Cabot Dividend Investor Weekly Update
Earnings season is well underway and is causing some divergences among stock market sectors. Financials, always among the first companies to report, are finally seeing some investors return after most of the major U.S. banks posted solid earnings numbers late last week.
Earnings season is well underway and is causing some divergences among stock market sectors. Financials, always among the first companies to report, are finally seeing some investors return after most of the major U.S. banks posted solid earnings numbers late last week. But weak results from Netflix (NFLX) caused tech and consumer discretionary stocks to pull back this week, creating a divergence between the S&P 500 and Nasdaq and the Dow. The latter has been buoyed by strong numbers from blue chips including Johnson & Johnson (JNJ) and UnitedHealth (UNH), as well as persistent investor interest in conservative dividend stocks.
Low interest rates are making dividend stocks more popular than ever, and while we’re happy to benefit, it’s also worth asking if the situation is sustainable. I delved into just that question in my Cabot Wealth Advisory earlier this week. If you missed it, I recommend you read it now by clicking here. Then come back here for updates on all our holdings, including an upgrade of Home Depot (HD) to Buy.
HIGH YIELD TIER
HOLD – General Motors (GM 31 – yield 4.9%) – GM has been outperforming the market since July 6, and looks strong ahead of the company’s second-quarter earnings announcement tomorrow morning. Analysts are expecting the automaker to report EPS of $1.51, up 17%, on 2% revenue growth, to $38.9. I’m tempted to put the stock back on Buy now that it has finally demonstrated some momentum, but since earnings are tomorrow, I’ll wait to see how the stock reacts. If you own, Hold. If you don’t, a post-earnings breakout through resistance at 32 would be quite bullish.
Next ex-div date: September 8, 2016 est.
BUY – Mattel (MAT 32 – yield 4.7%) – After pushing to the top of its multi-month trading range in a powerful 10-day rally, MAT took a breather this week. The stock is pulling back toward its 50-day moving average near 32, but still looks healthy. Mattel said yesterday that it won the license for toys based on the Jurassic Park franchise, which previously belonged to Hasbro. Although Hasbro reported weak demand for Jurassic World toys in the latest quarter, a new movie in the franchise will be released in 2018 and Mattel expects to have related toys ready. Mattel will report earnings after the close today; analysts are expecting the mid-turnaround company to report a loss of five cents and a 5.2% contraction in revenues. MAT remains a Buy for investors with high risk tolerance; a breakout through 35 would be very bullish.
Next ex-div date: August 15, 2016 est.
BUY – Pembina Pipeline (PBA 30 – yield 4.9%) – PBA has retreated to its 50-day moving average at 30 amid a pullback in energy stocks, and looks buyable here for high yield investors. The Canadian pipeline company will report earnings on August 4 after the close and hold a conference call the next day. Analysts are expecting EPS of $0.30, up from $0.09 last year, while revenue is expected to grow 24%, to $1.5 billion. PBA pays dividends monthly and will trade ex-dividend tomorrow. As a reminder, dividends are paid in Canadian dollars, and subject to a withholding tax unless the shares are held in a qualified retirement account. The withholding can be reduced from 25% to 15% by registering with the Canadian tax authorities.
Next ex-div date: July 21, 2016
DIVIDEND GROWTH TIER
BUY – Amgen (AMGN 162 – yield 2.5%) – Amgen will report earnings after the market closes on July 27. Analysts expect EPS of $2.74, up 6.6%, and revenue of $5.58 billion, up 3.9%. Amgen is a biotech company specializing in technologically advanced treatments for serious diseases, like tumor-targeting antibodies to fight cancer. Management has been improving operating margins recently, and free cash flow has increased by an average of 17% every year since 2011. The company has paid dividends since 2011, boosting the dividend by an average of 29% per year. Technically, AMGN looks poised for a breakout if earnings are strong and the market is supportive. The stock is back at the top of its multi-month trading range after a three-week, 13% advance. But a lot of that depends on investor appetite for biotechs, so a pullback to about 150 wouldn’t be surprising either. AMGN is a Buy for dividend growth and total return investors with medium risk tolerance.
Next ex-div date: August 10, 2016, est.
BUY – Costco (COST 168 – yield 1.1%) – After blasting through the top of its trading range on high volume two weeks ago, COST has added a few more points and is now trading at 52-week highs. This strength is a very bullish sign and Costco is a Buy here for dividend growth investors. The company has increased its dividend every year for 12 years and often surprises investors with large special dividends when things are going well.
Next ex-div date: August 10, 2016, est.
HOLD – CVS Health (CVS 97 – yield 1.8%)
– CVS remains quiet, trading just under its 50- and 200-day moving averages. The pharmacy company will report second-quarter earnings on August 2. Analysts are expecting EPS of $1.30 and revenue of $44.3 billion, up 6.6% and 19.1%, respectively. CVS is a high quality, diversified health care company with a strong history of dividend growth, but the stock is lacking momentum. CVS is a Hold.
Next ex-div date: October 20, 2016 est.
