Investing

Merrill Lynch Makes Big Changes to High Quality and Dividend Yield Portfolio

Lee Jackson

Published: June 3, 2016 10:15 am

Last Updated: January 13, 2020 7:14 am

The best on Wall Street when it comes to portfolio management always have at least one certain positive trait that they share. They stay faithful to their portfolio metrics and guidelines. If a company trades out of portfolio parameters it is removed. Conversely, if a company being screened as an addition fits the characteristics required, it may be added. This is the kind of discipline investors are looking for.

In a recent research report, Merrill Lynch sticks to it parameters for the firm’s High Quality and Dividend Yield portfolio and makes two changes for June: adding Raytheon Corp. (NYSE: RTN) and dropping Target Corp. (NYSE: TGT). The portfolio seeks to find high-quality stocks with secure and above-market dividend yields.

We also screened the portfolio for the three highest yielding members.

Raytheon has a diversified mix of business and posted solid first-quarter numbers, and it is the newest addition to the portfolio. The company is an industry leader in defense, government electronics, space, information technology and technical services. It operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems.

Top retailer Target was removed from the portfolio as the company’s debt to equity is now higher than the S&P 500. It operates as a general merchandise retailer in the United States, offering household essentials, including pharmacy, beauty, personal care, baby care, cleaning and paper products; music, movies, books, computer software, sporting goods and toys; electronics, such as video game hardware and software; and apparel for women, men, boys, girls, toddlers, infants and newborns; as well as intimate apparel, jewelry, accessories and shoes.

Target’s stock has plunged since a controversial corporate decision over bathrooms was implemented, but it remains Buy rated at Merrill Lynch.

Raytheon investors are paid a 2.22% dividend. The Merrill Lynch price target for the stock is $150, and the Thomson/First Call consensus price target is set at $141.76. The shares closed most recently a $132.16 apiece.

Target shareholders receive a 3.28% dividend. Merrill Lynch has a $95 price target. The consensus estimate is$77.47, and the shares closed Thursday at $68.32.

The following are the three highest yielding members of the portfolio currently also rated Buy at Merrill Lynch.
Qualcomm

This top technology stock has totally underperformed this year and also resides on the Merrill Lynch US 1 list. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies. It includes Qualcomm’s licensing business, QTL, and the vast majority of its patent portfolio.

Qualcomm Technologies, a subsidiary of Qualcomm, operates, along with its subsidiaries, substantially all of Qualcomm’s engineering, research and development functions, and substantially all of its products and services businesses, including its semiconductor business.

Qualcomm posted solid fiscal second-quarter numbers that beat estimates, but the forward guidance was tepid. While the Merrill Lynch team sees some potential share loss at Apple, they think a resolution with LG could offset the loss.

Qualcomm shareholders are paid a 3.88% dividend. The $65 Merrill Lynch price target compares with the consensus target of $56.92, as well as Thursday’s close at $54.88.

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 dramatically. 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.

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 are paid a very solid 3.3% dividend. Merrill Lynch has as $89 price target, and the consensus is posted a touch lower at $84.79. The stock closed most recently at $81.95.

Tiffany

This high-end retailer has one of the highest yielding Buy-rated stocks in the Merrill Lynch portfolio. Tiffany & Co. (NYSE: TIF) has seen consistent floor traffic and sales from its base high-end clientele. The company’s jewelry products include fine and solitaire jewelry; diamond engagement rings and wedding bands to brides and grooms; and non-gemstone, sterling silver, gold, metal and platinum jewelry.

The company also sells timepieces, leather goods, sterling silver goods, china, crystal, stationery, fragrances and accessories. Above all, the Tiffany name is one of the most highly regarded luxury retail names in the world.

Shareholders receive a 2.86% dividend. The Merrill Lynch price objective is $75. The consensus target is $75.79. The shares closed Thursday at $63.23.

With outstanding metrics and good dividends, these quality companies make good sense for conservative growth portfolios. With solid total return potential, and less potential for volatility, they all are outstanding long-term portfolio additions.