bond fund is quickly dwindling as its maturity date approaches (Guggenheim moves the fund’s assets into cash or treasuries as the fixed income holdings mature). So rather than waiting for Guggenheim to redeem the fund at the end of December, we’ll sell the 2016 fund now, for about 25.80 per share—likely very close to the amount we’d receive at the end of December anyway. Although we bought the 2016 fund slightly above its par value, the distributions we’ve collected over the past year give us a slight profit on the position.
To maintain our bond ladder, we’ll start a new half position in the BulletShares 2020 High Yield Corporate Bond ETF (BSJK). BSJK is currently trading below par and yields about 5.0%, vs. the 2016 fund’s 1.8%.
Next ex-div dates: all November 1, 2016, est.
HOLD – Home Depot (HD 128 – yield 2.2%) – HD is rebounding this week after buyers stepped in right around 125 once again. Housing data has been mixed recently, but a brighter U.S. economic outlook is a positive for the home improvement retailer. Hold.
Next ex-div date: December 6, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%) – PGX is an ETF that holds preferred shares, mostly issued by financial companies. The ETF’s pullback this month is a decent buying opportunity. The fund doesn’t offer much capital appreciation potential if bought above 15, but it’s a great source of regular income: the preferred share ETF pays reliable monthly dividends, usually of about seven cents per share.
Next ex-div date: October 14, 2016 est.
HOLD – J.M. Smucker (SJM 133 – yield 2.3%)
– SJM remains on the chopping block, but the stock still has decent support here. And on a long-term chart, SJM’s uptrend still looks intact, with the stock now supported by its 40-week moving average. Feel free to cut bait if you want to put the money to work elsewhere; we’ll hold our half position for now.
Next ex-div date: November 9, 2016 est.
BUY – UPS (UPS 109 – yield 2.9%) – No news.
Next ex-div date: November 23, 2016 est.
HOLD – Xcel Energy (XEL 40 – yield 3.4%)
– XEL is pulling back on rising rate-hike expectations, once again. The utility is a long-term hold for investors whose priority is safe income.
Next ex-div date: January 2017
Closing prices as of October 4, 2016.
