Dow’s Cash Flow Increases The Safety Of Its Dividend Yield

On a price return basis, the Safest Dividend Yields Model Portfolio (+4.4%) outperformed the S&P 500 (+3.8%) by 0.6% from June 23, 2022 through July 19, 2022. On a total return basis, the Model Portfolio (+4.8%) outperformed the S&P 500 (+3.8%) by 1.0% over the same time. The best performing large cap stock was up 12% and the best performing small cap stock was up 14%. Overall, nine out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from June 23, 2022 through July 19, 2022.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow provide higher quality and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Since its spin-off from Dupont De Nemours Inc. (DD) in 2019, Dow has grown revenue by 13% compounded annually and net operating profit after-tax (NOPAT) by 65% compounded annually. Dow’s NOPAT margin rose from 6% in 2019 to 13% over the trailing twelve months (TTM), while invested capital turns improved from 0.7 to 1.1 over the same time. Rising NOPAT margins and invested capital turns drive the company’s return on invested capital (ROIC) from 4% in 2019 to 14% TTM.

Figure 1: Dow’s Revenue and NOPAT Since 2019

Dow has increased its regular dividend from $2.10/share in 2019 to $2.80/share in 2021. The current quarterly dividend, when annualized, provides a 5.5% dividend yield.

Dow’s free cash flow (FCF) comfortably exceeds its regular dividend payments. From 2019 to 2021, Dow generated $16.0 billion (43% of current market cap) in FCF while paying $5.7 billion in dividends. Over the TTM, Dow has generated $6 billion in FCF and paid $2 billion in dividends. See Figure 2.

Figure 2: Dow’s FCF vs. Regular Dividends Since 2019

Companies with strong FCF provide higher quality dividend yields because the firm has the cash to support its dividend. Dividends from companies with low or negative FCF cannot be trusted as much because the company may not be able to sustain paying dividends.

DOW Is Undervalued

At its current price of $52/share, DOW has a price-to-economic book value (PEBV) ratio of 0.3. This ratio means the market expects Dow’s NOPAT to permanently decline by 70%. This expectation seems overly pessimistic given that Dow grew NOPAT by 65% compounded annually since 2019.

Even if Dow’s NOPAT margin falls to 9% (vs. 13% over the TTM) and the company’s NOPAT falls 5% compounded annually over the next decade, the stock would be worth $75+/share today – a 44% upside. See the math behind this reverse DCF scenario. Should the company’s NOPAT not fall at such a steep rate, or even grow from current levels, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Dow’s 10-K and 10-Qs:

Income Statement: I made $3.1 billion in adjustments with a net effect of removing $930 million in non-operating expenses (2% of revenue).

Balance Sheet: I made $16.6 billion in adjustments to calculate invested capital with a net increase of $11.3 billion. The most notable adjustment was $9.0 billion (18% of reported net assets) in other comprehensive income.

Valuation: I made $24.1 billion in adjustments with a net effect of decreasing shareholder value by $19.8 billion. Apart from total debt, one of the most notable adjustments to shareholder value was $6.1 billion in underfunded pensions. This adjustment represents 16% of Dow’s market value.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.

New Constructs leverages reliable fundamental data to provide unconflicted insights into the fundamentals and valuation of private and public businesses.

Source: Dow’s Cash Flow Increases The Safety Of Its Dividend Yield

Critics by Macrotrends

Dow annual/quarterly free cash flow history and growth rate from 2017 to 2022. Free cash flow can be defined as a measure of financial performance calculated as operating cash flow minus capital expenditures.

  • Dow free cash flow for the quarter ending June 30, 2022 was 2,607.00, a year-over-year.
  • Dow free cash flow for the twelve months ending June 30, 2022 was , a year-over-year.
  • Dow annual free cash flow for 2021 was $4.79B, a 18.72% decline from 2020.
  • Dow annual free cash flow for 2020 was $5.893B, a 48.51% increase from 2019.
  • Dow annual free cash flow for 2019 was $3.968B, a 91.69% increase from 2018.

Dow annual/quarterly revenue history and growth rate from 2017 to 2022. Revenue can be defined as the amount of money a company receives from its customers in exchange for the sales of goods or services. Revenue is the top line item on an income statement from which all costs and expenses are subtracted to arrive at net income.

  • Dow revenue for the quarter ending June 30, 2022 was $15.664B, a 12.81% increase year-over-year.
  • Dow revenue for the twelve months ending June 30, 2022 was $60.129B, a 30.19% increase year-over-year.
  • Dow annual revenue for 2021 was $54.968B, a 42.62% increase from 2020.
  • Dow annual revenue for 2020 was $38.542B, a 10.27% decline from 2019.
  • Dow annual revenue for 2019 was $42.951B, a 13.41% decline from 2018.

