As the 10-year Treasury plumbs a new low yield as investors are panicking over the European debt crisis and a slowdown in the U.S., I think that long-term investors with a strong stomach should build their buy list. Many large capitalization equities yield significantly more than the 10-year Treasury and have embedded dividend growth from earnings per share growth. The panic driven 10-year Treasury will not provide investors with earnings growth.
Over the last 12 years equity markets have made very little progress. While policy makers are concerned about stagnating employment growth and a "lost decade" from the U.S. economy, investors have already experienced their own lost decade in U.S. equities. While the 2000s ended with the bursting of the tech bubble and an overbought stock market, the last 10 years of no price appreciation have helped the valuation.
The Cult of Bonds
Investors have flocked to long-term bonds due to their perceived safety. I think that investors should shun bonds at these prices and the paltry yields in favor of equities. Before plunging into the 10 year, buyers should perform some basic bond math to understand the principle loss if rates move back to 2%.
Earnings and dividends of large-capitalization companies have grown over the last decade, creating opportunity for value investors. With the 10-year U.S. treasury below 2.0%, equity market investors can find yields in high-quality, large-capitalization companies at relatively modest valuations.
Microsoft (MSFT) - Software
Dividend Yield: 2.7%
EBITDA Margins: 42%
Price to Earnings: 10.7 times
Market Capitalization: $245.2 billion
Thesis: Microsoft still maintains a significant share in the enterprise PC software market. The company has a strong balance sheet, a strong dividend and a low price-to-earnings multiple.
BlackRock (BLK) - Financial
Dividend Yield: 3.5%
EBITDA Margins: 40%
Price to Earnings: 13.5 times
Market Capitalization: $30.6 billion
Thesis: BlackRock is the world's largest asset manager with more than $3.0 trillion under management. The company has a strong foothold in the institutional market.
NYSE Euronext (NYX) - Exchange
Dividend Yield: 4.9%
EBITDA Margins: 29%
Price to Earnings: 11.5 times
Market Capitalization: $6.1 billion
Thesis: NYSE Euronext will benefit from increasing regulations of OTC derivatives. The company's modest leverage and attractive dividend yield make it a god candidate for investors. The company's payout ratio is less than 50%. The company could also benefit from Nasdaq's FaceBook (FB) issues.
Vodafone (VOD) - Wireless
Dividend Yield: 5.5%
EBITDA Margins: 31%
Price to Earnings: 12.6 times
Market Capitalization: $84.5 billion
Thesis: Vodafone operates a globally diverse business with strong free cash flow dynamics at attractive margins.
Duke Energy (DUK) - Utilities
Dividend Yield: 4.6%
EBITDA Margins: 34%
Price to Earnings: 19.7 times
Market Capitalization: $29.4 billion
Thesis: The company operates as a regulated utility providing a stable source of earnings. The company has pricing power and its rate growth should provide earnings growth.
Altria Group (MO) - Tobacco
Dividend Yield: 5.1%
EBITDA Margins: 41%
Price to Earnings: 19.3 times
Market Capitalization: $65.5 billion
Thesis: Altria is a cash cow that provides investors a strong dividend yield in a low growth, yet stable, market. The company is a market leader in the U.S. tobacco market with nearly 50% market share.
American Electric Power Company (AEP) - Utilities
Dividend Yield: 4.9%
EBITDA Margins: 32%
Price to Earnings: 11.6 times
Market Capitalization: $18.5 billion
Thesis: Similar to Duke Energy, American Electric is a utility with strong cash flow. The company operates a diverse model, limiting risks to any one state.
