In an effort to kick-start the aggressive portfolio, I am adding Delta Air Lines (NYSE: DAL – $50.96) to the list, which replaces Hess Corp., which was removed late last month. One of the nation’s largest air carriers, Delta is poised to offer investors decent long-term capital appreciation along with a dividend equal to 1.6%. More on Delta in an upcoming post.
I believe much of the good news is factored in to the shares of Dow Chemical Co. at this point and all that remains is wrangling by activist investors and management as to how to break up the combined DowDuPont businesses. Furthermore, the dividend picture of the three new companies, post-split, are unclear. Therefore, I am taking profits on Dow that entered the income portfolio in July 2105. Since that time, DOW has returned investors about 30% in price appreciation and dividend income. In its place, I am adding chemical giant LyondellBasell Industries. LYB was a successful member of the aggressive portfolio from 2015 through February of this year. Although somewhat speculative as compared to the more conservative candidates on the income list, I believe the company deserves a place in the portfolio for exposure to the global chemical industry along with providing a healthy 4% dividend yield. I will supply more details on LyondellBasell in an upcoming post.
Another record for the Dow, but the other major averages have lagged. I guess you don’t necessarily have to own any of the so-called FANG stocks to make money these days, as the bluest of the blue chips have led the market. Over the past few weeks, the Dow has been led higher by traditional names like Apple, Boeing, Caterpillar and 3M. For the week, the Dow Industrials gained another 262 points or 1.2% to close at 22,093, just five months since it broke through 21,000. True, the Dow is price-weighted, and stocks with triple digit price tags will move the average disproportionately. The more diversified and market-cap weighted S&P 500 moved up a fraction and the tech-heavy NASDAQ fell by 0.36%. Small-cap stocks took a breather too, with the Russell 2000 shedding 1.2%. Not only did some of the long-standing industrials do the heavy lifting, but prosaic utilities and income-centric financials also led the charge this week.
A stronger-than-expected jobs report helped sentiment, but was offset by a disappointing ISM Non-Manufacturing Index and consumer prices remain flat. Employers added 209,000 new jobs in July, handily beating expectations and the unemployment rate hit a 16-year low at 4.3%. Other positives driving the markets include durable goods orders, housing and resilience in manufacturing. The consumer, however, has been more cautious as seen by an extended slump in new car sales and reluctance at the retail counter.
OPEC meets early in the week to scold member nations that are reneging on output cuts and oil prices may bounce if there is some success there. Looking ahead, some of the nation’s largest department store chains (Macy’s, Kohl’s, Nordstrom) will be reporting second quarter results on Friday, all indicating lower profits from last year. We will also hear from conservative candidate CVS Health, which will do well to meet last year’s figures as well. On balance, however, investors remain optimistic.
Here is the answer to last week’s trivia question: Ford Motor Co. was founded by Henry Ford in 1903. In what year did the company become publicly held? 1905, 1919, 1931 or 1956. Answer: January 17, 1956.
Today’s Trivia Question: The “40” in the WD-40 Co. brand represents the fortieth attempt to perfect the iconic lubricating formula. What does the “WD” stand for? Will-Do, Wilmer Dawson, Water Displacement or Wear Detraction.
Verizon Communications, Inc. (NYSE: VZ – $48.91) continues its push to collect assets useful for the next phase of network technology, called 5G. The carrier says it will pay $225 million for a portion of Englewood, Colorado-based WideOpenWest, a fiber broadband company that serves the Chicago area. In addition to being used for cell sites, Verizon says the fiber optic wires will be useful to serve small and medium-sized business customers with internet connections. Earlier this year, the company agreed to pay $3.1 billion for Straight Path which controlled high frequency wireless airwaves suitable for 5G. Wells Fargo Advisors tells Barron’s it is “yet another indicator of Verizon’s commitment to its One Fiber initiative — to invest in high-capacity, multi-use dense metro fiber assets”. Also, on its most recent earnings call, Chief Financial Officer Matt Ellis stated “Verizon will be adding capacity through a combination of ‘buying and building fiber’ as well as leasing fiber assets that already exist”.
Separately, Verizon said it has been named enterprise infrastructure solutions provider by the U.S. General Services Administration under a 15-year contract that has a total spending ceiling of $50 billion. Under the contract, federal agencies will be able to buy information technology, telecommunications services and other enterprise solutions from Verizon.
Not without intense competition in the wireless space and headwinds from the ever-changing landscape for companies providing on-demand content to subscribers, the shares of Verizon can be held in a well-diversified conservative account and enjoy a 4.7% dividend yield, to boot.
