In alphabetical order by company name: NLY, CAKE, CLX, CVS, EL, PBI, PSA, QCOM, O, SMG
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Annaly Capital (NLY): We’ve been warning about the mortgage REITs (REM) for as long as we can remember, and we just issued yet another warning recently about the sustainability of group’s dividends. These equities are high-risk, and they’ve been underperformers for years. On May 1, Annaly Capital pre-announced a dividend cut to $0.25 per share, down from $0.30 per share previously. Economic leverage at the mREIT was 7x at the end of the quarter, and mortgage market dynamics remain as difficult to predict as ever. CEO Kevin Keyes characterized the current environment as one hindered by a “flattening yield curve and compressed spreads.” Buyer beware. Mortgage REITs Still Dangerous Vehicles >>
Cheesecake Factory (CAKE): After Texas Roadhouse’s (TXRH) first-quarter results showed the impact of rising labor costs on restaurant operators, we’ve been on high alert. Cheesecake Factory’s fiscal first-quarter results, released May 1, showed a decent 1.3% increase in comparable restaurant sales, and while both that mark and adjusted earnings per share came in at the high end relative to internal targets, labor expenses nudged higher 40 basis points as a percentage of revenue. We’ll continue to watch how rising minimum wage laws are impacting profits across the restaurant space. We continue to believe franchisers are much better positioned that operators, though the former group is usually saddled with considerable debt. View Cheesecake Factor’s stock page >>
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Clorox (CLX): Clorox is another consumer staples entity whose shares had run too far too fast. The company reported fiscal third-quarter results May 1 that showed a miss on both the top and bottom lines, and it didn’t hesitate to reduce full-year earnings per share guidance to the range of $6.25-$6.35 from $6.20-$6.45 previously (midpoint lower). The firm continues to face aggressive competition in its “Bags and Wraps and Wipes” categories. We value shares at less than $120 each, so the large pullback after the quarterly results could only have been expected, in our view. We’re not excited about its dividend as a result of its large net debt position, and we continue to believe shares are pricey. View Clorox’s stock page >>
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CVS Health (CVS): CVS Health’s shares have been shellacked for a number of reasons over the past year or so. For starters Amazon, Berkshire and J.P. Morgan are looking to disrupt the healthcare industry, and Amazon in particular continues to cast a shadow over the pharmacy market. CVS’ purchase of Aetna saddles it with a debt load that is far too uncomfortable at this stage in the economic cycle. Defensive acquisitions hardly work out as intended, and while the company posted a beat on the top and bottom line when it reported first-quarter results May 1, expectations had been reduced substantially heading into the report. Shares continue to trade near the low end of its 52-week range at the time of this writing. View CVS’ stock page >>
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Estee Lauder (EL): The global prestige brand posted fiscal third-quarter results May 1 that showed a beat on both the top and bottom lines, and the company raised its full-year earnings per share guidance to the range of $5.15-$5.19 versus $4.92-$5.00 previously. The company noted outperformance in China relative to expectations, and the skin care, makeup, fragrance and hair care provider expects to continue to gain market share in the global prestige beauty industry. We think the report is good news for consumer brands tied to China, particularly the luxury and aspiration arena. We expect a material increase in our fair value estimate upon the next update. View Estee Lauder’s stock page >>
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Pitney Bowes (PBI): Pitney Bowes is facing a whirlwind of trouble. During its first quarter of 2019, results released May 1, equipment sales dropped nearly 16%, while support services fell 8.6%, pressure that pushed its adjusted EBIT margin lower 500 basis points, to 7.9%. Adjusted earnings per share was a mere $0.12, and management made it clear that it was not pleased with profit performance. As shares continue to face pressure, however, Pitney Bowes bought back $39 million of them in the quarter. The company needs to batten down the hatches and look to manage its huge net debt position ($3+ billion). Annual free cash flow generation just isn’t large enough ($200-$250 million). View Pitney Bowes’ stock page >>
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Public Storage (PSA): We didn’t see anything in Public Storage’s first-quarter report, released May 1, that would cause any concern relative to our income thesis. Funds from operations (FFO) came in at $2.52 per share during the period, a nice 6.3% increase relative to last year’s mark (core FFO advanced 2%). The company’s FFO remains far in excess of its regular quarterly common dividend of $2 per share at the moment, and its debt load remains very manageable. What we like most about Public Storage is that the company is free cash flow positive on a traditional basis, registering more than $2.06 billion in operating cash flow and just $140 million in capital expenditures during fiscal 2018. Very few REITs have this traditional free-cash-flow strength. View Public Storage’s stock page >>
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Qualcomm (QCOM): Qualcomm has been in the news recently given its truce with Apple, but we’re going to let the dust settle before reevaluating whether Qualcomm makes any sense as an idea in the simulated newsletter portfolios. Shares have already rocketed to 52-week highs and handicapping the outcome of any legislation is not something investors should be focused on in trying to drive return performance in their respective portfolios. The company’s fiscal second-quarter results, released May 1, came in better than expected, and its leadership in 5G remains. We like Qualcomm, but there are too many moving parts at the moment to get us excited about shares. View Qualcomm’s stock page >>
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Realty Income (O): One of our favorite dividend growth ideas Realty Income reported first-quarter results May 1 that showed adjusted funds from operations advancing 3.8% to $0.82 per share in the quarter. In March 2019, the REIT announced its 86th consecutive quarterly dividend increase, and the company has now raised the dividend more than 100 times since it went public in 1994 (101 times, in fact). In our High Yield Dividend Newsletter portfolio, we’ve removed shares as they’ve run so far, but we continue to include them as a modest “weighting” in the Dividend Growth Newsletter portfolio. View Realty Income’s stock page >>
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Scotts Miracle-Gro (SMG): Scotts Miracle-Gro’s fiscal second-quarter 2019 report, released May 1, was a sight to see. US consumer sales leapt 8% thanks to double-digit growth in purchases (total sales were up 17%), and the company posted non-GAAP adjusted earnings per share of $3.64, significantly better than last year’s mark of $2.88. Management maintained its non-GAAP adjusted earnings in the range of $4.10-$4.30, but it noted that “consumers came flying out of the gate compared with last year to get a head start on the lawn and garden season.” Investors might expect a guidance raise for fiscal 2019 when the company updates investors in June. We expect a modest bump in our fair value estimate. View Scotts Miracle-Gro’s stock page >>
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.