Tag Archives: industry

Peer Inside The iShares S&P 500 Value ETF

Summary The individual holdings look fairly solid with a heavy exposure to XOM. The sector allocations are going heavy on the financial sector. While those financial firms may benefit from raising short term rates, I’d rather hedge rate risk and add more exposure to utilities. The iShares S&P 500 Value ETF (NYSEARCA: IVE ) is one way to get the value exposure for your portfolio. On the other hand, if you prefer to look at individual sectors you may find the holdings a little more concerning as 25% of the equity is invested in the financial sector. Generally I have tendency to prefer the value side of the index, but going so overweight on financials is an interesting aspect of the fund. Quick Facts The expense ratio is .18%. I have a strong preference for very low expense ratios, so this is a bit higher than I like to see. With over $8 billion in assets under management, it seems better economies of scale could be achieved, but the higher expense ratio may simply reflect more profits to the sponsor of the fund. Holdings I put together the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I find the exposure to AT&T (NYSE: T ) interesting simply because the 2.4% weighting is almost twice that of Verizon (NYSE: VZ ). I find the telecommunications sector a little risky because of the intense price based competition brought by Sprint (NYSE: S ). The sector will probably find a solution to the intense competition, but I’ve gotten burned pretty badly by the mining sector where industry competition reached absurd levels and companies opted to focus on lowering their own costs by increasing production and driving down prices. Declining prices for the product combined with increased production and intense capital expenditures is a pretty ugly situation. Outside the Top 10 Outside of the top 10 you’ll find Johnson & Johnson (NYSE: JNJ ) as 1.64% of the portfolio. This is another great dividend company to hold. They have an effective R&D team and a global market presence. Just look at their dividend history and try to come up with a reason that this company shouldn’t be in a dividend growth portfolio: (click to enlarge) Beyond JNJ you’ll also see other dividend champions like Wal-Mart (NYSE: WMT ) and Pepsi (NYSE: PEP ). The heavy exposure to dividend champions is one reason for investors to appreciate the value side of the index. Wal-Mart has been on a massive slide lately but I don’t see it getting much worse before it gets better. The market for equity can be a little too short sighted in valuations. While Wal-Mart is seeing their already thin operating margins get pressed even thinner amid higher wages, they are also the low cost leader. When Wal-Mart raises prices, the rest of the industry should follow. Who will undercut Wal-Mart? Will it be Target (NYSE: TGT )? I doubt Target really wants to do that since they raised wages also and have the same challenge. Sectors Going heavy on financials hasn’t been my style, but increasing interest rates may benefit them more than the rest of the economy. It’ll be interesting to see how much higher the Federal Reserve can push interest rates without crashing the economy. What to Add The biggest weakness here in my opinion is the relatively small position in utilities. Since utilities often have a material correlation with bonds, I’d like to see a little more utility exposure in the portfolio. An investor could modify the exposure by simply adding the Vanguard Utilities ETF (NYSEARCA: VPU ) to their portfolio when using IVE as a substantial holding. Conclusion The expense ratio is a bit high and the concentration in the financial sector is a little higher than I’d like to see. However, the rest of the portfolio exhibits some great traits with a focus on established dividend growth champions that have the size and experience to whether difficult market environments. All things considered, I think there is more to like than to dislike in this portfolio. Some investors with a very long holding period may want to look for options with slightly lower expense ratios. If investors have a shorter time frame or intend to move their positions more frequently the healthy liquidity on IVE should be attractive for creating a smaller bid-ask spread.

