Lingering fears of economic instability are coming to reality in 2012. At the end of last year there was growing concern of worldwide slowing of economic growth. China reported expectations of growth slowing by a full percentage point. Europe was deeply embroiled in negotiations to alleviate debt stress amongst European Union members. So far this year I have only seen confirmation of these fears. The International Monetary Fund has lowered its outlook for Europe, the US and global economic activity. The IMF is now saying that the European recession will impact the US and global economies.
Last year, when fears of European recession were at a head, the markets declined sharply and focus shifted to dividend bearing, American based stocks. The stellar performance of the Dow Dogs is evidence of this trend. The major indexes, as represented by their respective index tracking stocks DIA, QQQ and SPY returned very poor results in 2011. The biggest and only gain, 5.5% was posted by the Dow. The other two both declined, finishing the year down from 2010. The Dow dogs, the ten highest yielding Dow stocks, returned an average of 15% when adjusted for dividends. The biggest gainer for 2011, McDonald's (MCD), returned an amazing 31% for the year and is currently yielding around 2.25%. Many of the Dow gainers have reached peaks and begun to decline. McDonald's itself has begun showing some signs of a price reversal. The multinational company is very exposed to economic conditions around the world. Not only does the chain face slowing growth but also unfavorable exchange rates, particularly in Japan.
There are still good dividend plays out there, you just have to look. Two industries I like right now are electric utilities and small cap American banks. Both of these industries have been improving balance sheets, preparing for future growth, providing steady if not growing profits and returning good dividends to their investors. TECO Energy, Inc (TE) is a prime example. This electric utility operates primarily in Florida through subsidiaries like Tampa Electric, People's Gas and TECO Power Services. The stock currently yields around 4.75% and is undervalued with a forward looking p/e around 13.
This utility company, like many others in the class like Duke Energy (DUK), has been producing steady growth in revenue and profits. TECO is scheduled to release fourth quarter and full year earnings on February 2 but has already issued a 2012 update to it guidance. The company, in expectations of weaker demand and lower prices, has decided to scale back coal operations. One reason sited is that growing inventory has helped to lower prices. Instead of having unsold tonnage on it's books they have decided to produce less. Total sales of coal in 2012 are expected to be inline or slightly above 2011 production levels.
Third quarter results included a 75% increase in quarterly profits over last year, clearer full year guidance and the announcement of discovery of new coal reserves. Third quarter net income was $.42 per share compared to $.24 cents per share in the same quarter 2011. The full year earnings per share are expected to be in a range of $1.25 to $1.35. The company had earned $1.02 per share by the third quarter, an improvement of 20% from 2010. The 2010 balance sheet had been negatively impacted by one time regulatory charges, there were no negative charges in 2011.
The stock has been trending sideways all year and appears to have solid support around $17.50. TECO is currently trading around $18, near the middle of its one year range, and will probably stay there until after earnings. The company has been doing a good job of letting investors know what to expect. The lowered guidance should prove overly cautious. I think they are going to surprise with full year 2011 numbers and continue on in 2012. This stock will be trading around $20 before year end.
I also like the small cap financials for a number of reasons. First they are super cheap, after the hammering the financial sector has been through, bank stocks are down around 60% on average. Many small banks had little to no exposure in the sub-prime mortgage scandal. Unfortunately for them, their share prices have suffered along with the larger firms like Bank of America (BAC), making it easy to find good yields. New York Community Bancorp (NYB) is one of these.
New York Community Bancorp is a leading provider of commercial and private banking and business related mortgages in the greater New York metro area and 5 other states including Ohio and Arizona. This bank has been providing steady earnings and dividends for years. New York Community bank currently yields around 7.5% and trades in a recent range between $18 and $19 dollars. Fourth quarter earnings were based on improved profitability, improved asset quality and loan portfolio growth. The GAAP earnings resulted in a 15% gain in shareholder equity from 2010 and there was a rise in loan margins of 12 basis points. Also, total non-performing loans decreased to represent a mere 1.1% of total loans outstanding. This is due in part to an actual decrease in bad debt and an increase in loan production.
These improvements to core business will pay off in 2012 and are underestimated by analysts. This bank is insulated from direct exposure to the impending European recession. It also stands ready to continue performing well, and increase profitability, while the US steadily recovers. This stock has been trading on higher volume for over a year and has growing support between $12 and $13. The attractive dividend and steady earnings will provide a base for 2012 earnings surprises to jump from. I expect to see this stock trade around $16 or higher in late 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