BUY – Equifax (EFX 135 – yield 1.0%) – EFX is taking a few days to collect itself after hitting a new 52-week high for the umpteenth time this year. Equifax is one of the big three U.S. credit reporting agencies, and is benefiting from the use of credit scores and other consumer data in ever more transactions and decisions. Equifax is also expanding internationally, primarily through acquisitions. The company will release second-quarter results after the close on July 27 and hold a conference call the next morning. Analysts are expecting EPS growth of 18.3%, to $1.36, on revenue growth of 18.4%, to $802.8 million. Try to get in on a pullback if you’re starting a new position; the stock’s 50-day moving average is down at 125.
Next ex-div date: August 19, 2016 est.
BUY – Reynolds American (RAI 53 – yield 3.2%) – RAI is consolidating around 52-53 after a controlled pullback. Conservative tobacco stocks are likely to become less popular if the market rally continues, but RAI’s high dividend should help create a floor for the stock, especially with income investors desperate for yield today. Reynolds will report second-quarter earnings before the open on July 26. Analysts are expecting the tobacco company to report EPS of $0.61, up 19.6%, and revenue of $3.62 billion, up 35.7%.
Next ex-div date: September 6, 2016 est.
HOLD – U.S. Bancorp (USB 42 – yield 2.4%) – USB has rebounded nearly to its pre-Brexit level following a solid earnings report on Friday morning. EPS rose 4% to 83 cents, impressing analysts who were expecting earnings to be flat year-over-year. Revenue rose 8.1%, twice as much as expected, to $5.5 billion. The earnings growth was driven by good growth in deposits and loans, particularly commercial loans, mortgages and credit card loans. Other big U.S. banks have also been reporting solid earnings, and The Wall Street Journal reported Tuesday that options traders are turning bullish on the sector—which is still the only stock market sector lower year-to-date. USB is a Hold.
Next ex-div date: September 28, 2016 est.
HOLD – Wynn Resorts (WYNN 95 – yield 2.1%) – WYNN fell below its 50-day moving average again last week after JP Morgan downgraded the stock to neutral, citing valuations. The stock has since recovered and is trading right around the middle of its multi-month range. WYNN tends to be very volatile, but the stock’s dividend can rise rapidly when businesses is booming, thanks to the company’s semi-variable dividend policy. The company is opening a new property in Macau later this summer, hopefully just in time to benefit from a recovery in gambling and tourism revenues there. WYNN is a Hold for risk-tolerant dividend growth investors.
Next ex-div date: August 11, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 79 – yield 3.4%) – ED is consolidating just a few points off its 52-week high. Utilities are likely to fall out of favor eventually, as equity investors shift to more aggressive investments, but with interest rates at record lows, yield-hungry income investors could keep a floor under the stocks. ED is a Hold for long-term income investors.
Next ex-div date: August 8, 2016 est.
HOLD – 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 4.5%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
Our bond ladder is the most conservative part of our portfolio, generating regular monthly income with minimal exposure to the bond market, thanks to these four ETF’s defined maturities. If you’re starting your own bond ladder, begin with the 2017 fund as your nearest-dated holding and add a 2020 fund if you like. Guggenheim offers a high yield and an investment grade fund for each year.
Next ex-div dates: all August 1, 2016, est.
BUY – Home Depot (HD 137 – yield 2.0%) – HD is trading near 52-week highs, bolstered by solid housing data. Housing starts rose 4.8% in June, the U.S. Commerce Department said yesterday, the highest level since February. While the stock may face resistance here as it attempts to break through its old highs around 137, I’m putting Home Depot back on Buy today. Home Depot is a high quality company with a 29-year history of paying dividends. Since the housing crisis, management has made impressive efficiency improvements, achieving margins that are among the best in the industry. The company will announce earnings on August 16. Analysts are expecting EPS of $1.97 on revenue of $26.47 billion, up 15.2% and 6.6%, respectively. HD is a Buy for all investors.
Next ex-div date: September 6, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.6%) – No news.
Next ex-div date: July 15, 2016 est.
BUY – J.M. Smucker (SJM 153 – yield 1.8%) – While the market rally has dulled interest in some conservative stocks, SJM appears to have solid support here, despite being at all time highs. As discussed in today’s introduction, high quality dividend-paying equities are lacking much competition these days. And Smucker’s management just raised the dividend for the 15th consecutive year, hiking the quarterly payout 12% to $0.75 per share. SJM is a Buy on pullbacks for all investors. The company won’t report earnings until late August.
Next ex-div date: August 10, 2016
BUY – UPS (UPS 111 – yield 2.8%)
– UPS is trading at 52-week highs ahead of the company’s July 29 earnings announcement. Analysts expect EPS to rise 5.9% to $1.43, on revenue growth of 3.9%, to $14.7 billion. After over a year with no real progress price-wise, UPS is trading at a reasonable valuation and I think the stock is buyable right here. UPS has paid dividends since 2000 and increases its dividend by an average of 8% per year.
Next ex-div date: August 24, 2016 est.
HOLD – Xcel Energy (XEL 44 – yield 3.1%) – Xcel Energy will report second-quarter results on August 3 before the open. Analysts expect EPS of $0.41 on revenue of $2.52 billion, up 5.1% and 0.4% respectively. With interest rates expected to stay historically low for a prolonged period, utilities could remain popular with income investors. But I don’t recommend buying XEL at this elevated level. XEL is a Hold.
Next ex-div date: September 13, 2016 est.
Closing prices as of July 19, 2016.