Current and historical gross margin, operating margin and net profit margin for Dow (DOW) over the last 10 years. Profit margin can be defined as the percentage of revenue that a company retains as income after the deduction of expenses. Dow net profit margin as of June 30, 2022 is 11.06%.

Current and historical p/e ratio for Dow (DOW) from 2017 to 2022. The price to earnings ratio is calculated by taking the latest closing price and dividing it by the most recent earnings per share (EPS) number. The PE ratio is a simple way to assess whether a stock is over or under valued and is the most widely used valuation measure. Dow PE ratio as of August 03, 2022 is 5.40.

Current and historical current ratio for Dow (DOW) from 2017 to 2022. Current ratio can be defined as a liquidity ratio that measures a company’s ability to pay short-term obligations. Dow current ratio for the three months ending June 30, 2022 was 1.64.

Historical dividend payout and yield for Dow (DOW) since 2021. The current TTM dividend payout for Dow (DOW) as of August 03, 2022 is $2.80. The current dividend yield for Dow as of August 03, 2022 is 5.43%.

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Dividend-Payers Still Shine Brightly As Stocks Stage Bounce-Back Rally

After seven straight down weeks for the S&P 500 Index and eight weeks of declines by the Dow Jones Industrial Average, stocks staged a big comeback from lows last Tuesday to finish the week with robust gains across the board. Sentiment gauges from the AAII survey to Investor’s Intelligence’s roundup of investment newsletter editor outlook had been flashing multi-decade highs in pessimism. Technically, put-call ratios had also spiked to levels associated with widespread panic. but now they are on the decline and helping to thrust stocks higher as pessimism recedes from unsustainable peaks.

The most important piece of economic news came out on Friday after the rally was well underway when the Commerce Department reported that the core personal consumption expenditure (PCE) price index rose at a 4.9% annual rate in April, which was a deceleration from the 5.2% pace in March. The report provided hope that the Federal Reserve would not need to be as aggressive as planned in hiking rates in the coming months. Next Friday’s nonfarm payrolls report for May will be another critical piece of data for handicapping the Fed’s moves.

By the end of the week, both the S&P 500 Index and the Russell 2000 Small Cap Index had both gained 6.6%. It would not be unreasonable to see this rally take the S&P 500 to it’s declining 50-day moving average, but there is a lot to prove for the bulls to make this burst of buying anything more than a rally within a larger downtrend.

The biggest gains last week came from the sector that has been the most beaten down this year: Consumer staples jumped higher by 9.5%. A 4.3% increase in crude oil prices helped drive the energy sector higher by 8.3%. Growth stocks outperformed value, and domestic equities performed better than international stocks.

Equity Income Universe: Last week, the top performing equity income funds that we track were the WisdomTree MidCap Dividend (DON DON +6.6%) and FlexShares Quality Dividend (QDF QDF +6.3%).

Dividend growth funds have been big underperformers this year, but the style shined last week with T. Rowe Price Dividend Growth (PRDGX +6.2%), WisdomTree U.S. Quality Dividend Growth (DGRW DGRW +6.2%) and Vanguard Dividend Appreciation Index (VIG VIG +6.2%) all gaining more than 6%.

Also jumping more than 6% were the year-to-date total return leader, Alerian MLP (AMLP AMLP +6.2%) master limited partnership ETF, and the VanEck BDC Income (BIZD BIZD +6.2%) business development company ETF.

FDI Portfolio Action: Last week’s Forbes Dividend Investor portfolio of 22 stocks gained an average of 4.87%, with only two stocks failing to post positive returns.

Our top performer was master limited partnership Holly Energy Partners, L.P. (HEP +8.9%). Also higher by more than 8% for the week were Luxembourg-based steel maker Ternium TX SA (TX +8.7%), chemicals maker LyondellBasell Industries LYB NV (LYB +8.5%), and International Business Machines (IBM +8.4%).

Capturing Call Premium On The Bounce

A medium-term bearish environment with at least a temporary burst of bullishness is one in which selling covered calls makes sense. Last Monday, we sold covered calls on Tyson Foods TSN (TSN +6.8%) and Kraft Heinz (KHC -0.3%). Both companies had ex-dividend dates last week.

Selling the same TSN $87.50 July 15 calls would now earn you $5.30, based on Friday’s closing price for Tyson of $91.04. With Kraft Heinz, the $39 July 1 calls we sold for $1.30 last Monday now trade for only $0.65-$0.70. Going out to the July 15 expiration and selling slightly in-the-money KHC $37.50 calls earns premium of $1.65-$1.70.

