Cabot Dividend Investor Weekly Update
Most of our portfolio holdings are acting similarly healthy, and if you feel underinvested, you can add positions judiciously here. I’m switching Smucker (SJM) back to Buy today based on the solid technical support the stock demonstrated over the past week.
The past three days have brought a respite from the stock market’s pullback. The S&P 500 bounced off its 50-day moving average on Friday and has closed higher on each of the last three days. Most of our portfolio holdings are acting similarly healthy, and if you feel underinvested, you can add positions judiciously here. I’m switching Smucker (SJM) back to Buy today based on the solid technical support the stock demonstrated over the past week.
On the fixed income side, the bond market is now pricing in virtually no chance of a June interest rate hike, and odds are starting to favor no more than one rate hike all year.
Lastly, remember that you can email me questions any time at Chloe@cabot.net and find additional market commentary on Twitter, where I tweet as @ChloeAtCabot.
HIGH YIELD TIER
BUY – General Motors (GM 31 – yield 4.9%) – GM is consolidating just below its 50-day moving average and is virtually unchanged over the past five days. The automaker has already reported earnings, which showed demand remains strong for trucks and SUVs. Sales results from China released last Thursday were also solid. Year-over-year, sales rose 7.5% in April, up from a 0.6% decline in March. SUV sales rose 107%. Longer-term, GM and Lyft now plan to introduce self-driving taxis within a year, using GM’s Chevy Bolt. Risk-tolerant high yield and total return investors can buy some GM here.
Next ex-div date: June 8, 2016
BUY – Mattel (MAT 31 – yield 4.9%)
– MAT has found support at 30, just as we hoped it would. MAT remains on Buy for risk-tolerant high yield and total return investors.
Next ex-div date: May 17, 2016
BUY – Pembina Pipeline (PBA 29 – yield 5.2%)
– Pembina reported solid first-quarter earnings last week, including strong growth in revenue and improvement in operating margins. EPS were lower than in the same quarter last year, however the culprit was higher non-cash expenses like depreciation. Pembina evacuated all of their Fort McMurray-based staff in advance of last week’s wildfire, and hasn’t reported damage to any of their operations in the area. While production in some of the areas served by Pembina’s pipelines may be affected by the fire, management said on last week’s conference call that they expect the financial impact will be covered by either insurance or the terms of their contracts with their customers. Management also declared the next monthly dividend, payable June 15 to investors who own the stock by the end of next week. The 16-cent Canadian dividend is equivalent to $0.1245 U.S. at the current exchange rate.
Next ex-div date: May 23, 2016
DIVIDEND GROWTH TIER
HOLD – Costco (COST 150 – yield 1.2%) – COST lost more ground last week, after reporting April sales that missed analyst’s estimates. Net sales rose 3%, but comp sales were flat year-over-year due primarily to the devaluation of foreign currencies over the past year. Excluding the impact of exchange-rate changes and gas-price changes, comp sales rose 3%. Costco should see the impact of exchange rates moderate this year as the dollar’s strength begins to wane. However, the stock still lacks momentum—though it’s above support from February. COST is a Hold.
Next ex-div date: August 10, 2016, est.
BUY – CVS Health (CVS 106 – yield 1.6%)
– CVS has pushed to its highest level since August after reporting strong earnings last week. CVS is an excellent Buy on pullbacks for both medium- and long-term investors. (Note that the table at the bottom of last week’s update incorrectly reported that we had a 0% total return in CVS and that our yield on cost was 0.0%; both errors have been corrected in the version below.)
Next ex-div date: July 20, 2016 est.
BUY – Equifax (EFX 125 – yield 1.1%) – EFX continues to chug to new 52-week highs weekly, and we aren’t complaining. Hold if you own it; Buy on pullbacks if you don’t. The credit reporting company is expanding both its scope and size, and management recently raised full-year estimates for both revenue and EPS.
Next ex-div date: May 20, 2016 est.
HOLD – Reynolds American (RAI 51 – yield 3.3%) – RAI is recovering nicely from its April pullback, getting a boost above its 50-day from the strengthening market yesterday. The FDA announced new rules on e-cigarettes this week, including a ban on sales to minors. The regulations are similar to those already in place for regular cigarettes and are expected to pose the greatest hurdle to small, independent e-cigarette companies, ultimately benefiting big tobacco. RAI is looking better, but I’d like to see the stock build some support above its 50-day before putting it back on Buy.
