Vanguard's Top High-Yield Holdings: 2 To Buy, 3 To Avoid

Includes: COP, GE, MRK, PFE, PM, T, VZ
by: Rash Menaria

The Vanguard Group is an American investment management company managing approximately $1.6 trillion in assets. It offers mutual funds and other financial products to individuals and institutional investors. As per its latest 13F filing, it has $631.7 bn worth of position in equities. The following is a list of top 7 high yield stocks from its holdings.



Shares Held - 12/31/2011


General Electric Co.




AT&T Inc.




Pfizer Inc.




Philip Morris International Inc.








Merck & Co. Inc.




Verizon Communications Inc.




Amongst these stocks, Pfizer is my favourite long candidate. I also like Merck & Co. Three stocks in the above list which I would like to avoid are General Electric, Verizon and AT&T.

Pfizer's stock price has seen a good 20% appreciation in last 6 months, and I expect it to continue its upward trend going forward. I am bullish on Pfizer because of management's commitment to enhancing shareholder value through dividend and buybacks, and company's improving product pipeline. Pfizer increased its quarterly dividend by 10% to $0.22 from $0.20 in Q4 and authorized an additional $10 billion share repurchase program with $5 billion in repo expected for 2012. Pfizer is likely to generate ~$20B in free cash flow in 2012, so even with the dividend of ~$6.5B and share buyback of $5B there is still plenty of room for inorganic growth through M&A. In addition, Pfizer entering an interesting new product launch cycle with four $1+ bn opportunities including Xalkori, Eliquis, tofacitinib, and Prevnar 13 adult which could provide organic growth catalysts for the company.

I also like Merck given the defensive nature of its business and its low valuations. The stock has outperformed S&P 500 (NYSEARCA:SPY) in the last 6 months gaining over 22%. I believe this outperformance will continue going forward as investors realizes the significant discount company is trading at versus other large cap pharma names.

Among the companies which I would like to avoid, the first one is AT&T. I am not too positive on AT&T. Although its derailed deal with T-Mobile came somewhat along expected lines, the failure of this deal is a net negative for AT&T, as it will now have to look elsewhere for the spectrum. Further, fall off of this deal is not good from a competitive point of view for AT&T. AT&T would have been a more powerful competitor with the merger. Without the deal, both Verizon and Sprint (NYSE:S) should be better able to compete.

I also don't like Verizon and General Electric. Verizon is seeing secular pressure from declining wireline business and pension dilution. Further, high valuation (15x Forward PE) limits any potential upside for Verizon in the near term. On the other hand, GE is likely to see headwinds from weak pricing, a difficult European environment and decelerating growth in emerging markets. Hence I recommend a sell on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.