PPL Corporation – Ready To Go Strong Starting 2016

Summary Stock is compelling investment prospect for income-hunting investors. Strategic investments in utility infrastructure development and extension-related projects are in-line with long-term growth generating strategy. Strategy of sharing cash flow base strength with shareholders through dividend payments will continue to positively affect stock price. PPL Corporation (NYSE: PPL )’s strong business fundamentals and its important infrastructural growth-related investments cast an impressive outlook for the stock. I believe the company’s regular efforts to augment the growth capabilities of its regulated business’ infrastructure with regular infrastructural improvement and enhancement-related investments will bode well for its future EPS growth. These healthy growth prospects of PPL will ultimately better its future cash flow productivity level and this will in turn help the company maintain its practice of paying increasingly healthy dividends in the years ahead. Moreover, PPL’s current valuations are more attractive than its peers and the industry average. Nevertheless, un-foreseen adverse weather conditions, volatility in fuel prices and strict regulatory restrictions are key threats that will keep on hovering over the company’s future financial performance. Over the last few years, the U.S. utility industry has faced challenges such as a decline in energy demand by industries amid the recession. Furthermore, the regulatory uncertainties and restrictions imposed by the Environmental Protection Agency (EPA) caused industry disruptions. However, the EIA has projected that energy demand in the U.S. will increase by 2.1% in residential space in the second of 2015 and will grow by 0.7% in industrial space in 2015, which indicates that the overall utility industry’s outlook is attractive. To combat the industrial headwinds and to meet the expected rise in energy demand, the U.S. utility industry players have accelerated their growth investments in order to get a broader regulated infrastructure. Like all of the other utility industry players, PPL is also making hefty infrastructural investments; around $10 billion is projected to be spent by the company on infrastructure improvement by the end of 2017, which will help it apply for regular rate base hikes and will ultimately drive its future earnings and revenues. I continue to believe that this utility company’s attractive growth investments will help it enjoy EPS growth in future, which will support its cash flows and dividend growth. PPL, however, is confident of achieving a 6% compounded annual earnings growth rate through 2017. And for its U.K. operations, the company now expects EPS growth of 1% to 2%, in contrast to its previous expectation of flat earnings growth. I think that these strong earnings growth potentials will augur well for the stock valuation. To recover the capital investments made previously, the company has applied for a 5.1% rate case hike. Although the case is still waiting for regulatory approval, if approved, it will add around $124 million per year towards PPL’s revenues. The company has plans to use the proceeds of its rate cases in technological upgradation and improvement-related projects. In this regard, recently, PPL asked for the Pennsylvania Public Utility Commission’s approval to make an investment of $450 million in the technology upgradation process of meters in order to resolve their problems associated with old meters. This investment will not only improve the company’s image as a quality regulated utility but will also benefit its EPS growth, because the cost of investment will be recovered through a special rate rider; as per the management’s estimates, this investment will increase rate base by $330 million . Moreover, two of PPL’s subsidiaries, namely Louisiana Gas And Electric Company and Kentucky Utilities Company, have recently signed a $220 million agreement with Paringa Resources Limited for the purchase of coal from Buck Creek No.1 mine, with the completion of certain construction-related work, coal purchase under this agreement will begin in 2018. The coal purchase agreement will extend PPL’s energy generation resources, thereby improving its load capacity and will help it apply for rate case, which in turn will help it in reporting incremental EPS growth. Furthermore, the company has maintained an impressive record of sharing its cash flows with shareholders through healthy dividend payments. Owing to consistent dividend growth, currently, PPL offers an attractive yield of 4.44% . Moreover, the commitment to keep its dividends growing has been affirmed by the company’s chairman in the 3Q2015 earnings conference call; he said : “Regarding the dividend, we expect minimal dividend growth again for 2016 as we strive to get the payout ratio down into the mid-60% range, at which time we will target a 4% to 6% dividend growth rate, more in line with our earnings growth expectations. We currently expect to be in the targeted payout range by the end of 2016. So our current expectation is that we will grow the dividend more meaningfully starting in 2017, but our current expectation for 2017 is at the low end of the 4 to 6% relative to the dividend.” Due to the abovementioned strong strategic growth prospects, I think the chairman’s dividend growth expectation is realistic and achievable. Moreover, PPL’s strong balance sheet position, as reflected in the chart below, makes me believe in the company’s ability to continue sharing a decent portion of its future cash flows with shareholders in the years ahead. Source: 4-traders.com Final Words PPL is a compelling investment prospect for income-hunting investors. The company’s strategic investments in utility infrastructure development and extension-related projects and its strong balance sheet position are in-line with its long-term growth generating strategy. Moreover, PPL’s strategy of sharing its cash flow base strength with shareholders through dividend payments will continue to positively affect its stock price. Also, earnings for PPL are expected to grow at a growth rate of 4.86% , better than Southern Company (NYSE: SO )’s earnings growth expectations of 3.88% . Also, PPL has attractive stock valuations in comparison to SO and the industry average, as displayed below. Source: Yahoo Finance & NYU.edu

