By Justin Cahoon
We have taken a look at investments that should form a portfolio's core, meaning: a lower beta, earnings stability, durable competitive advantages, and capable leadership. While core holdings are typically bid to or above fair value, a few core holdings are under-appreciated in this market. Here they are:
AT&T Inc. (NYSE:T) maintains real advantages in bandwidth and smartphone technology over its major competitors Verizon (NYSE:VZ) and Sprint Nextel Corp. (NYSE:S). This mega cap company has continuously and predictably paid out increasing dividends since 2004. Yearly dividend payouts tend to remain the same for each year, so a consistent record makes for a predictable investment.
How much bang for your buck are you getting with AT&T? A dividend of $1.71 and a close price on July 21, 2011 of $30.23 yields us 5.66%, which beats out Verizon (VZ) but is 2% less than CenturyLink (NYSE:CTL). However, AT&T is a lower risk investment at this moment, due to its positioning in the wireless service markets it serves. Investors are not appreciating that fundamental indicators continue to swing bullish for AT&T, namely, the initial access it got via Apple's (NASDAQ:AAPL) iPhone and the options available through the pending merger with T-Mobile (OTCQX:DTEGY).
Utilities are also a fertile field for finding core holdings. For electric power operators, I started with a list of twenty-five companies and narrowed the companies down to nine companies with a large market cap (over $10B). Energy Future Holdings Corp (TXU), Dominion Resources Inc (NYSE:D), and Edison International (NYSE:EIX) were knocked off the list because of their dividend yields below 4%.
Exelon Corp. (NYSE:EXC) is a high yielding company with a consistent dividend payout history that-- since 2006-- has never decreased. Though the company has remained at $0.525 since December of 2008, this is a low risk investment because of Exelon’s steady cash flow from PECO Energy and ComEd utilities. Even Exelon’s higher-risk energy marketing operations have not deterred S&P from suggesting a buy of Exelon Corp. as a low risk investment.
I like the upcoming merger with Constellation Energy (NYSE:CEG) in the first quarter of 2012. I expect the merger to increase dividend earnings for 2012 and expect the second half of 2011 to remain strong with the added bonus of a small increase in share price. Similar to Exelon Corp. is FirstEnergy Corp. (NYSE:FE), with a slightly higher yield of 5.07%. FirstEnergy Corp. recently acquired Allegheny Energy (AYE) to increase customer base by a third. The acquisition is going to take a while to settle in, and the lower operating margin of 18.46% compared to Exelon Corp.’s operating margin of 25.35% would push me to go long Exelon Corp instead of FE.
The highest yielding company on the list is Duke Energy Corp. (NYSE:DUK) with a yield of 5.2%. DukeEnergy Corp. services 3.9 million electric customers. The large market cap, 25,069M, is appealing as well as the bullish trend since early 2009. I see DUK as a low risk investment and would add this to my portfolio for a long-term investment. Small dividend increases since 2006 are consistent with the rest of the Electric Power Distribution industry and I like DUK’s recent increases in 2011 to about $0.25 per share. Shares closed July 21, 2011 at $19.10. PPL Corp. (NYSE:PPL) is less appealing at a higher price of $28.03, because of the lower yield and market cap of 13,403M. PPL Corp. is more risky because of the company’s power supply segment. PPL Corp. recently acquired Central Network's electric distribution business in the U.K. This acquisition is an unappealing venture since the euro’s depreciation due to the recent troubles with Greece. I’d stick with DUK.
While technology stocks often lack the earnings stability needed to represent a core holding, specific names have such a defensible position that competitors may only settle for second place. Intel Corp. (NASDAQ:INTC) fits the bill, but has a low yield of 2.95%. However, this company needs a second glance and has more factors than dividend yield to consider. S&P projected a 21% increase in sales in 2011 and a 4.3% increase in 2012. From a technical point of view, a breakthrough occurred in early May, setting up previous resistance as support in July. Intel Corp. has the largest market cap by far, 121B in the semiconductors industry, compared to competitor Texas Instrument's (NYSE:TXN) market cap of $36B. I like this company a lot for my portfolio because although it is more risky than those listed above, there is immense room for growth. The operating margin for Intel Corp. is a high 35.73% compared to Texas Instrument's 32.32%. TXN has a low dividend yield of 1.63, which is far overshadowed by Intel. I like Intel Corp. for the prospective dividend increase and market security due to a large operating margin and market cap.
Lilly (Eli) & Co. (NYSE:LLY) has a dividend of 1.96 and a yield of 5.13%. Though LLY has a much smaller market cap than pharmaceutical preparations giants like Procter & Gamble Co. (NYSE:PG), Johnson & Johnson (NYSE:JNJ), and Pfizer (NYSE:PFE), LLY outshines these giants in operating margin and dividend yield, with an excellent operating margin of 28.86%. New product lines and favorable foreign exchange conditions will allow LLY to grow and advance revenues for the second half of 2011. Both Gemzar (anti-cancer line) and Zyprexa (antipsychotic) are maturing or have matured due to patent expirations, but sales will be driven by the growing products Cymbalta (antidepressant), Alimta (oncology agent) and Cialis (erectile dysfunction).
Though 2008 produced a steady decline in share price until early 2009, the company has steadied out and has been consistent since mid-2009. Even in the company’s decline phase in 2008, dividends rose $0.18 and have since risen to $0.49. Dividends look to remain strong and steady, if not increasing, for the rest of 2011 and going into 2012. Another similar competitor is Bristol-Myers Squibb Co. (NYSE:BMY), but its dividend yield is 4.53% and much more risk is involved due to patent expirations in the U.S. and Europe.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.