Dividend Investors Need To Play The Rotation In The Market

Includes: AAPL, AFL, LAZ
by: Bret Jensen

Dividend investors that get the majority of their income from traditional defensive sectors (Telecom, Utilities & Consumer Staples) have had a rude awakening over the last month as money has rotated into the Financial, Industrial & Technology sectors partly in reaction to rising interest rates. This was on full display last week. Utilities, Consumer Staples & Telecom posted large losses of between 2.75% to 4.7% during last week's trading sessions. Meanwhile Finance & Industrials posted small losses last week and the Tech sector even managed a nice gain (.84%) as investors accelerated the rotation into these sectors that underperformed the overall market in the first four months of 2013. I expect funds to continue to flee the defensive sectors especially if interest rates continue to tick higher. For income investors looking to take advantage of the rotation currently going on in the market, I have highlighted a few solid plays in these stronger sectors. They all have S&P's highest rating "Strong Buy" and should also show strong dividend growth in the years ahead.

Lazard (LAZ) - ($33.50 a share) The advisory firm and asset manager should see its business to continue to improve as M&A activity perks up in an era of cheap money and little organic growth, forcing companies to use acquisitions to buy growth. Higher interest rates and improving spreads along with a stock market that is delivering a solid performance in 2013 should help its asset management arm. Earnings are in the middle of a strong uptick. The company made $1.44 a share in FY2012 but analysts see stronger earnings in FY2013 ($1.76 a share consensus) and FY2014 ($2.35 a share consensus). The stock also sports an attractive five year projected PEG (.55). S&P has a "Strong Buy" and a price target of $40 on LAZ. Credit Suisse also has an "Outperform" on the shares. LAZ yields 3% and has hiked its dividend at a ~19% CAGR over the last five years.

AFLAC (AFL) - ($55 a share) The accident and health insurance provider is yielding 2.5% and has increased its dividend payout by a ~7% annual rate over the past half-decade. The stock is priced at ~8.5 trailing earnings and also sells near the bottom of its five year valuation range based on P/CF, P/B and P/E. S&P has a "Strong Buy" rating and a $62 price target on AFL. Credit Suisse also has an "Outperform" rating on the shares. The company has more than doubled operating cash flow over the last two completed fiscal years and earnings have increased ~150% since the trough in FY2008.

Apple (AAPL) - ($445 a share) The stock of the tech giant from Cupertino has found its footing since the company announced that it will spend an astounding $100B to buy back shares and provide dividend payouts through 2015. The shares have also been buoyed by a couple of analyst forecasts that it will sell 30mm or 31mm iPhones in the second quarter. A couple of weeks ago the consensus view was that the company would sell just 27mm iPhones in the quarter. The company just initiated a dividend in the third quarter of 2012 but has already announced a hike and the stock yields 2.7%. Given the company's huge cash/marketable securities hoard (~$145B) and strong cash flow, I would expect Apple to continue to raise its payouts at a double digit level annually over the next few years. The stock sports a minuscule five year projected PEG (.54) and has a forward PE of around 7 if you back out net cash/marketable securities. S&P has a "Strong Buy" rating and a $550 price target on the stock.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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