John Dobosz

I am the deputy editor of investing content for Forbes Media. I’m responsible for money and investing coverage on Forbes.com and in Forbes magazine.

Source: Dividend-Payers Still Shine Brightly As Stocks Stage Bounce-Back Rally

Highest Dividend-Paying Stocks in the S&P 500

Part of the reason we are seeing a “risk-off” environment on Wall Street in 2022 is because – for the first time in a long time – you can get a decent payday in traditional fixed-income investments thanks to a rising interest rate environment. Consider that 10-year Treasury bonds pay almost 2.9% right now – more than double the yield of last summer – while the S&P 500 averages a dividend yield of just 1.4% right now. Many income investors aren’t willing to settle for the risk of stocks when they can instead get significantly higher yield in bond markets. However, the following S&P 500 components offer a way to tap into outsized yield that may make them worth a look – with a minimum yield of 4.7% and payouts as high as 8.6% at current pricing.

By now, everyone knows how bad smoking is for your health. But as with sugary soft drinks or fatty fast food, just because something is unhealthy doesn’t mean consumers will stop buying it. And as we enter a period of volatility for the stock market thanks to price inflation, many investors are learning that smokers are incredibly reliable customers. That makes $160 billion tobacco icon Philip Morris a slam dunk thanks to leading brands such as Marlboro, the best-selling cigarette in the world, along with its other popular products. PM dividends have roughly doubled from 64 cents quarterly back in 2011 to $1.25 as of the beginning of this year, adding up to one of the best yields in the S&P 500 index.

Office real estate operator Vornado has a portfolio concentrated in the nation’s key metropolitan markets, including prime properties in New York City, Chicago and San Francisco. Vornado is also the leading firm when it comes to sustainable commercial properties, with over 23 million square feet of Leadership in Energy and Environmental Design, or LEED, certified buildings. Structured as a REIT, or real estate investment trust, VNO must deliver 90% of its taxable income back to shareholders each year – meaning a mandate for consistent and generous dividends for shareholders.

Another REIT, Simon differs from Vornado in that it is one of the largest mall owners in America. Its locations are focused on shopping, dining, entertainment and mixed-use destinations instead of commercial real estate high-rises. COVID-19 was naturally quite tough on Simon; however, the recovering economy and the decline of social distancing restrictions has allowed SPG to get back on track. Shares have more than doubled from this time two years ago, and Simon just gave dividend investors a lot more to like with a big boost of almost 27% in its payout this year.

Old-school tech giant IBM isn’t often included in the same conversations as dynamic and younger firms like Amazon.com Inc. (AMZN) or Google parent Alphabet Inc. (GOOG, GOOGL). However, “Big Blue” still has a lot to offer. Its deep enterprise technology relationships in software, consulting and IT infrastructure make the company tremendously profitable. Though the company forecast earnings per share north of $10.50 next fiscal year, dividends currently only add up to $6.56 annually. That means the generous dividends aren’t just sustainable but ripe for future increases down the road, even if earnings don’t grow at the outsized rates you’ll find at more ambitious Silicon Valley firms.

Big Oil companies have gotten a lot of attention this year, but integrated energy giants that have risen along with crude oil are not as generous with their dividends as smaller and more focused players like Oneok. OKE is a play on the “midstream” portion of the energy business alone, which involves transportation and storage and is not exposed to the risks of commodity price volatility. Oneok helps move natural gas around the U.S. and charges fees for that service, then passes a portion of that cash on to shareholders. Income investors will take comfort in this stable model, which supports strong cash flows regardless of the price of a barrel of oil in 2023 and beyond.

KMI is another energy infrastructure company operating across North America, with a network of natural gas and crude oil pipelines, as well as storage and processing facilities. All told, the stock owns roughly 83,000 miles of pipelines and almost 150 terminals and is valued at nearly $45 billion. With a scale like that, alongside a midstream focus that insulates it from the ups and downs in oil and gas prices, it should be no surprise that KMI is one of the most reliable income plays in the S&P 500 right now.

You may see AT&T stock in some screening tools with a higher yield, but keep in mind that is based on previous payouts before a recent spinoff of Warner Bros. Discovery Inc. (WBD) that reduced both the market value of parent AT&T along with its dividend potential. However, a new dividend run-rate of about 28 cents per share quarterly annualizes to a yield that is more than four times the typical S&P 500 component. And furthermore, the spinoff helps management focus on the core business of this long-standing telecom leader. Shares have rallied strongly since March as Wall Street has looked ahead to life after the split, and with a big-time payout there’s reason to think this run could continue in 2022.

