Image Source: Ken Teegardin
We’re on the move January 26 in the Dividend Growth Newsletter portfolio.
By Brian Nelson, CFA
Hi everyone,
I hope that you are doing great! We’re on the move January 26 with three new additions to the Dividend Growth Newsletter portfolio. Many of you have read our “5 Shocking Stock Market Predictions for 2017,” and consistent with what we think may happen this year, we’re putting some cash to work.
First, let’s talk Boeing (BA). We love the aerospace giant, and its recent dividend hike of 30%+ caught our attention in a big way. The company’s backlog is tremendous and its free cash flow generation is top notch. Boeing’s diversified exposure to both commercial aerospace and defense helps shield it from exogenous shocks that may originate from the Trump administration’s effort to cut defense costs relative to what other defense contractors may encounter (e.g. LMT). Please read our latest note on the company, “Boeing’s Lift Off, Lockheed’s Caution, and United Tech’s Outlook.” We’re adding a 3% position to the Dividend Growth Newsletter portfolio at $168.44 per share. Shares yield ~3.4%.
Next, Hanesbrands (HBI). This company’s net cash flow from operations generation during fiscal 2016 is expected to be phenomenal, and while it operates in the fickle consumer retail environment, we view the demand profile of its products as similar to any other consumer staple entity, except this one is trading at ~12 times last fiscal year earnings from continuing operations. Hanesbrands is coming off a 36%+ dividend hike just the other day, and we like what we see as it relates to the company’s valuation. Hanesbrands’ inventory levels and net debt load are key risks, but free cash flow coverage of the dividend looks solid. Please read our latest note on the company, “Adding an Undervalued, Dividend Growth Prospect.” We’re adding a 3% position to the Dividend Growth Newsletter portfolio at $23.77 per share. Shares yield ~2.5% at the time of this writing.
Third — yes, this isn’t a typo. We’re adding the Alerian MLP ETF (AMLP) to the Dividend Growth Newsletter portfolio. Shares of this ETF are still down heavily since we warned about the hazards of the MLP business model in June 2015, but with energy resource markets moving back into balance, and euphoria following the Trump election running rampant, we’re adding this diversified ETF with our finger on the “remove” button the entire time. Dividends on the ETF are paid quarterly, and the last distribution came in at $0.24 per share, putting its effective “yield” at 7.3%. As this stock market bubble continues to inflate, we think portfolio managers will be looking to add to beaten-down industries, and very few have performed worse than those embracing the MLP business model during the past few years. We had announced we were considering the Alerian MLP ETF for the Dividend Growth Newsletter portfolio in a January 10 note, “MLPs: Williams’ Double Equity Raise,” and we’re making it happen today. We’re adding a 3% position at $13.19 per share.
Boeing’s tremendous backlog, Hanesbrands improving free cash flow generation and the implementation of a “trade” on MLPs… It may be hard to fathom, but if the stock market “bubble” gets way out of whack and news flow during the Trump administration continues to prop up midstream pipeline players, we could even see MLPs reach new heights. Under such euphoria, the market may simply not care if an MLP’s distribution is backed by traditional free cash flow or not (remember when it didn’t before?). We’re gaining exposure in the Dividend Growth Newsletter portfolio to this distinct possibility, even as we reiterate the substantial and myriad risks of the MLP business model. Importantly, we view our exposure to MLPs as a trade, not an investment.
That’s all for now. Dow 20,000 came and went!
Tickerized for holdings in the Alerian MLP ETF at the time of this writing.