Cabot Dividend Investor Update February 17, 2016
Chloe Lutts Jensen, Chief Analyst
After revisiting its January lows last week and relaxing over the long weekend, the market is making another attempt at a rally. The S&P 500 re-tested its January 20 low of 1,820 last Thursday, but surged Friday and Tuesday and is now about halfway back to 1,950, where the last rally failed in early February.
The fact that January’s lows held was good news, and the number of stocks hitting new lows is much smaller than it was in January. However, as we’ve said before, this bottoming process—if that’s what it is—is likely to take more than a couple of weeks.
Financials were among the worst hit in last week’s selloff, although Deutsche Bank—the center of much of the panic—is now taking steps to calm the markets. But fears about the health of the global financial system have already altered interest-rate expectations in the U.S., with some Fed watchers now expecting an interest rate cut rather than another hike in 2016. That has swiveled attention back to the Fed, and all eyes will be on the six Fed officials speaking this week, not to mention the minutes of the January FOMC meeting being released later today.
Our portfolio is already hunkered down in a pretty conservative stance and we’re selling the rest of our Novo Nordisk (NVO) position today and moving our PowerShares Preferred ETF (PGX) to Hold. We have no other rating changes today.HIGH YIELD TIER
HOLD – General Motors (GM 29 – yield 5.3%)
– GM pulled back to its August lows last week amid fears that auto sales have peaked for the time being. But yesterday, debt rating agency Moody’s upgraded their credit rating outlook for GM to positive, saying that they expect GM will “continue to strengthen its performance in North America and Europe, and that it will maintain a strong position in China.” Moody’s pointed to GM’s progress in “building an operating structure that can contend with the risk inherent in the global automotive sector,” citing the automaker’s strong margins, low breakeven level, proactive management of its pension obligations and high liquidity. Trading at less than five times earnings, GM remains a Hold.Next ex-div date: March 9, 2016
BUY – Mattel (MAT 30 – yield 5.0%) – MAT continues to consolidate its gains after popping on strong a earnings report and the disclosure of merger talks with Hasbro. MAT is still rated Buy for high yield investors with high risk tolerance.
Next ex-div date: May 16, 2016 est.
DIVIDEND GROWTH TIER
HOLD – Costco (COST 149 – yield 1.1%)
– We took some of our Costco profit off the table last week, selling half our position at Wednesday’s average price of 148.88, for a 33% gain. We’ll hold the rest of the shares, which are trading sideways around January’s lows.Next ex-div date: May 11, 2016 est.
HOLD – CVS Health (CVS 97 – yield 1.8%) – CVS’s post-earnings rebound has erased the stock’s pullback, demonstrating strong buying power behind this high-quality, conservative name. We will continue to Hold.
Next ex-div date: April 20, 2016 est.
HOLD – Equifax (EFX 99 – yield 1.3%) – As hoped, Equifax reported strong earnings after the close last Wednesday and the stock has begun to rebound from the lows hit last Monday. Adjusted fourth-quarter EPS of $1.14 beat analyst expectations of $1.11 and were 12% higher than in the same quarter last year. For the full year, Equifax reported adjusted EPS of $4.50, up 16% and above expectations of $4.47. Revenue rose 7% in the fourth quarter and 9% for the full year. And management announced a 14% dividend increase to $0.33 per quarter. EFX is a solid Hold.
Next ex-div date: March 1, 2016
SELL – Novo Nordisk (NVO 50 – yield 1.1%) – NVO has recovered about a third of its losses, but I still think selling is the right call. The stock’s post-earnings breakdown, which pulled NVO through the lower band of its nearly year long trading range, means the stock is technically broken for the foreseeable future. Management’s lowered expectations for 2016 are also likely to keep the stock under pressure, and may not be the last bad news from the drugmaker. We sold half our NVO position last Wednesday and will unload the rest at today’s average price. You can do the same, or see if you can get a few more dollars for your shares in the coming days.
Next ex-div date: March 21, 2016
BUY – Reynolds American (RAI 48 – yield 3.5%) – Reynolds American reported earnings on Thursday, and while EPS numbers missed consensus estimates, strong sales numbers and sunny guidance inspired a positive reaction from investors. For the fourth quarter, revenue rose 43% to $3.05 billion, beating estimates of $3.04 billion. The Newport brand, acquired in the Lorillard merger, was a major factor in the sales growth, contributing to 33% higher sales volumes, compared with a 0.5% contraction for the industry overall. Adjusted fourth-quarter EPS missed estimates slightly, coming in at $0.48 versus the $0.50 consensus, although they were still 9% higher year over year. In addition, management announced a 16.7% dividend increase, to $0.42 per quarter. RAI is a Buy on pullbacks.
Next ex-div date: March 8, 2016
HOLD – U.S. Bancorp (USB 40 – yield 2.5%)
– USB continues to hold its ground, despite sharp selloffs in financials last week. The stock did dip below 38 last Thursday but has rebounded, and is outperforming most other bank stocks and the financials index (XLF). Hold.
Next ex-div date: March 29, 2016 est.
SAFE INCOME TIER
BUY – Consolidated Edison (ED 71 – yield 3.8%)
– ConEd will announce earnings tomorrow, February 18. Analysts expect the utility to report net income of $0.54 per share, 6.9% lower than in the same quarter last year, and revenue growth of 8.1%, to $3.06 billion.Next ex-div date: May 9, 2016 est.
BUY – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 25 – yield 3.4%)
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 23 – yield 5.0%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.0%)
High yield bonds got a bit of a reprieve thanks to an uptick in oil prices this week. However, if you’re uncomfortable with the pullback in our high-yield bond ETFs, remember that Guggenheim offers a high-yield and investment-grade option for each year, and you can use any combination you’re comfortable with to make your own bond ladder.
Next ex-div dates: all March 1, 2016, est.
HOLD – Home Depot (HD 119 – yield 2.0%)
– HD has bounced back a bit from its early-February pullback, returning about halfway to its starting point. The home improvement retailer will report fourth quarter and full-year earnings February 23. Analysts are expecting EPS of $1.10 for the quarter on revenue of $20.37 billion, up 10% and 6% year-over-year, respectively. For the full year, estimates average $88.12 billion for revenue and $5.34 for EPS, representing year-over-year growth of 5.9% and 17%, respectively.
Next ex-div date: March 1, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 14 – yield 5.8%)
– The panic over global financial institutions’ balance sheets has begun to spread to preferred shares, since most preferred shares are issued by banks and other financial institutions. And PGX, holding about 86% preferreds issued by banks and other financials (94% rated BB or above), has not been immune. But even non-financial preferreds have been affected; the Market Vectors Preferred Ex-Financials ETF, which doesn’t hold financial preferreds, has also dipped. We’ll put PGX on Hold until the selloff subsides, even though the panic is likely to turn out to have been overdone.
Next ex-div date: March 15, 2016 est.
HOLD – Target (TGT 72 – yield 3.1%) – Target will report earnings on February 24; analysts expect 2.7% quarterly EPS growth, to $1.54, and 0.7% revenue growth, to $21.9 billion. For the full year, analysts expect EPS to rise 10.5%, to $4.72, while revenue rises 2.1%, to $74.1 billion.
Next ex-div date: May 16, 2016, est.
BUY – Xcel Energy (XEL 39 – yield 3.3%)
– XEL has pulled back slightly over the past week, and is a decent buy here for all investors.
Next ex-div date: March 15, 2016 est.
Closing prices as of February 16, 2016.
