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Be Prepared for Earnings Season with these Stocks

The overall tone at the start of the earnings season is looking downbeat.  The S&P 500 index is on pace for its fourth day of declines over concern the global economic slowdown was hurting profits and causing companies to lower their outlooks.  The index is testing the technical support level of 1,440.  If the overall earnings picture does disappoint, the market can break the support level and fall into correction territory.

But as important as beating consensus earnings expectations for the third quarter are, it is even more important to provide reassuring enough guidance for the fourth quarter and beyond.  The overall earnings scorecard for the third quarter is that we have 28 companies from the S&P 500 already report results as of this morning (October 10), with total earnings down 4.9% from the same period last year and less than half of the companies beating earnings expectations.

It is still early in the earnings season, but if the quality of guidance remains weak, then estimates for the fourth quarter will have to come down from current expectations.  Prudent investors will want to protect against this potential decline by seeking safety in high quality dividend stocks.  Here are some stocks to consider if the earnings season disappoints and the markets pullback from current levels.

Food producer Conagra Foods (CAG) is showing price strength in the past few weeks on the heels of several analyst upgrades.   Conagra beat Q1 earnings and raised 2013 earnings outlook.  In addition, Conagra raised its dividend 4% and now has a dividend yield of 3.60%.  The Company has a low beta of 0.46 meaning it has low price volatility compared to the overall market.  Conagra has an equity summary score of 9.6 out of 10 for a VERY Bullish outlook.

Ketchup maker H.J. Heinz Co. (HNZ) has a flat stock price which is up only 5% year to date but it is a stable stock with a low beta of 0.50.  Heinz is continuing to exhibit strong sales in emerging markets, where organic sales rose 19.3% last quarter.  Heinz is increasing marketing efforts in the U.S. as shoppers remain frugal with their grocery budgets.  The Company has a current dividend yield of 3.63% that was increased 7.3% in the past year.  Heinz has an equity summary score of 9.1 out of 10 for a VERY Bullish outlook.

Medical device maker Medtronic (MDT) has a 1-year total return of 32%. However, it is still considered a low volatility stock with a beta of 0.67.  Medtronic just agreed to buy China Kanghui Holdings (KH) for $816 million in cash, in a growth move to enter China’s medical device market to accelerate its overall globalization strategy.  The Company has a current dividend yield of 2.41% that was increased 7.2% in the past year.  Medtronic has an equity summary score of 9.1 out of 10 for a VERY Bullish outlook.

Everyone’s favorite tobacco stock Altria Group (MO) is always a stable stock.  Altria has a low beta of 0.27.  Altria’s Board of Directors in August approved a 7.3% increase to their quarterly dividend.  Altria has a current dividend yield of 5.25%.  Altria has an equity summary score of 7.9 out of 10 for a Bullish outlook.

Altria Group Increases Dividend 7.3%

Altria Group, Inc. (MO) announced that its Board of Directors voted to increase Altria’s regular quarterly dividend by 7.3% to $0.44per common share versus the previous rate of $0.41 per common share. The quarterly dividend is payable on October 10, 2012 to shareholders of record as of September 14, 2012. The ex-dividend date is September 12, 2012.

The new annualized dividend rate is $1.76 per common share, representing a yield of 5.3% based on Altria’s closing stock price.

This dividend increase reflects Altria’s intention to return a large amount of cash to shareholders in the form of dividends and is consistent with Altria’s dividend payout ratio target of approximately 80% of its adjusted diluted earnings per share. Altria has increased its dividend 46 times in the last 43 years.

Recently, Altria has lowered its guidance for FY12, now expecting EPS in the range of $1.96 – $2.00, down from its prior forecast range of$2.29 – $2.33. Analysts polled by Capital IQ are expecting GAAP EPS to be $2.29.

The parent of the Marlboro brands cited one-time charges related to a plan to buy back about$2 billion of its long-term debt, and expects to record a one-time pre-tax charge of $1 billion, or$0.33 per share, in Q3 related to the early extinguishment of debt.

