Tag Archives: stocks

Buy Consolidated Edison For The 4.13% Dividend And Solid Fundamentals

The company was named a top 25 SAFE dividend stock in most recent “DividendRank” report. The dividend has been growing for the past 40 years. Solid fundamentals and a payout ratio of only 64% make the dividend look extremely safe going forward. Consolidate Edison (NYSE: ED ) also known as Con Ed, is one of the largest investor owned energy companies in the United States with nearly $13 billion in revenue and a market cap of $18 billion. The company offers a very nice 4.13% dividend that has been increasing for the last 40 years . The dividend was named a top 25 SAFE dividend by the prestigious “DividendRank” report . While the above may not be a good enough reason to invest the stock buy itself, when paired with the company’s rock solid fundamentals, an overall picture of safety and high yield emerges. The stock is currently trading at 15 times earnings, 1.4 times sales, and 1.4 times book value. These are very conservative numbers that show the stock is fairly valued and has limited downside even in the event of a severe market downturn (which would make the yield go through the roof). In addition to the reasonable price of the stock are the solid profit margin, return on equity, and even revenue growth to go along with it. The company is earning a profit margin of 8.67%, which is about average for the industry. The return on equity is 8.53%, which is a little below average , but still just fine with all of the other aspects of the company performing well. The most recent earnings report even showed quarterly YoY revenue increasing by 1.67%, which means the company is growing, albeit slowly. Furthermore, the payout ratio is only 64%, which is one of the reasons the dividend looks so safe. Most high yielding companies have much higher payout ratios . The great thing about a solid dividend stock like ED is its defensive nature during a bear market. While a rate hike is expected to hurt dividend stocks generally due to the fact that higher interest rates make bonds relatively more attractive, it will take years for rates to gradually return to normal, so the fear of one small hike by the Fed, which may not happen for many more months, is overblown. Furthermore, a utility company like ED is more stable than a typical run of the mill dividend stock, so if you’re worried about a market downturn, you really can’t get any safer than a leading utility company that pays a dividend over 4%. Finally, the stock recently dropped over 5% in one day when it just barely underperformed quarterly earnings expectations (they earned $1.45 a share when the market expected $1.48). I look at this as an opportunity to get some discounted shares rather than a sign that investors should be concerned. This is a good example of the market overreacting negatively to good results simply because they missed expectations slightly. I expect the stock to slowly recover over the next quarter while I collect the nice dividend in the interim.

Why Long-Term Investors Need To Be Looking Overseas…

Summary Value opportunity in foreign markets. Developed markets facing multiple headwinds. Investors looking to go international face many obstacles. Over long-term investment horizons, valuations can be a valuable guide for portfolio allocation. Most recently, we here at AlphaClone have been struck by the current valuation divergence across global equity markets. We believe long-term investors should be looking to increase their allocations to international equities in their portfolios. Why? In a word, price. The case for favoring international equities over U.S. domestic equities all comes down to price. This table sums up the current situation. (click to enlarge) (Table Source ) Whether it is developed market central banking policies, or other economic factors that have led to developed markets being richly valued, the bottom line is that equity markets in the U.S. and other western markets are historically expensive. As you can see in the table above, United States equities trade for 24x their cyclically adjusted price-to-earnings ratio or CAPE ratio. The historic average for U.S. equities has been a CAPE of around 16x. If U.S. equities regress all the way back to their historic average of 16x CAPE over the next 10 years, then investors would be looking at a -4% per year headwind. As price multiples contract, earnings have to grow that much faster to maintain the same price growth levels. Even if we only go only half way back to a 20x CAPE ratio, that would represent a -2% per year headwind for U.S. investors. All of these headwinds would predict anywhere from a positive 1% to potentially negative -2% real return for U.S. equities over the next 10 years. That is a lot of headwind for the investor who invests solely in the U.S.! Meanwhile… In the international markets and emerging markets, in particular, their average CAPE is just 13x. What’s more, if you focus in on just value stocks within emerging markets, you can find an average CAPE of 8.5x for those stocks. These markets have been hammered over the last three years but now they may offer compelling value to the patient long-term investor. This opportunity means investors can get almost 2-3x times as much value for their invested dollar through investing in stocks internationally as they can from buying the U.S. broad market indices. If you’ve invested Internationally, you’ve lived this growing valuation divergence. Through November 4, 2015, Morningstar’s Foreign Large Blend equity fund category is -4.8% in the past three months compared with their U.S. Large Blend equity fund category -0.6%. This foreign category is dominated mostly by actively managed funds. Annualized returns for longer periods can be seen below. (click to enlarge) Is the time right for foreign equities to start outperforming U.S. domestic equities? Timing is always difficult, but we believe that this is the area where patient long-term investors should be looking for value to increase their international equity portfolio allocations and take advantage of the discount they represent. How should you do it? Even if you are convinced of the opportunity that exists internationally, how should an investor best do it? International investing brings with it a host of additional challenges for investors including: Which countries to choose Which sectors to pick Which securities to select Foreign currencies issues When to enter/exit trades Tax implications What visibility do you have But probably the most important question is which managers should you trust to help you navigate the above obstacles over the long term. If the table above shows you anything, it shows you how difficult it’s been historically for active managers to beat the broader, cap-weighted market benchmarks. Despite the under performance recently of active management in the international arena, active management is still probably the best choice for long-term investors who would like a solution that can adapt to the changing market environments we are likely to face, and who would like to add a value tilt in their foreign investing.