The $100 billion tobacco icon Altria is behind some of the biggest brands in North America, including its flagship Marlboro cigarettes, Black & Mild cigars and smokeless tobacco products including Copenhagen and Skoal. Yes, the health risks of these tobacco products are real. But that doesn’t stop millions of customers from buying Altria products despite this. And with the company increasingly looking beyond this core revenue stream to cannabis-related goods and vaping products, there’s a good chance this “sin stock” will see consistent profits and generous dividends for the foreseeable future regardless of whatever morality you assign to its business model.

Lumen is a telecommunications company offering voice and data connections, along with related services including cloud solutions and cybersecurity add-ons. CenturyLink rebranded itself Lumen Technologies a few years ago, in the wake of a series of big-time acquisitions including the purchase of Level 3 Communications for about $25 billion, but despite that big price tag the current LUMN stock valuation is only about $12 billion or so. There are challenges for this second-tier telecom, including its large debt load from those previous deals. However, income investors who don’t mind the risk may be interested in the big-time yield of this top S&P dividend stock as a hedge against potentially lackluster share performance.

More contents:

5 Reasons Why Property Stocks Remain Attractive

It’s a well-known fact that Singaporeans love property. Before the pandemic, it was common to hear of hordes of people thronging condominium showrooms where units are snapped up like hotcakes.

While the pandemic has eliminated these throngs, the property market continues to remain buoyant. Last month, 99.co and SRX reported that condominium resale prices climbed for the 15th consecutive month, hitting a new all-time high.

The rental markets for HDB flats and private property also benefitted from Singapore’s economic recovery, with condominium rents climbing by 9.1% year on year in October. But it’s not all good news for investors. 

Physical property requires heavy upfront capital and constant upkeep. Property-related stocks, on the other hand, offer an alternative, acting as a proxy for owning physical capital and can easily be accessed through the stock market.

REITs and property stocks are breathing a sigh of relief as economic activity picks up. As an investor, you may wish to take a second look at property-related stocks as they offer some compelling characteristics. Here are five reasons why they are attractive.

1. A scarce resource

No matter how you cut it, land is a scarce resource in our tiny island. That’s the reason why the government has been trying to maximise the space by building higher and increasing the plot ratio for properties. Property developers such as CapitaLand Investment (SGX: 9CI) and City Developments Limited (SGX: C09) that own land banks have a valuable asset on their balance sheets.

And REITs such as Frasers Centrepoint Trust (SGX: J69U) and Mapletree Commercial Trust (SGX: N2IU), which owns a portfolio of heartland retail malls and retail cum commercial properties in Singapore, respectively, are sitting on a veritable gold mine. By buying into such companies and REITs, investors can indirectly own a piece of valuable real estate.

2. Tax exemptions

Companies naturally are obliged to pay corporate taxes to the taxman at the current rate of 17% on their chargeable income. REITs, however, have a distinct advantage in this area. As long as they pay out at least 90% of their earnings as distributions, REITs are exempted from paying income taxes.

In addition, investors also do not need to pay income taxes on dividends received from both REITs and property developers. So, REIT investors win on two fronts as their distributions are completely exempted from income tax. Contrast this with owning an investment property where the property tax rate stands at 10% of the annual value of the property.

3. Easy to transact

Selling physical real estate can be a tedious process. You will need to engage a property agent and lawyer, and get in touch with the banker who offered you the mortgage. Not to mention the property is also an illiquid asset that may take weeks or even months to dispose of.

In contrast, property stocks and REITs offer much less hassle. As they are listed on a stock exchange, you can easily transact through the platform. The market is also fairly liquid and you can obtain your cash much more quickly should you sell. All you need is a stockbroker to facilitate the transaction.

4. Piecemeal holdings

When you’re dealing with physical property, you can’t sell it off piece by piece. It’s impossible to just, for example, sell off the dining room while retaining the rest of the property. For property-related stocks, though, you can choose to sell all or part of your shareholders.

This ability to transact in piecemeal fashion provides you, the investor, with much more flexibility.

5. An external manager

Owning an investment property comes with a set of responsibilities including maintenance and tenant management. You have to periodically check in on the property to ensure it is in good condition and also liaise with your tenant on rent collections. If the unit is vacant, you have to expend the effort to locate a suitable replacement tenant or else your cash flow dries up.

On the other hand, REITs appoint a manager that takes care of all the above, and the portfolio will be professionally managed by a competent team of staff.