3 ETF Winners Post Fed Rate Hike

For the first time in nearly a decade, the Fed opted for a lift-off last week indicating that the economy has gained enough strength to bear future increases in borrowing costs. Significant improvements in the key sections of the economy including that in the labor market were the main reasons behind the hike. Expressing confidence in the U.S. economy, Fed Chair Janet Yellen announced the beginning of a slow-but-steady series of rate increases. The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50% as policy makers unanimously voted in favor of a hike. The long wait for the hike was what Janet Yellen labelled an “extraordinary period.” During this period, ultra-low interest rates aided economic recovery, lending a bull run to the markets. Following the lift-off decision, Yellen stated that the decision “reflects our confidence in the U.S. economy.” The Fed also indicated that “solid” consumer spending, a rebound in the housing market and strong business fixed investment played an important role in the decision. How the Markets Moved Post Hike? Though the highly anticipated hike helped the broader benchmarks to move northward, markets failed to extend the gains due to concerns including the slump in oil prices. Despite yesterday’s gains, the Dow, S&P 500 and Nasdaq lost 2.4%, 1.8% and 1.3%, respectively. Oil was the main reason behind the benchmarks slipping into negative territory following the rate-hike decision. Concerns regarding weak global demand, absence of production cuts from OPEC and North American shale suppliers, and a stronger dollar continued to weigh on oil prices, which in turn affected energy shares during the period. The broader energy index – Energy Select Sector SPDR ETF (NYSEARCA: XLE ) – declined nearly 5.4% in this time frame. However, the alternative energy sector moved in the opposite direction thanks to some important developments. The historic Paris Climate Deal and news on tax credit extension boosted the sector during this period. The Paris deal, in which about 195 countries agreed to a landmark treaty to curb global warming to a significant extent, will invariably motivate renewable energy companies to step up their investments in new technologies, boosting the industry’s growth prospects. Meanwhile, the unexpected approval of a five-year extension to the Investment Tax Credit (ITC) and Production Tax Credit (PTC) for solar and wind companies by the U.S. government also boosted the stocks. 3 ETF Winners In this scenario, we have highlighted three ETFs that registered healthy gains in the post rate-hike period. Guggenheim Solar ETF (NYSEARCA: TAN ) This ETF follows the MAC Global Solar Energy Index, holding 31 stocks in the basket. American firms dominate the fund’s portfolio with nearly 50.9% share, followed by Hong Kong (19.8%) and China (17.5%). The product has amassed $323.8 million in its asset base and trades in moderate volume of around 226,000 shares a day. It charges investors 70 bps in fees per year. The fund has returned 7.7% in the post rate-hike period. Market Vectors Mortgage REIT Income ETF (NYSEARCA: MORT ) The ETF tracks the Market Vectors Global Mortgage REITs Index, measuring the performance of companies primarily engaged in the purchase or service of commercial or residential mortgage loans. The fund consists of 24 stocks and charges 41 bps in investor fees per year. The fund is relatively less popular with an asset base of $102.2 million and average volume of roughly 31,000 shares per day. The commitment of a gradual increase in the key interest rate helped the fund to return 4.6% in the post rate-hike period. SPDR S&P Biotech ETF (NYSEARCA: XBI ) This ETF follows the S&P Biotechnology Select Industry Index, holding 105 stocks in the basket. The fund has a well-diversified portfolio as none of the firms has more than 1.7% of assets. The fund is quite popular with an asset base of $2.8 billion and strong average volume of more than 4 million shares per day. It charges investors 35 bps in fees per year. The fund has returned 4.7% in the post rate-hike period. Original Post