Next ex-div date: June 8, 2016
HOLD – U.S. Bancorp (USB 42 – yield 2.4%)
– USB is trading right around its 200-day moving average, in the middle of its multi-month trading range. USB is a high-quality stock, but changing interest rate expectations have the potential to cause further rotations into and out of the financial sector going forward, causing volatility. It’s also unlikely the stock will make much progress until institutional investors begin to anticipate near-term interest rate increases again (higher rates boost profitability at U.S. Bancorp and other financials)—although surprises—like acquisitions—are always possible. USB is a long-term Hold.
Next ex-div date: June 28, 2016 est.
BUY – Wynn Resorts (WYNN 94 – yield 2.1%) – Wynn announced final first-quarter results on Thursday, although the casino company had already pre-announced results in early April. Net revenue fell 9%, due to the 14% decline in Macau already reported, but adjusted EPS rose to $1.07 from $0.70 in the same quarter last year. Wynn is well known and can be very volatile, but that volatility is trending up today. A decisive breakout through the psychologically important 100-level could lead to an impressive rally. WYNN is a Buy for risk-tolerant dividend growth and total return investors.
Next ex-div date: May 13, 2016
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 74 – yield 3.6%) – ED pulled back slightly after reporting earnings last Thursday, but quickly found support around 74. Adjusted EPS of $1.18 fell 3 cents short of the analyst consensus. Warmer winter weather was the primary culprit. However, management reiterated their full-year guidance. ED is on Hold because of valuation—after a 20% rally from January 1 to April 1, the stock is near 52-week highs and likely overextended for a conservative utility that delivers single-digit revenue growth. ED is a long-term Hold.
Next ex-div date: May 16, 2016
HOLD – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 26 – yield 2.9%)
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.4%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.8%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.0%)
Next ex-div dates: all June 1, 2016, est.
BUY – Home Depot (HD 138 – yield 2.0%)
– High-quality HD is trading at a 52-week high ahead of its May 17 earnings report. Consensus estimates now call for EPS of $1.35 on revenue of $22.28 billion, up 16.4% and 6.6%, respectively. The stock was featured in Monday’s Cabot Top Ten Trader, where my colleague Mike Cintolo wrote, “After two months of operating in such a tight range, a breakout could be imminent, especially if next week’s earnings beat estimates. You can buy a little here and add to your position if the breakout is to the high side.” Home Depot is a good long-term Buy for all investors.
Next ex-div date: June 7, 2016 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%)
– Wait for a pullback before adding to or starting a new position in PGX, an ETF that holds preferred shares. With very limited potential for price appreciation, it’s best to buy on dips below 15. PGX provides monthly income and low volatility.
Next ex-div date: May 13, 2016 est.
BUY – J.M. Smucker (SJM 131 – yield 2.0%)
– SJM is back above its 50-day moving average, and has closed higher on each of the past five days. The stock’s tight range since the end of January is looking increasingly like an area of strong support that could provide a foundation for a renewed rally. I’m putting SJM back on Buy today, but keep new positions small until after earnings (currently scheduled for June 9 before the market open). Note that the stock is trading ex-dividend today.
Next ex-div date: May 11, 2016
HOLD – Target (TGT 80 – yield 2.8%) – Because of recent weakness in the stock, TGT remains on Hold until after earnings, which are due on May 18. Analysts expect EPS to rise 9.1% to $1.20, while revenue is expected to come in around $16.3 billion, which is 4.7% lower than in the same quarter last year due to the sale of the company’s pharmacies to CVS. We reduced our position in TGT by half in August, and have a 43% profit in our remaining stake, so we can afford to give the stock some leeway here.
Next ex-div date: May 16, 2016
BUY – Xcel Energy (XEL 41 – yield 3.3%)
– Xcel Energy reported adjusted first-quarter EPS of $0.47, in line with analyst estimates and 2.2% higher than in the same quarter last year. While unusual weather contributed to a 6.4% decline in revenues, Xcel improved margins by reducing operating expenses by more than 12%, in part thanks to lower energy prices. At the same time, the company was able to increase rates in some districts. Management also reaffirmed their guidance for the full year. XEL is a long-term Buy, but aim for pullbacks.
Next ex-div date: June 14, 2016 est.
Closing prices as of May 10, 2016.