The REIT manager’s duty is to ensure the properties are occupied and well-maintained, and that all tenants pay up on time. You can thus outsource the management of the properties to a competent manager who has your best interests at heart. Stay tuned for another five reasons as to why we believe property stocks are a great asset class to own!

First-time investors: We’ve finally released our beginner’s guide to investing. Read it in an afternoon, follow the principles, pick an investing style and buy your first SGX stocks within the next few hours! Click here to download it for free.

By: Royston Yang

Source: https://thesmartinvestor.com.sg/

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More Contents:

E.g. Corporation Tax Act 2010s 519 in the UK. See A. O’Sullivan (2006),

“Residential shut out fears for UK Reits played down after German move”. CityWire.

“What is a REIT?”. reit.com. Retrieved 4 December 2014. Green, Richard K.; Rhea, Parker.

“Listed and Non-Listed Reits: Exploring the Cost Difference” (PDF). USC Lusk Center for Real Estate. University of Southern California. Retrieved 13 December 2018. Moskowitz, Dan.

“REIT Regulation 101”. Investopedia. Retrieved 11 January 2019.

“Guide to Equity REITs”. reit.com. Retrieved 4 December 2014

. “Guide to Mortgage REITs”. reit.com. Retrieved 4 December 2014.

“Real Estate Slated for Eleventh Headline Sector in GICS®”. reit.com. Retrieved 4 December 2014.

“The Most Important Metrics for REIT Investing”. Simply Safe Dividends. Retrieved 16 March 2021.

“REIT 50 Years Timeline”. Reit.com. Archived from the original on 2012-11-13. Retrieved 2012-12-18. Section 10(a) of Public Law no. 86-779, 74 Stat. 998, 1003-1008 (Sept. 14, 1960), enacting Internal Revenue Code sections 856, 857 and 858.

“Realty Trust Wins Fraud Action Brought by SEC”. Washingtonpost.com. 1977-04-22.;

“SEC News Digest” (PDF). “Securities and Exchange Commission. 1977-03-21.

“History of REITs & Real Estate Investing”. Retrieved 24 February 2021.

“Global Real Estate Index Launches”. Retrieved 24 February 2021.

“Investing in Listed Real Estate – IPE Reference Hub”. Retrieved 24 February 2021.

“FTSE Russell Factsheet:FTSE EPRA Nareit Global & Global ex US Indices”. FTSE. Retrieved 25 February 2021.

“What Higher Rates Mean for REITs”. U.S. News & World Report. 8 June 2018.

“Screening For High-Yielding High-Quality REITs”. Forbes. 5 July 2018. “Keeping it Real Estate”. PodBean. 29 June 2018. Pleven, Liam.

“News for SA Reit Association”. Mahipal Singh, Security Analysis with Investment and Portfolio Management, Isha Books 2011, page 145. Baljeez Hbk, July 12, 2007 So, KK.

“Global REIT Survey 2012: Hong Kong”. Global REIT Survey. European Public Real Estate Association (EPRA). Archived from the original on 2013-05-17. Retrieved 2013-02-27.

“Worldwide Wisdom”. reit.com. Retrieved 4 December 2014.

“Arun Jaitley’s Budget 2014-15 promises big push to real estate and the first company to trade is always now existing”. “Better late than never! Investors finally lap up Indian REITs & InvITs”. “History Timeline of J-REIT History”. Retrieved 25 February 2021. Stooker, Richard (2011).

REITs Around the World: Your Guide to Real Estate Investment Trusts in Nearly 40 Countries for Inflation Protection, Currency Hedging, Risk Management and Diversification. “Japan-based REITs have dumped over half their US stocks: report”. The Real Deal. 31 October 2018.

“Siaran Pers: OJK Terbitkan Aturan Inovasi Keuangan Digital”. “Practical Law US Signon”. signon.thomsonreuters.com. Retrieved 2020-12-19.

“Breaking News, World News & Multimedia”. nytimes.com. Retrieved 15 March 2018. Nordberg, Antton.

“The Future of REIT in the Philippines”. KMC MAG Group. Inc. Retrieved 11 May 2015. Endo, Jun (2 March 2021).

“Philippines’ young REIT market snubbed by foreign investors”. Nikkei Asia. Retrieved 17 June 2021. “AREIT, a trailblazer in the country’s REIT path”. Philstar.com. 5 March 2021. Retrieved 17 June 2021.

How To Squeeze Yields Up To 6.9% From Blue-Chip Stocks

Closeup of blue poker chip on red felt card table surface with spot light on chip

Preferred stocks are the little-known answer to the dividend question: How do I juice meaningful 5% to 6% yields from my favorite blue-chip stocks? “Common” blue chips stocks usually don’t pay 5% to 6%. Heck, the S&P 500’s current yield, at just 1.3%, is its lowest in decades.