Utility Investors: Embrace Pending Rate Hikes

Utility investors should be more afraid of declining interest rates than rising. History points to rate cycle turns in 2004-2007, 1993-2000, and 1986-1989. Overall annual total return for utility stocks during the previous three rates hike cycles was 7.5%. In July 2014, I penned an article investigating the effect of previous interest rate cycle upswings on share prices of utilities, and with the pending rate hikes anticipated to begin in just a few weeks, it may be time to revisit this topic. The premise of the previous article was to review the performance of some well known utilities stocks after the previous three turns in the rate cycle. History points to rising interest rate cycles of 2004 to 2007, 1993 to 2000, and 1986 to 1989. I will not reiterate all the finer historic points of the previous article, including the graphs of the respective yield curves, but will analyze stock performance over the time frames. As background, I suggest reviewing the previous article. Many investors believe utilities are negatively hurt by rising rates. The most common reasoning is: •Higher rates increase interest costs for utilities and the capital-intensive nature of their business makes profits more sensitive to leverage expense. In addition, weak share prices reduces the effectiveness of equity raises to fund capital expenditures, along with raising the cost of the debt portion of billions in cap ex budgets. •Higher rates cause income-oriented investors to gravitate to bonds where principal risk is perceived to be lower. •If interest rates are increasing to stem the tide of rising inflation, utility operating costs, such as coal fuel costs, will also increase along with labor cost pressures. A traditional cost-push inflation cycle could be distressing to more than just a few utilities. Yes, corporate interest costs go up as new borrowings reflect current yield conditions. However, interest expense is part of operating expenses that are incorporated in most rate decisions. While there is a delay between cash out due to greater interest costs and inclusion in rate decisions, the higher expense is usually passed on to customers. While income investors will gravitate to safer bonds as their yield rises, selectively reviewing top quality utilities with a higher spread to 10-yr Treasuries will mitigate downward pressure in stock prices. Currently, rising rates are not being caused by cost-push pressures but due to stronger economic growth. Stronger growth usually leads to higher energy demands. In addition, a large percentage of infrastructure growth and cap ex is upgrading older assets and accommodating new sources of green energy, which are not as sensitive to underlying population and economic growth. The age of sector ETFs is relatively short and most do not encompass the above listed time frames. For example, S&P Utility ETF (NYSEARCA: XLU ) started trading in Dec 1998. In order to evaluate utility stock performance during these periods, a list of some of more popular stocks was chosen. These include: Duke Energy (NYSE: DUK ), NextEra Energy (NYSE: NEE ), Dominion Resources (NYSE: D ), Southern Co (NYSE: SO ), American Electric Power (NYSE: AEP ), PPL Corp (NYSE: PPL ), and PCG Corp (NYSE: PCG ). Combined, these represent 45% of the current value of XLU. Below are two tables outlining each stock’s performance during the last three up cycles in rates. The first table lists the starting and closing price of each stock, the individual performance of its share price and the value of an equal weight holding for these seven firms. The Fed Fund Rate is listed as well. The second table relies on information from buyupside.com to calculate the overall total return for each stock, the number of days held, and the value of an investment of $10,000 at the start date. As most utility investors realize, returns from utility stock dividends is an important portion of total return, and an overriding reason for buying utility stocks. The table also compares these with the return of S&P 500. These tables support the strategy of buying potential weakness in utilities when investors mistakenly sell at the turn in the rate cycles. Many utility stocks have declined from their 52-week highs, with the most common reason being a fear of rate hikes. For example, Duke Energy is trading -24% below its 52-wk high and 1% over its low, NextEra Energy -12% and 8%, Dominion Resources -16% and 3%, Southern Co -15% and 10%, American Electric Power -15% and 6%, PPL Corp -11% and 17%, and PCG Corp -12% and 13%, respectively. If an investor were to buy as the total return table outlines, their investment would have been a total of $210,000 combined, $70,000 each cycle. The value of these investments at the end of the respective rate hike cycle would be $350,000, or a total annual return of 7.5% over the 8.5 year covered. Utility investors should embrace the beginning of the rate up cycle by not dumping their stock holdings. If anything, investors should be looking for bargains as others are fearfully selling. Author’s Note: Please review disclosure in Author’s profile.