Over the past year, the ALPS Dividend Dogs ETF (NYSE: SDOG – $43.02) has performed quite well and provided conservative income investors with a yield of 3.4%. The fund seeks to replicate, as closely as possible, the performance of the S-Network Sector Dividend Dogs Index, which consists of about 50 stocks that must be constituents of the S&P 500 Index and offer the highest dividend yields. Therefore, the fund is not expected to outperform the market, but to provide relatively safe and steady dividend income. Over the past fifty-two weeks, the fund has provided a total return of about 7%. Currently, the ALPS Sector Dividend Dogs exchange traded fund is comprised of the following top ten stocks in its portfolio of 49 and is diversified by industry sector as follows:
For those investors willing to sacrifice capital gains for safety and income, the shares can continue to be held.
Technology communications and defense provider Harris Corp. (NYSE: HRS – $115.94) reported revenue in the fourth quarter of $1.54 billion compared with an adjusted $1.53 billion in the prior year and slightly exceeding analysts’ views. Adjusted income from continuing operations was $183 million, or $1.49 per share, compared with $1.30 per share in the prior year period and in line with expectations. Orders for the fourth quarter were $1.57 billion. Income from continuing operations for the fiscal 2017 full-year period was $689 million, or $5.53 per share, compared with $645 million, or $5.14/share last year. Sales of communication and electronics systems rose in the period as the company won more government contracts, even as revenue from space and intelligence systems dropped slightly. Specifically, revenue in the Communication Systems group was up 3%; the Electronic Systems segment was higher by 4% compared to last year’s fourth quarter; and the Space and Intelligence business was lower by 4%. During the year, Harris sold non-core businesses including an IT service to focus on “technology-differentiated, high-margin” units.
In a statement by management, Melbourne, Florida-based Harris is looking to “return to growth in fiscal 2018”. Initial guidance for the current year is for income from continuing operations in a range of $5.85 – $6.05 per share with revenue in the range of $6.02 – $6.14 billion, up 2 – 4 percent from fiscal 2017 and expects fiscal 2018 free cash flow in a range of $850 – 900 million. The shares are closing in on its previous 52-week high of $116.49 set back in June and can be held for further long-term appreciation and moderate income.
Thanks in part to huge gains in Caterpillar and Boeing, the Dow Industrials recorded a new high this week, up over 250 points or nearly 1.2%. Some of the so-called FANG stocks, like Amazon.com and Alphabet (Google), didn’t fare as well and the NASDAQ was slightly negative. Tech stocks in general were among the weakest of the sectors along with healthcare. The S&P 500 was flat on the week. A sudden rise in oil prices helped the energy sector. Crude futures were up nearly $4.00/bbl. to close near the $50 mark as Saudi Arabia cut production and OPEC said it would crack down on countries not living up to their planned reductions. The largest gains came from telecommunications with a 6.5% positive showing, but the other sectors were mostly mixed.
The Fed kept interest rates in check, but confirmed that it expects to scale back its balance sheet “relatively soon” by selling a small portion of its holdings of Treasury bonds. The interest rate vote was largely due to muted Inflation as well as the latest GDP number for the second quarter that rose just 2.6%, less than the consensus forecast. While there have been some positives in the economy (housing starts, employment and consumer confidence), unevenness in retail and modest improvements elsewhere are still present.
Pundits are on the fence with every record high signaling a correction, while others see any downturn as a buying opportunity. The volatility index – or VIX – hit a record low during the week at 8.8, which could signal a selloff in the short run. Clearly, the bulls still hold the better hand right now. Looking ahead, however, their grip might not be quite as firm as it was earlier in the year. That’s when equity prices were lower and the path to health care revision, further deregulation, tax reform and infrastructure revitalization all seemed better defined. Conclusion: The market outlook is still positive, overall, as the economic and profit variables affecting equity prices remain largely supportive.
Here is the answer to last week’s trivia question: As of June 30, 2017, which company lead the pack in terms of market capitalization (shares outstanding times price per share)? Apple, Alphabet (Google), Amazon.com or Microsoft. Answer: Apple. Alphabet comes in second, followed by Microsoft and Amazon.com.
Today’s Trivia Question: Ford Motor Co. was founded by Henry Ford in 1903. In what year did the company become publicly held? 1905, 1919, 1931 or 1956.
International Paper Co. (NYSE: IP – $55.85) said earnings per share fell to $0.65 from $0.92 a year earlier, but met analysts’ estimates. Revenues rose to $5.77 billion in the quarter from $5.32 billion a year ago, coming in ahead of the $5.72 billion consensus. By segment:
- Industrial Adjusted Packaging operating profits were $407 million (excluding special items) compared with $360 million in the first quarter. U.S. box shipments remained strong driven by favorable domestic conditions. Earnings were also favorably affected by solid sales price realization and strong demand for U.S. kraft linerboard exports, partly offset by mill outage costs and rising costs for recycled linerboard.