But we can consider the exact same 505 companies in the popular index—names like JPMorgan Chase (JPM), Broadcom (AVGO) and NextEra Energy (NEE)—and find yields from 4.2% to 6.9%. If we’re talking about a million dollar retirement portfolio, this is the difference between $13,000 in annual dividend income and $42,000. Or, better yet, $69,000 per year with my top recommendation.

Most investors don’t know about this easy-to-find “dividend loophole” because most only buy “common” stock. Type AVGO into your brokerage account, and the quote that your machine spits back will be the common variety.

But many companies have another class of shares. This “preferred payout tier” delivers dividends that are far more generous.

Companies sometimes issue preferred stock rather than issuing bonds to raise cash. And these preferred dividends have a few benefits:

  • They receive priority over dividends paid on common shares.
  • Sometimes, preferred dividends are “cumulative”—if any dividends are missed, those dividends still have to be paid out before dividends can be paid to any other shareholders.
  • They’re typically far juicier than the modest dividends paid out on common stock. A company whose commons yield 1% or 2% might still distribute 5% to 7% to preferred shareholders.

But it’s not all gravy.

You’ll sometimes hear investors call preferreds “hybrid” securities. That’s because they act like a part-stock, part-bond holding. The way they resemble bonds is how they trade around a par value over time, so while preferreds can deliver price upside, they don’t tend to deliver much.

No, the point of preferreds is income and safety.

Now, we could go out and buy individual preferreds, but there’s precious little research out there allowing us to make a truly informed decision about any one company’s preferreds. Instead, we’re usually going to be better off buying preferred funds.

But which preferred funds make the cut? Let’s look at some of the most popular options, delivering anywhere between 4.2% to 6.9% at the moment.

Wall Street’s Two Largest Preferred ETFs

I want to start with the iShares Preferred and Income Securities (PFF, 4.2% yield) and Invesco Preferred ETF (PGX, 4.5%). These are the two largest preferred-stock ETFs on the market, collectively accounting for some $27 billion in funds under management.

On the surface, they’re pretty similar in nature. Both invest in a few hundred preferred stocks. Both have a majority of their holdings in the financial sector (PFF 60%, PGX 67%). Both offer affordable fees given their specialty (PFF 0.46%, PGX 0.52%).

There are a few notable differences, however. PGX has a better credit profile, with 54% of its preferreds in BBB-rated (investment-grade debt) and another 38% in BB, the highest level of “junk.” PFF has just 48% in BBB-graded preferreds and 22% in BBs; nearly a quarter of its portfolio isn’t rated.

Also, the Invesco fund spreads around its non-financial allocation to more sectors: utilities, real estate, communication services, consumer discretionary, energy, industrials and materials. Meanwhile, iShares’ PFF only boasts industrial and utility preferreds in addition to its massive financial-sector base.

PGX might have the edge on PFF, but both funds are limited by their plain-vanilla, indexed nature. That’s why, when it comes to preferreds, I typically look to closed-end funds.

Closed-End Preferred Funds

CEFs offer a few perks that allow us to make the most out of this asset class.

For one, most preferred ETFs are indexed, but all preferred CEFs are actively managed. That’s a big advantage in preferred stocks, where skilled pickers can take advantage of deep values and quick changes in the preferred markets, while index funds must simply wait until their next rebalancing to jump in.

Closed-end funds also allow for the use of debt to amplify their investments, both in yield and performance. Should the manager want, CEFs can also use options or other tools to further juice returns.

And they often pay out their fatter dividends every month!

Take John Hancock Preferred Income Fund II (HPF, 6.9% yield), for example. It’s a tighter portfolio than PFF or PGX, at just under 120 holdings from the likes of CenterPoint Energy (CNP), U.S. Cellular (USM) and Wells Fargo (WFC).

Manager discretion means a lot here. That is, HPF doesn’t just invest in preferreds, which are 70% of assets. It also has 22% invested in corporate bonds, another 4% or so in common stock, and trace holdings of foreign stock, U.S. government agency debt and cash. And it has a whopping 32% debt leverage ratio that really helps prop up the yield and provide better returns (though at the cost of a bumpier ride).

You have a similar situation with Flaherty & Crumrine Preferred and Income Securities Fund (FFC, 6.7%).

Here, you’re wading deep into the financial sector at nearly 80% exposure, with decent-sized holdings in utilities (7%) and energy (7%). Credit quality is roughly in between PFF and PGX, with 44% BBB, 37% BB and 19% unrated.