Altria Group has an equity summary score of 8.6 out of 10 for a Bullish outlook.  Zacks Investment has a 12-month target price of $37 for Altria.

Low Beta Dividend Stocks for an Uncertain Market

As the markets continue to show uncertainty and a lack of capitulation, investors are looking for a place to hunker down.  The best place at this time is in low beta stocks with dividend yields (defensive stocks) to support the share price.  I had identified 5 stocks that are up in price the last 4 weeks and have a bullish outlook for when the market rallies.  Here are 5 stocks to consider:

Tobacco operator Altria Group (MO) seems to do well in these types of markets.  It is up 4.9% over the last 4 weeks.  It has a low beta of 0.25 with a dividend yield of 4.91%.  MO has an equity summary score of 7.4 out of 10 for a Bullish outlook.

Low cost retailer Wal-Mart (WMT) shines when there is a slow economy.  WMT is up 14% in the last 4 weeks.  It has a beta of 0.33 and a dividend yield of 2.35%.  WMT has an equity summary score of 8.4 out of 10 for a Bullish outlook.

Telecom giant AT&T (T) is a steady as they go in this type of market.  AT&T is up 5.4% in the last 4 weeks.  It has a beta of 0.57 and a dividend yield of 5.03%.  AT&T has an equity summary score of 9.8 out of 10 for a VERY Bullish outlook.

Retailer Target Corp (TGT) has been performing great this year.  TGT is up 5.13% in the last 4 weeks.  It has a beta of 0.58 with a dividend yield of 2.06%. TGT just announced a 20% increase in its dividend.  TGT has an equity summary score of 9.2 out of 10 for a VERY Bullish outlook.

Pharmaceutical giant Bristol-Myers Squibb (BMY) is a solid dividend stock.  BMY is up 3.73% in the past month.  It has a beta of 0.41 with a dividend yield of 3.97%.  BMY has an equity summary score of 9.1 out of 10 for a VERY Bullish outlook.

Building a High Dividend Yield, Low Beta Income Portfolio (Part 1)

For income investors wanting to go it alone, they should consider creating a portfolio of high dividend stocks with low beta.  This type of portfolio will provide a risk to reward profile during times of uncertainty in the markets.  By adding the component of a bullish outlook to the low beta stocks indicates these stocks can be held in a long-term portfolio.  The high dividend yield can be compounded over time and will increase as these stocks raise their dividends each year.  This portfolio will be built in a series of articles.  Here are the first stocks to look at for your portfolio.

AT&T Inc. (T) provides telecommunications services to consumers, businesses, and other providers worldwide.   We see gains in consumer wireless and broadband continuing to offset some wireline voice pressure.  We believe T’s strong balance sheet, expected wide operating margins in 2012 and its review of rural assets are positives. While we think that failure to complete its planned acquisition of T-Mobile USA assets represents a setback, we believe T will move forward and has sufficient spectrum and liquidity to grow. We view T’s above-average dividend as secure and adding to total return potential, though with a rise in the shares in 2012.  T has a dividend yield of 5.69% and a 3-year beta of 0.58.  T has an equity summary score of 9.2 out of 10 for a VERY Bullish outlook.  The First Call Consensus of 37 analysts is a Buy rating.

Altria Group, Inc. (MO) engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally.  Although we continue to expect domestic cigarette industry volumes to contract over the long term, we see cigarette companies still having the ability to raise prices,
and thus margins.  As the largest U.S. cigarette manufacturer, MO should lead this pricing strategy, in our view.  Moreover, we look for more limited commodity input cost pressures than in other industries in the consumer staples sector.  Operationally, we think Altria is likely to benefit from several factors over the next several years, including the growth from higher-margin smokeless tobacco products and various restructuring actions.  MO has a dividend yield of 5.23% and a 3-year beta of 0.44.  MO has an equity summary score of 7.6 out of 10 for a Bullish outlook.  The First Call Consensus of 14 analysts is a
Buy rating.

