Valuentum Exclusive Analysis for the Discerning Investor

Symbol Keyword

Image: Mike Cohen

Summary of Changes

AT&T (T) – remove

Global X SuperIncome Preferred ETF (SPFF) – to 5% from 10%

Vanguard Real Estate ETF (VNQ) – to 5% from 10%

Chevron Corporation (CVX) – initiate at 5%

ExxonMobil Corporation (XOM) – initiate at 5%

Magellan Midstream Partners, L.P. (MMP) – to 5% from 2.5%

Enterprise Products Partners L.P. (EPD) – to 5% from 2.5%

By Brian Nelson, CFA

We released the Valuentum Weekly last night, which can be accessed here , but we saved our note regarding the High Yield Dividend Newsletter portfolio changes as well as portfolio updates to today, November 8.

A few weeks ago, we mentioned that we had a change of heart with AT&T (T). Today, we are removing the company from the High Yield Dividend Newsletter portfolio. AT&T had been one of our favorite high-yield dividend considerations prior to the announcement that it will rightsize its payout in May of this year. We were unfortunately blindsided by AT&T’s CEO John Stankey’s decision (as was most of the market) given that he wrote he would support it in the firm's latest Annual Report (2/8/21).

Months ago, we had thought AT&T posed a nice risk/reward yield situation (despite its huge net debt position), but the company’s huge net debt position obviously opened us up to a disappointment (albeit a small one given the diversification of the High Yield Dividend Newsletter portfolio), and shares have languished. We still like AT&T as a yield play, of course, but the pending rightsizing of its payout gives us somewhat of a self-inflicted black eye, especially in light of how excited we were about its income prospects some months ago.

For those wanting to stay the course on AT&T, that’s not a terrible idea, however (shares have breached the low end of our fair value estimate range). For us, however, it’s just hard to get behind a management team that we feel largely has burned its investor base. We estimate that dividends to be paid on a go-forward run-rate basis post-2022 at AT&T may be ~$8.6+ billion versus ~$15 billion on an annual basis today. That implies a rather sizable impending yield adjustment at AT&T that will likely continue to alienate its investor base.

As a post-mortem on this idea, we knew AT&T was a high-risk yield play (its Dividend Cushion ratio is -0.1; anything less than 1 is considered risky), and we know high yield dividend stocks themselves are not for the faint of heart. For one, there aren’t many companies with huge net-cash-rich positions on the balance sheet that also pay lofty dividend yields, so a situation as that which happened with AT&T, where a CEO does a 180 on us, was bound to happen…eventually. AT&T will still have a very nice dividend payout after the rightsizing of the payout, but we’re saying good-bye to it as an idea in the High Yield Dividend Newsletter portfolio. Our fair value estimate of AT&T, nonetheless, stands at ~$34 at this time (shares are trading under $25 each).

We’re also adjusting the High Yield Dividend Newsletter portfolio’s "weightings" in the Global X SuperIncome Preferred ETF (SPFF) and the Vanguard Real Estate ETF (VNQ). We still like these two ETFs as core considerations of any diversified high yield dividend portfolio, but we want to gain greater exposure to the juicy yields in the energy complex, given that the portfolio may lose some yield with the AT&T removal. Energy resource prices, too, have, in our view, attained a sustained recovery making many large energy players attractive these days.

Specifically, we’re reducing both the SPFF’s and VNQ’s "weightings" in the High Yield Dividend Newsletter portfolio to 5% from 10%, and with the newly raised 15% of the newsletter portfolio from the T, SPFF, and VNQ moves, we’re "initiating" a 5% weighting in each of Chevron (CVX) and ExxonMobil (XOM), while increasing the weightings of Magellan Midstream Partners, L.P. (MMP) to 5% from 2.5% and Enterprise Products Partners L.P. (EPD) to 5% from 2.5%. The updated High Yield Dividend Newsletter portfolio will be published in the December edition of the High Yield Dividend Newsletter, released December 1.

During the past few weeks, there were a number of quarterly reports across the High Yield Dividend Newsletter portfolio. You may have read our views on the recent quarterly results at Digital Realty Trust (DLR) here and Philip Morris International (PM) here, but it’s worth noting that Magellan Midstream Partners put up better-than-expected third-quarter results November 2 and nudged its quarterly dividend modestly higher October 20--now paying a forward estimated annual dividend yield of ~8.7%!

Several other High Yield Dividend Newsletter portfolio ideas are also performing quite well. Midstream peer Enterprise Products Partners put up an excellent third-quarter report November 2, and the midstream MLP yields an enticing ~7.9% on a forward estimated annual basis. Data center REIT CyrusOne (CONE) reported better-than-expected third-quarter results October 27 and raised its full-year revenue and funds from operations (FFO) guidance. Shares of CONE yield ~2.5% at the time of this writing.

Public Storage (PSA), which is up a whopping ~40% year-to-date, registered nice third-quarter results November 1, beating the market’s expectations. Thanks to the self-storage group’s strong dividend coverage tendencies with respect to traditional free cash flow, we continue to be huge fans of the space. High Yield Dividend Newsletter portfolio idea and self-storage peer CubeSmart (CUBE) is up an amazing ~60% so far this year, announcing November 2 that it would hike its dividend more than 26%. Shares of CUBE now yield ~3.2% on a forward estimated annual basis.

Another High Yield Dividend Newsletter portfolio idea Crown Castle International Corp. (CCI) did not disappoint when it reported third-quarter results October 20, raising its dividend a very impressive 10.5%. Though its share-price performance thus far hasn’t been as impressive as the self-storage space (very little has been as impressive!), CCI’s shares yield a very nice ~3.3% at the time of this writing, and we like its moaty characteristics. When it comes to CCI, we’re huge fans of the specialized REIT’s cell tower business model that allows for large incremental margins as more communications capacity is added to the system.

All in, calendar third-quarter results were solid for constituents in the High Yield Dividend Newsletter portfolio, and we look forward to a bright 2022! We're available for any questions.

-----

The High Yield Dividend Newsletter and accompanying simulated portfolio is an add-on to your existing membership.

$1,000/year. No refunds offered. This is a recurring membership. Cancel anytime.

----------

Image Source: Value Trap

----------

Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.

Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

----------

Valuentum (val∙u∙n∙tum) [val-yoo-en-tuh-m] Securities Inc. is an independent investment research publisher, offering premium equity reports, dividend reports, and ETF reports, as well as commentary across all sectors/companies, a Best Ideas Newsletter (spanning market caps, asset classes), a Dividend Growth Newsletter, modeling tools/products, and more. Independence and integrity remain our core, and we strive to be a champion of the investor. Valuentum is based in the Chicagoland area.

Valuentum is not a money manager, broker, or financial advisor. Valuentum is a publisher of financial information.

The Benefits of Premium Membership >>

Subscribe Now!