Nonetheless, smart management selection (and a healthy 31% in debt leverage) has led to far better, albeit noisier, returns than its indexed competitors. The Cohen & Steers Select Preferred and Income Fund (PSF, 6.0%) is about as pure a play as you could want in preferreds.

And it’s also a pure performer.

PSF is 100% invested in preferred stock (well, more like 128% if you count debt leverage), and actually breaks out its preferreds into institutionals that trade over-the-counter (83%), retail preferreds that trade on an exchange (16%) and floating-rate preferreds that trade OTC or on exchanges (1%).

Like any other preferred fund, you’re heavily invested in the financial sector at nearly 73%. But you do get geographic diversification, as only a little more than half of PSF’s assets are invested in the U.S. Other well-represented countries include the U.K. (13%), Canada (7%) and France (6%).

What’s not to love?

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

I graduated from Cornell University and soon thereafter left Corporate America permanently at age 26 to co-found two successful SaaS (Software as a Service) companies. Today they serve more than 26,000 business users combined. I took my software profits and started investing in dividend-paying stocks. Today, it’s almost impossible to find good stocks that pay a quality yield. So I employ a contrarian approach to locate high payouts that are available thanks to some sort of broader misjudgment. Renowned billionaire investor Howard Marks called this “second-level thinking.” It’s looking past the consensus belief about an investment to map out a range of probabilities to locate value. It is possible to find secure yields of 6% or more in today’s market – it just requires a second-level mindset.

Source: How To Squeeze Yields Up To 6.9% From Blue-Chip Stocks

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Critics:

A blue chip is stock in a stock corporation (contrasted with non-stock one) with a national reputation for quality, reliability, and the ability to operate profitably in good and bad times. As befits the sometimes high-risk nature of stock picking, the term “blue chip” derives from poker. The simplest sets of poker chips include white, red, and blue chips, with tradition dictating that the blues are highest in value. If a white chip is worth $1, a red is usually worth $5, and a blue $25.

In 19th-century United States, there was enough of a tradition of using blue chips for higher values that “blue chip” in noun and adjective senses signaling high-value chips and high-value property are attested since 1873 and 1894, respectively. This established connotation was first extended to the sense of a blue-chip stock in the 1920s. According to Dow Jones company folklore, this sense extension was coined by Oliver Gingold (an early employee of the company that would become Dow Jones) sometime in the 1920s, when Gingold was standing by the stock ticker at the brokerage firm that later became Merrill Lynch.

Noticing several trades at $200 or $250 a share or more, he said to Lucien Hooper of stock brokerage W.E. Hutton & Co. that he intended to return to the office to “write about these blue-chip stocks”. It has been in use ever since, originally in reference to high-priced stocks, more commonly used today to refer to high-quality stocks.

References:

Morrisons Shares Surge As Investors Bet On Low U.K. Supermarket Valuations

Morrisons, CD&R. Tesco, Sainsbury's, Asda

Shares in U.K. publicly-listed supermarket chain Morrisons surged by almost a third in morning trading today, after Britain’s fourth biggest grocer rebuffed a $7.6 billion takeover from U.S. private equity giant Clayton, Dubilier & Rice.

The huge spike in its valuation was prompted by emerging news over the weekend that Morrisons had become a takeover target for CD&R, potentially sparking a bidding war for the grocer.

The news prompted shares to rise across the grocery sector, as investors bet that other supermarket groups could become targets for private equity investors or that a bidding battle could erupt, with online giant Amazon AMZN -0.9% – which has an online delivery deal with Morrisons – one possible bidder for its partner.

American private equity firms Lone Star and Apollo Global Management APO +1.9% have also been mentioned as possible suitors for Morrisons, which has been battling with a declining market share, now down at 10%, from 10.6% five years ago. There is a sense that the U.K. supermarket sector could be ripe for more potential takeovers. The share price performance of the entire sector is seen as under-performing compared with U.S. grocers, for example, despite being profitable and achieving typical dividend yields of around 4%.

CD&R has history, having previously made investments in the discount U.K. store chain B&M, from which it made more than $1.4 billion.

Morrisons Rebuffs Bid But More Could Follow

Morrisons first announced on Saturday that it had turned down a preliminary bid by Clayton, Dubilier & Rice, which is believed to have been made on or around 14 June. The Bradford-based company said that its board had “unanimously concluded that the conditional proposal significantly undervalued Morrisons and its future prospects”.

CD&R had offered to pay nearly 320c a share in cash, while Morrisons’ share price closed at 247c on Friday, before its surge today as trading reopened for the first time since the announcement.

