You saw it again this week, despite the fact that most of the data coming in are positive — low unemployment, rising wages, rising inflation and more — the Federal Reserve held back and didn’t raise interest rates. The reason for this is pretty obvious: they plain and simple don’t want to force the Chinese into a massive yuan devaluation. Raising rates fast will strengthen the dollar, and that could tip the Chinese hand.
So what are investors to do in a continued low rate environment? Buy the best stocks out there, especially ones paying good dividends. We screened the Merrill Lynch US 1 list, which contains the firm’s top picks for companies to buy that also pay sizable dividends. We found four that look outstanding.
AT&T
This company will continue to serve customers regardless of where oil or the yuan trade. AT&T Inc. (NYSE: T) is the world’s largest provider of pay-TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE.
The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions. With shares trading at a very cheap 12.5 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic, but increased device financing plans.
While fourth quarter earnings were in line with forecasts, and slightly below the Wall Street estimates, a change in accounting for the entertainment group lowered revenue/EBITDA by $300 million for the quarter. Merrill Lynch notes that this knocked three cents off the bottom line numbers. All in all, a solid quarter, and another reason for conservative accounts to own the stock, especially with solid DirecTV additions and mid-single-digit earnings growth estimated for 2016.
The AT&T AdWorks division is the self-described leader in Addressable TV advertising. The company combines unparalleled scale in addressable TV advertising with the best targeting capability in the TV business to deliver a better return-on-investment for advertisers. The AT&T AdWorks product suite includes: Addressable TV Advertising, TV Blueprint, Interactive TV and Premium Digital Video Advertising (including Otter Media properties). This is helping to drive revenue at the telecommunications giant.
AT&T investors receive a 4.91% dividend. The Merrill Lynch price target for the stock is $40, and the Thomson/First Call consensus estimate is $37.85. Shares closed Thursday at $39.12.
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CF Industries
This company is somewhat off the radar but could be a very solid addition to growth and income portfolios. CF Industries Holdings Inc. (NYSE: CF) is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. It operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States and distributes plant nutrients through a system of terminals, warehouses and associated transportation equipment located primarily in the Midwest. The company also owns a 50% interest in an ammonia facility in the Republic of Trinidad and Tobago.
While the company reported mixed fourth-quarter results, Merrill Lynch notes that near-term fundamentals remain robust; low inventory, weak fall application and strong demand could be setting stage for higher prices. The firm also sees share repurchases and Chinese capacity closures as catalysts that could emerge as 2016 unfolds
CF investors receive a 3.42% dividend. Merrill Lynch has a $45 price target. The consensus target is $39.78. Shares closed Thursday at $35.05.
Pfizer
This top pharmaceutical stock recently was added to the Merrill Lynch US 1 list. Pfizer Inc. (NYSE: PFE) has a very strong pipeline, and b the world’s largest being drug manufacturer by sales value supports the Wall Street notion that it can generate higher long-term revenues through the accelerated growth of its new drugs over the next five years.
Pfizer announced recently the details in what would be one of this year’s biggest deals, a $160 billion merger with Allergan. But the Treasury Department also said recently that it is working on new rules for corporate tax inversions, and are expected to release regulatory guidance in the next two to three months. Merrill Lynch sees 37% upside from current levels and 51% if the Allergan deal does indeed go through. With $3 to $5 arbitrage pressure on the stock, there is some downside protection, even if the deal does break.
Pfizer has announced that it is starting 20 clinical trials this year, and more soon after, on treatments to conquer cancer, as it also seeks to gain leadership in one of the hottest and most lucrative areas of medicine. Hedge funds seem to like the stock, as a total of 22 own it now.
Pfizer investors receive a 4.09% dividend. The $39 Merrill Lynch price target a tad higher than the consensus target of $38.81. Pfizer closed Thursday at $29.34.
Qualcomm
This top technology stock has totally underperformed this year but still resides on the Merrill Lynch US 1 list. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies. The company includes its licensing business, QTL, and the vast majority of its patent portfolio.
Its subsidiary, Qualcomm Technologies, operates, substantially all of Qualcomm’s engineering, research and development functions, and substantially all of its products and services businesses, including its semiconductor business, QCT. The company recently settled with the SEC over the hiring of relatives of Chinese officials, which removed an overhang on the stock.
The growth of 3G mobile technologies in emerging markets, like China and India, has had a positive impact on Qualcomm and could be a difference-maker going forward. Qualcomm is and has been for years a market leader in the development of 3G CDMA (Code Division Multiple Access) technologies. The company recently developed an LTE chipset that supports SCDMA (Synchronous Code Division Multiple Access) technology. China’s mobile network runs on this, and it could provide the company with a huge leg up in years to come. The company recently signed numerous big licensing deals in China, which gave the stock a solid boost.
The company also recently announced a joint venture with Japan’s TDK that will enable delivery of radio frequency front-end (RFFE) modules and radio frequency filters to fully integrate systems for mobile devices and other fast-growing business segments. According to Qualcomm, the RFFE space is projected to be an $18 billion market by 2020.
Recently posted fourth-quarter results were strong, but a licensing dispute with Japanese technology giant LG has surfaced, and the analysts feel the dispute could last through fiscal 2016. They do remain positive on the stock and reiterated their Buy rating.
Investors receive a 3.72% dividend. The Merrill Lynch price target is $75, well above the consensus price objective of $57.03. Shares closed Thursday at $51.38.
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The Federal Reserve will raise rates, but it will be slow and measured. Some say the raise comes in June, and some say not until the fall. Either way, solid, total return stocks like these make good sense for investors.
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