Verizon Communications Inc. (VZ) provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide.  VZ is a large, steady high yield dividend stock.  It boasts a dividend yield of 5.3% and a 3-year beta of 0.54.  VZ has a
strong operating margin and perception of network quality, the company’s wireless segment should be a driver for VZ in 2012, even as we see higher
subsidies for smartphones launched on 3G and 4G networks.  We are encouraged by the relative stability in VZ’s wireline segment over the past six months, helped by FiOS gains and by the company’s above-average dividend. We believe VZ’s pending acquisition of spectrum from a cable consortium will help alleviate future network congestion. VZ has an equity summary score of 8.9 out of 10 for a Bullish outlook.  The First Call Consensus of 39 analysts is a
Buy rating.

A Fresh IPO with an 8.6% Dividend Yield

Roundy’s Supermarkets (RNDY) is a strong regional food retailer with a local market merchandising strategy that provides high quality food products at competitive prices.  The company was founded in 1872 in Milwaukee and operates 159 retail grocery stores and 97 pharmacies under the Pick ‘n Save, Rainbow, Copps, Metro Market, and Mariano’s Fresh Market retail banners.  The company went public in February 2012 and has a market capitalization of $454 million.  Roundy’s generated $150 million of operating income on $3.8 billion of revenue in 2011.

RNDY began trading on February 8, 2012 at an initial stock price of $8.50.  Currently, RNDY is trading at $10.62, an increase of 25% from its IPO price.  What is unique to RNDY is that it will pay a dividend in 2012.  RNDY plans to pay a quarterly dividend of $0.23 per share.  This represents an annual yield of 8.6% at Roundy’s current price per share.  The dividend payout of ~$40 million represents 60-65% of net income and appears secure, given solid free cash flow generation.  The stock’s dividend yield is much  higher than any other names in the consumer staples universe, and we believe that this provides meaningful downside support to the stock.  In fact, the 8.6% dividend yield is higher than tobacco stocks like Altria Group (MO) at 5.5%, Reynolds American  (RAI) at 5,4%, Lorillard (LO) at 4.8% and Philip Morris (PM) at 3.6%.

Roundy’s is the dominant player in its key markets, with strong market share.  Strong local share is critical in supermarket retailing, given the inherently high fixed cost structure of the conventional model.  Most players in the industry believe that it is critical to be the number one or number two player to compete effectively in a market over the long term.  Roundy’s is the dominant player in its most important markets, holding the number one market share position in four out of its six primary markets. Roundy’s dominance is even more impressive in Milwaukee, its biggest market, where it has 55% share. The company’s average share in all markets is 35%, amongst the highest in U.S. food retail.

While the company’s core business provides no real opportunity for growth, we believe their expansion into the adjacent Chicago market presents an underappreciated opportunity.  Chicago is the third largest market in the United States, with struggling market leaders in Supervalu and Safeway.  Roundy’s is rolling out a differentiated format focused on high-quality fresh product at highly competitive prices.  Roundy’s management team has a history of success in the market, and the company has negotiated a labor advantage with the local union.  The company has only five stores in the market currently but plans to open four to five annually.  We do not expect Chicago to provide a material lift to earnings in the near term; however, it could be a catalyst within the next few years if successful.

RNDY estimates fiscal 2012 EPS of $1.42, fiscal 2013 EPS of $1.50, and fiscal 2014 EPS of $1.65.  At a PE of 10, RNDY should trade at $14.20, a 33% increase from its current value.  At a stock price of $10.62 with a 8.6% dividend yield, we believe the market has not properly valued its steady income stream and assigned value to the growth in Chicago.  Investors should at least clip a steady coupon on the dividend and could see solid appreciation once the company’s story becomes better understood.

