Odds ‘n Ends – Income Portfolio

  • IncomeConsolidated Edison’s largest subsidiary, Con Edison of New York, revised its 2014 general rate case in June from an earlier request that was met with some resistance by the New York State Public Service Commission. The company is now seeking raises in its electric, gas, and steam rates of $425 million, $26 million, and $11 million, respectively, based on a 10.1% return on a 50% common-equity ratio. The NYSPSC is recommending that electric, gas, and steam rates be slashed based on a return of 8.7% on a common-equity ratio of 48%. As of this writing, the jury is still out. Nonetheless, 2013 full year earnings should settle at around $3.76, while 2014 will be dependent on the aforementioned rate petition. The shares, yielding 4.4%, have retreated along with the overall utility sector, but remain a worthwhile holding for conservative income accounts.
  • As discussed in my post of August 10, DuPont is moving to exit the Performance Chemicals business, specifically titanium paint pigments and concentrate on agriculture, electronics, security & safety and biotechnology. The company has recently increased the dividend by 5% to a yield equal to 3.2% at current quotations and is actively buying back stock. Not sure what activist investor Nelson Petlz/Trian Fund Management has in mind for its purchase of 5.78 million shares of DuPont, but time will tell. DD earns high marks for financial stability and earnings predictability should improve along with the global economy. Long-term total return potential is above average, in my opinion.
  • Intel Corp. unveiled new chips geared to data centers and the cloud computing market. The Atom processors are aimed specifically at microservers that have become more widely used for “lightweight workloads”. Microservers are projected to make up 10% of total server units in 2014, according to an analyst at RBC Capital. Admittedly, the PC market will weigh on INTC, but new products for cloud computing and mobile applications should pick up the slack. Long-term, the shares have appeal. Yield – 4.1%.
  • Healthcare giant Johnson & Johnson’s shares have come off their recent highs, but the outlook for the remainder of the year appears bright. The company has recently completed the acquisition of cancer fighting development drug firm Aragon Pharmaceuticals. New drugs such as Xarelto and Zytiga should lead growth in the pharmaceutical category and the 2012 acquisition of Synthes should drive gains in orthopedic devices. Also, the consumer products division – 21% of sales – is showing signs of life. The shares are providing a 3.1% yield and dividends should grow at a 7%-8% clip per year for the foreseeable future.
  • Kimberly-Clark got off to a good start this year and will probably continue to reward its shareholders though share buybacks in the $1.0 to 1.2 billion range. The shares are underperforming along with the consumer staples sector in general. However, KMB raised its second quarter dividend payout almost 9% to bring its yield to 3.5% under current quotations; a confident sign for future cash flows. Long-term, sales should be helped by expansion in its non-core categories of household and sanitary products and into its healthcare and industrial markets as well as focusing more on emerging economies in Asia and South America.
  • McDonald’s reported global July 2013 comparable sales increased 0.7% year-over-year, lead by US growth that increased by 1.6%, Europe decreased by 1.9% and Asia Pacific/Middle East/Africa declined 1.9%. There may be some price increases in the offing for the ten year old “Dollar Menu”, as franchisees are pressuring the company to boost sales and margins. MCD is test marketing a “Dollar Menu and More” approach with items from $1, 2 and $5. Also, minimum wage groups are fighting for higher pay, which will take its toll on both McDonald’s and the consumer. However, the good quality shares can remain in a well diversified income portfolio capitalizing on a growing dividend, yielding 3.25% at current levels.
  • A lot has been written over the past few weeks regarding Rogers Communications with the potential of a four-vendor wireless provider base in Canada. And Ottawa is still insistent on bringing in new competition as the spectrum battle scheduled for January is not over. Yes, Verizon has backed out, but may return once it pares down debt, and other large international players may want “in”, as they see an accommodative Canadian government. However, I believe that the beaten down shares of RCI have been oversold and positions can be maintained for its longer-term potential and attractive 4.2% yield.
  • The Canadian economy is stabilizing and operations are moving along nicely for Royal Bank of Canada. Earlier this month, Bank of Canada (Canada’s equivalent to the Federal Reserve) left the overnight rate unchanged at 1.0%. The forward guidance statement reiterates that as long as there is significant slack, low inflation and improving household balance sheet conditions, support of the current policy will remain and  “over time” as conditions stabilize a gradual normalization of policy interest rates can also be expected. Royal Bank’s take is that the Central Bank will look through the choppiness in the economic data with the expectation that the economy’s momentum will shift into a higher gear thereafter. While still heavily dependent on U.S. monetary policies and economic growth, RBC’s  wealth management and retail banking divisions should continue to do well and the shares are a solid holding. The yield for Royal Bank is 4.1%.
  • Verizon Communications will now be concentrating on its full integration of Verizon Wireless now that a deal has been struck with Vodafone. Fitch downgraded Verizon’s long-term issuer default rating to A-minus, four steps into investment grade with a “stable” outlook. Verizon will begin marketing its $50 billion bond offering in order to help pay the $60 billion in cash it will need to satisfy the Vodafone deal; the remaining $70 billion to be paid in Verizon stock. The recently increased dividend remains well covered and investors willing to wait for the next catalyst to drive VZ’s share higher will need to be satisfied with the 4.5% yield for now.

I will provide some updates for the Aggressive Portfolio over the next several days.

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