The New York-headquartered private equity firm has until 17 July to make a firm offer and to persuade a reluctant Morrisons management team to recommend that shareholders agree to the deal.

Sir Terry Leahy, a former Tesco chief executive, is a senior adviser for CD&R and, like its market-leading rival Tesco, Morrisons’ shares have been trading below their pre-pandemic levels as higher costs due to operating throughout the pandemic have taken their toll despite booming sales at essential stores across the U.K.

Morrisons currently employs 121,000 people and made a pre-pandemic profit of $565.5 million in 2019, which plunged to $278.6 million in 2020. It owns the freehold for 85% of its 497 stores. One-quarter of what it sells comes from its own supply chain of fresh food manufacturers, bakeries and farms.

CD&R has so far declined to comment on whether it will return with a higher bid, but analysts believe its approach is probably just the first salvo.

Previously, former Walmart WMT +0.9%-owned Asda was snapped up by the U.K.’s forecourt billionaire Issa brothers along with private equity firm TDR Capital in a debt-based $9.4 billion buyout. Likewise, CD&R could adopt a similar model and combine Morrisons, which has just a handful of convenience stores after a number of limited trials of smaller store formats, with its Motor Fuel Group of 900 gas stations.

There are also wider political concerns that it could emulate the Issas by saddling Morrisons with debt and selling off its real estate assets and CD&R is understood to be weighing political reaction before determining whether or not to come back with a higher bid.

Supermarket Takeovers More Likely Than Mergers

For tightly-regulated U.K. competition reasons, takeovers or mergers between supermarket groups appear increasingly complex. The competition watchdog blocked a proposed $9.7 billion takeover by Sainsbury’s for rival Asda two years ago, determining that the deal threatened to increase prices and reduce choice and quality.

However, comparatively relaxed rules on private equity bids mean few such restrictions apply to takeovers. Private equity firms have acquired more U.K. firms over the past 18 months than at any time since the financial crisis, according to data from Dealogic, and Czech business mogul Daniel Křetínský has established a 10% stake in Sainsbury’s, the U.K.’s second biggest supermarket chain. Having failed in an attempt to take over Germany’s Metro Group last year, he could yet make an offer for a British grocer.

AJ Bell investment director Russ Mould added in an investor note this morning that Morrisons’ balance sheet looks highly attractive, in particular to a private equity firm looking to sell business assets to release cash.

“Morrisons’ balance sheet has plenty of asset backing and the valuation was relatively depressed before news of private equity interest,” he said. “The market value of the business had weakened so much that it clearly triggered some alerts in the private equity space to say the value on offer was looking much more attractive.”

Follow me on Twitter or LinkedIn. Check out my website.

I am a global retail and real estate expert who looks behind the headlines to figure out what makes consumers tick. I work as editor-in-chief for MAPIC and editor for World Retail Congress, two of the biggest annual international retail business events.  I also organise, speak at, and chair conferences all over the world, with a focus on how people are changing and what that means for the retail, food & beverage, and leisure industries. And it’s complicated! Forget the tired mantra that online killed the store and remember instead that retail has always been dog-eat-dog: star names rise and fall fast, and only retailers that embrace the madness will survive. Don’t think it’s not important, your pension funds own those malls!

Source: Morrisons Shares Surge As Investors Bet On Low U.K. Supermarket Valuations

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Critics:

Wm Morrison Supermarkets plc (Morrisons) (LSEMRW) is the fourth biggest supermarket in the United Kingdom. Its main offices are in Bradford, West Yorkshire, England.The company is usually called Morrisons. In 2008, Sir Ken Morrison left the company. Dalton Philips is the current head. The old CEO was Marc Bolland, who left to become CEO of Marks & Spencer.

As of September 2009, Morrisons has 455 shops in the United Kingdom. On 15 March 2007, Morrisons said that it would stop its old branding and go for a more modern brand image. Their lower price brand, Bettabuy, was also changed to a more modern brand called the Morrisons Value. This brand was then changed again in 2012 as Morrisons started their low price option brand called M Savers.

In 2005 Morrisons bought part of the old Rathbones Bakeries for £15.5 million which make Rathbones and Morrisons bread. In 2011, Morrisons opened a new 767,500 square/foot centre in Bridgwater for a £11 million redevelopment project. This project also made 200 new jobs.

References:

  1. “Morrisons Distribution Centre Preview”. Bridgwater Mercury. Retrieved 6 July 2012. This short article about the United Kingdom can be made longer. You can help Wikipedia by adding to it.
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