High Yield Stocks with Growing Dividends that are Overpriced

My model for performing the intrinsic and future values are shown in the table below using three stocks that are trading at a premium or discount
to their fair value.  By using the average PE ratio and projected EPS growth, you can use the future time value formula to get an estimate of earnings X number of years into the future. Once you have the future projected earnings per share, just multiply by the PE ratio to get a future stock price. All of the projected growth rates are available on most websites providing detailed stock information. This is great information when looking at the future of a stock in comparative terms. Take this one step further, and you can determine the intrinsic value of a stock. Here, you are using the present time value formula based on your required rate of return. The end result is having a fair value estimate of the stock to compare to the stock’s current trading price. This comparison will determine if a stock is overvalued or trading at a discount.

We use the same concept to determine the future dividend payout and yield in future years.  For me, I prefer to project 10 years forward based on past compound annual growth rates [CAPG] of 10 years of data. The number of years can be adjusted for shorter time periods for stocks with less than 10 years of public data. What should your required rate of return be?  I am currently using a 10% return on invested capital.  Here is my assessment of three high yield

Altria Group (MO) engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally.  Currently, MO is trading at a 17% premium to its fair value.  It has an EPS growth rate of 8%, with an average PE of 13.4. MO is projected to have a future dividend yield
of 5.5%, but its dividend yield on cost is projected to be 12% in 10 years.  This is an excellent investment to buy as a dividend grower especially on a pullback to its fair value of $25.

AT&T Inc., (T) provides telecommunication services to consumers, businesses, and other service providers worldwide.  Currently, T is trading at a 39% premium to its fair value.  It has an EPS growth rate of 3.7%, with an average PE of 14. T is projected to have a future dividend yield of 5.7%, but its dividend yield on cost is projected to be 8.9% in 10 years.  AT&T is overpriced for such a low growing stock but is a stable dividend payer.

Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities.  HEP is trading at a 20% premium to its fair value.  It has an EPS growth rate of 6.7%, with an average PE of 21. HEP is projected to have a future dividend yield of 4.7%, but its dividend yield on cost is projected to be 9.7% in 10 years.  Investors should be cautious as HEP has a payout over 100% of EPS.

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List of Covered Call Trades for September 2011

 After two weeks of uncertainty and high volatility equities look as if they have found a short-term bottom.  For covered call traders, there are so many ideas available but the market still is not as stable as we would like it to be.   All of the improvement after Tuesday’s  reversal could be unwound if there is more negative news from Europe.  Our colleagues in Europe reminds us Italy is a huge debt problem and  since the European banks will need to raise capital, they will tighten lending,  especially interbank lending which may create liquidity issues.
As for last week’s volatility in the equity  markets, here is an appropriate quote from Samuel Brittan in last Thursdays  Financial Times. “The stock exchange always has been and always will be a  mixture of investment appraisal and sheer gambling.”  With this thought in mind, we still need to exercise caution with covered call trades.  The list below is primarily conservative stock trades with Coke, Exxon, Altria and General Mills.  The covered call trades will create monthly income while these stocks have nice dividend yields to add some income.
Covered Call Trades