- Global Cellulose Fibers operating profits in the second quarter of 2017 were $12 million (excluding special items) compared with a loss of $51 million in the prior period. The business achieved record fluff pulp sales volumes in the quarter as global demand for fluff pulp remained strong. Greater synergy benefits from the Weyerhaeuser acquisition, favorable pricing and lower overall manufacturing cost, along with lower planned maintenance outage expenses, contributed to the earnings increase.
- Printing Papers adjusted operating profits were $88 versus $100 million in the first quarter of 2017. Earnings in North America were impacted by lower sales volumes, unfavorable mix and heavy maintenance outage expenses, partially offset by higher export sales volume from Brazil.
- And finally, Consumer Packaging operating profits were a loss of $5 million excluding special items compared with adjusted earnings of $33 million in the first quarter of 2017. The earnings decrease was largely attributable to annual outage expenses and reliability issues at the Augusta, GA mill.
“Looking forward, we see margin expansion associated with the realization of our announced price increases, acquisition synergies and significantly lower outage expenses driving a very strong second half and putting IP on track to deliver our full year earnings target,” the company said. Earnings growth prospects are supported by the opportunity for continued expansion in IP’s Global Cellulose Fibers division. That said, the issue offers a high dividend yield (3.2%) and above-average long-term capital gains potential.
Kansas City-based Cerner Corp. (NASDAQ: CERN – $64.31) reported second quarter revenue of $1.292 billion, an increase of 6% compared to 2016 and in the company’s guidance range. Adjusted net earnings were $205.5 million, compared to $199.2 million in the second quarter last year and equal to $0.61 per share, and increase of 5% from a year ago and inline with analysts’ consensus. Bookings in the second quarter were $1.636 billion, which is an all-time high and an increase of 16% compared to the second quarter of 2016.
For the September period, the company expects earnings to be between $0.61 and $0.63 per share on revenue of $1.26 billion and $1.32 billion. This compares to previous guidance of $0.63/share on $1.3 billion in revenue. For the full-year, Cerner sees earnings to be between $2.46 to $2.54 per share versus prior guidance of $2.44 to $2.56 on revenue of $5.15 to $5.25 billion. This compares to analysts’ estimates of $2.51 per share on revenue of $5.21 billion.
The operational challenges the company experienced in the wake of the large Siemens Health Services acquisition seem to have been met, and active market support for shares has returned since late last year. That said, the stock is now trading at a bit of a premium at 25.5 times estimated 2017 earnings. The company’s prospects for the next few years, however, suggest that they continue to be held by investors willing to speculate on promising long-term growth in healthcare information technology and Cerner’s ability to get its share of the pie.
Chip giant Intel Corp. (NASDAQ: INTC – $36.41) said adjusted share earnings settled in at $0.72 for the second quarter, a 22% increase from the previous-year’s tally. Strength was broad-based, as virtually all the company’s segments performed well. Specifically, the company’s largest segment, the Client Computing Group, reported a 12% year-over-year increase during the period. Management attributes the strong top-line gain to a couple of key factors: Increased notebook volumes and average selling prices helped to shore up results and the ramp-up of the company’s LTE (long-term evolution) semiconductors provided a boost, likely in anticipation of the next iPhone launch. The company’s long-term growth engine – the Datacenter segment – posted a revenue gain of 9% and The Internet of Things division registered a year-to-year increase of some 26%. This arm continues to register strong growth, albeit off a relatively small base. What’s more, the Nonvolatile Memory segment inked a revenue improvement of 58% over last year’s figure, offset by the Programmable Solutions group, which declined 5%.
Management also gave solid guidance for the September interim and for full-year 2017. The company is forecasting third quarter revenues to be about $15.7 billion and earnings per share for the third period are likely to be $0.80 compared to the Street’s $.076. For the full year, management now looks for revenues of $61.3 billion (vs. analysts’ estimates of $60.2 billion) and adjusted share net of $3.00 vs. $2.67 last year and about ten cents better than consensus.
Intel remains a solid long-term choice for income-oriented investors seeking a technology powerhouse to round out their portfolios. While the company’s bread-and-butter personal computer presence is in the mature stage, the semiconductor titan has made strides in entering faster growing markets. Its intention to purchase Mobileye, which provides chips for driverless cars, along with other bolt-on acquisitions, should enhance the company’s long-term earnings growth initiatives. The shares yield 3.1% at current levels and the well-covered dividend should continue to grow.