[cnxvideo id=”625498″ placement=”ros”]The rally that took place this week has been great, and the reasons from strategists are many, but one thing is for sure: things could get a little more dicey this summer. The first consideration of course is whether the Federal Reserve will raise rates in June or July — one of the two looks like a lock. Secondly, will the United Kingdom exit the European Union? That looks like a jump ball. Lastly, politics. All summer long into the conventions, the rhetoric is going to get louder, and if we have continued civil disorder, that will stir the pot as well.
We know that it is a nonstarter for most investors to just “move to cash,” given commissions, tax gains/losses and other items. One good idea may be to switch from higher beta stocks to lower ones, especially dividend leaders. They will respond better to higher volatility and fare better in a sell-off. We screened the Merrill Lynch research universe for Buy-rated dividend stocks with the firm’s best volatility rating. Four look like good bets now.
AT&T
This company had an outstanding first quarter from a stock price standpoint and could be poised to go higher. 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 its 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.
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AT&T has been focusing on the IP VPN and Ethernet services. This outstanding business model, along with the decline of Verizon’s market share in the arena, has helped the company meaningfully grow its revenues from strategic business services. Apart from taking appropriate technical measures, the company has collaborated with big cloud service providers like Amazon Web Service and data center operators to provide Ethernet connections.
First-quarter revenue of $40.5 billion was 24% higher than in the year-earlier period, primarily due to the July 2015 acquisition of DirecTV for $49 billion in equity value. The company added 2.3 million wireless subscribers during the first quarter. About 328,000 of the additions were DirecTV net adds. The company’s Entertainment Group broadband grew with 186,000 IP broadband net adds.
AT&T investors receive a huge 4.94% dividend. The Merrill Lynch price target for the stock is $42. The Thomson/First Call consensus estimate is $39.57. Shares closed Thursday at $38.84.
Exxon Mobil
This company remains one of Merrill Lynch’s top 10 picks for 2016. Exxon Mobil Corp. (NYSE: XOM) is an energy sector play that the Merrill Lynch analysts are very positive on long-term, as the overall corporate strength of the massive integrated giant plays a significant part in the company’s usually solid earnings reporting pattern and in maintaining dividend coverage.
The company’s global downstream chemical segment plays a huge part for Exxon. It may be a part that many on Wall Street don’t fully appreciate as the segment contributes an estimated 16% of overall total revenue. Some very solid reasons for adding the stock to a long-term growth portfolio are that the company has consistently demonstrated disciplined investing, operational excellence and technological innovation.
Exxon is also a very strong company from a financial standpoint. It has an AA+ credit rating and an outstanding debt-to-equity ratio of 0.23. Exxon is free cash flow positive, with the company reporting free cash flow of $6.5 billion in 2015 and management cutting the capital expenditures budget for 2016. It is a sound investment to buy and hold forever.
Exxon investors receive a 3.33% dividend. Merrill Lynch recently raised its target price to $96 from $95. The consensus price objective is $85.02, and shares closed on Thursday at $89.80.
Eli Lilly
This top pharmaceutical should do just fine regardless of headline risk in the summer. Eli Lilly and Co. (NYSE: LLY) is a global health care company with numerous core products in a number of primary-care pharmaceutical markets. The company generates revenues from its pharmaceutical product and animal health segments.
The product portfolio includes Zyprexa (for schizophrenia and bipolar disorder), Gemzar (pancreatic cancer), Evista (osteoporosis), Cymbalta (depression), Cialis (erectile dysfunction), Strattera (attention deficit hyperactivity disorder), Erbitux (cancer) and Alimta (chemotherapy). Eli Lilly also has a strong presence in the diabetes market.
Reported first-quarter earnings and revenue came in just slightly under consensus. While the overall numbers were unremarkable in the analysts view, the Merrill Lynch team is still very focused on the company’s outstanding late-stage product pipeline, which they view as very undervalued. Eli Lilly did however raise the company’s 2016 earnings per share and revenue guidance to above the consensus estimates.
Shareholders are paid a solid 2.75% dividend. Merrill Lynch has a $108 price target, and the consensus target is $95.71. Shares closed Thursday at $75.52.
Procter & Gamble
This stock is trading at the same level it was this time last year, in part because the company has a very large 65% of sales directed to foreign customers. That should improve as the dollar’s run looks to be slowing. Procter & Gamble Co. (NYSE: PG) is a solid consumer staples stock especially for conservative investors to consider. The company sells lots of run-of-the-mill household items that are essential for everyday life, and it is not content to rest on its laurels.
The company is innovative in its product development process and uses that to help ensure future growth and cash flow. This should provide investors years of steady growth and dividends. While currency headwinds have weighed on recent earnings and projections, the dollar may be topping out this fall, and that would bode well for the rest of 2016 earnings.
The company posted an earnings beat for the fiscal third quarter. The analysts noted that while organic sales were light to expectations, cost savings more than offset the weakness to drive the earnings beat. Operating margins were up almost 3% year over year. The analysts also feel there is plenty of opportunity to improve growth, although it is taking longer than expected.
Shareholders receive a 3.3% dividend. The $89 Merrill Lynch price target is higher than the consensus target of $84.79 and Thursday’s $81.22 closing share price.
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Nothing fancy here. Safe, low volatility stocks to fight through what could be boisterous and raucous summer. Volumes tend to dry up in the summer as traders and investors go on vacation, making it all that much easier for the short-sellers to exploit headline and market risk. These make sense for conservative investors looking to lower risk levels.
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