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The Coca-Cola Company (KO) is a non-alcoholic beverage company. The Company owns
or licenses and markets more than 500 non-alcoholic beverage brands, primarily
sparkling beverages but also a variety of still beverages such as waters,
enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and
energy and sports drinks. It also owns and markets non-alcoholic sparkling
beverage brands, including Diet Coke, Fanta and Sprite. It manufactures, markets
and sells, beverage concentrates, referred to as beverage bases, and syrups,
including fountain syrups (the concentrate business or concentrate operations),
and finished sparkling and still beverages (finished products business or
finished products operations).It operates in six segments: Eurasia and Africa,
Europe, Latin America, North America, Pacific, Bottling Investments and
Corporate. On October 2, 2010, it acquired the North American business of
Coca-Cola Enterprises Inc. (CCE).
Exxon Mobil Corporation (XOM) is a manufacturer and marketer of
commodity petrochemicals, including olefins, aromatics, polyethylene and
polypropylene plastics and a range of specialty products. It also has interests
in electric power generation facilities. It has many divisions and hundreds of
affiliates with names that include ExxonMobil, Exxon, Esso or Mobil. Divisions
and affiliated companies of ExxonMobil operate or market products in the United
States and other countries of the world. Their principal business is energy,
involving exploration for, and production of, crude oil and natural gas,
manufacture of petroleum products and transportation and sale of crude oil,
natural gas and petroleum products. On June 25, 2010, it acquired XTO Energy
Inc. by merging a wholly owned subsidiary of ExxonMobil with and into XTO. In
October 2010, Global Partners LP acquired retail gasoline stations from Exxon
Mobil. In June 2011, the Company acquired Phillips Resources.
CVS Caremark Corporation (CVS) is a pharmacy healthcare provider
in the United States. It provides pharmacy services through its pharmacy benefit
management (PBM) mail order and specialty pharmacy division, Caremark Pharmacy
Services; approximately 7,000 CVS/pharmacy retail stores; retail-based health
clinic subsidiary, MinuteClinic, and through its online pharmacy, It
has three segments: Pharmacy Services, Retail Pharmacy and Corporate. The
Pharmacy Services segment provides a range of pharmacy benefit management (PBM)
services, including mail order pharmacy services, specialty pharmacy services,
plan design and administration, formulary management and claims processing. As
of December 31, 2010, the Pharmacy Services segment operated 44 retail specialty
pharmacy stores. As of December 31, 2010, its Retail Pharmacy segment included
7,182 retail drugstores, of which 7,123 operated a pharmacy, which is its, and retail health care clinics.
Mylan Inc. and its subsidiaries (MYL) is a generic and specialty
pharmaceutical company, which provides products to customers in more than 150
countries and territories. The Company operates in two segments: Generics and
Specialty. Mylan is a fully-integrated global pharmaceutical company that
develops, licenses, manufactures, markets and distributes generic and branded
generic pharmaceuticals, specialty pharmaceuticals and active pharmaceutical
ingredients (API). In September 2010, Mylan completed the acquisition of 100% of
the outstanding equity in Bioniche Pharma Holdings Limited (Bioniche Pharma).
The United States sales are derived through the wholly owned subsidiary Mylan
Pharmaceuticals Inc. (MPI), its primary United States pharmaceutical research,
development, manufacturing, marketing and distribution subsidiary, as well as
through Mylan Institutional. Mylan Institutional. The specialty pharmaceutical
business is conducted through Dey Pharma, L.P.
General Mills, Inc. (GIS), is a global manufacturer and marketer
of consumer foods sold through retail stores. The Company is also a supplier of
branded and unbranded food products to the foodservice and commercial baking
industries. General Mills manufactures its products in 15 countries and markets
them in more than 100 countries. The Company’s businesses are organized into
three operating segments: U.S. Retail, International, and Bakeries and
Foodservice. Its product categories in the United States include ready-to-eat
cereals, refrigerated yogurt, ready-to-serve soup, dry dinners, shelf stable and
frozen vegetables, refrigerated and frozen dough products, dessert and baking
mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, and a
variety of organic products including soup, granola bars, and cereal. In July
2011, it acquired 51% controlling interest in Yoplait S.A.S.
Altria Group, Inc. (MO) is a holding company. As of December 31, 2010, Altria
Group, Inc.’s wholly owned subsidiaries included Philip Morris USA Inc. (PM
USA), which is engaged in the manufacture and sale of cigarettes and certain
smokeless products in the United States; UST LLC (UST), which through its
subsidiaries, is engaged in the manufacture and sale of smokeless products and
wine, and John Middleton Co. (Middleton), which is engaged in the manufacture
and sale of machine-made large cigars and pipe tobacco. Philip Morris Capital
Corporation (PMCC), another wholly owned subsidiary of Altria Group, Inc.,
maintains a portfolio of leveraged and direct finance leases. As of December 31,
2010, in addition, Altria Group, Inc. held a 27.1% economic and voting interest
in SABMiller plc (SABMiller). As of December 31, 2010, Altria Group, Inc.’s
segments included cigarettes, smokeless products, cigars, wine and financial
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