Investing

Merrill Lynch Makes a Huge Change to Prestigious US 1 Portfolio

Lee Jackson

Published: September 28, 2016 10:05 am

Last Updated: January 13, 2020 3:03 am

With earnings for the third quarter on deck, and the fourth quarter of 2016 almost underway, many of the top companies we follow on Wall Street are making some changes to the lists of their high conviction stock picks for clients. With the market bursting through to new all-time highs, it makes sense to examine the lists and make some changes as the rest of the year could have additional volatility as the political cycle could prove to be very volatile component.

In a recent research note, the analysts at Merrill Lynch make a big move by adding NextEra Energy Inc. (NYSE: NEE), a top utility company, to the firm’s well-respected US 1 list of stocks to Buy. We cover this new addition, as well as the company it replaced. We also screened the list for the highest dividend-paying stocks in the group.

Merrill Lynch cites the very strong balance sheet and NextEra Energy. It is a leading clean energy company with consolidated revenues of over $17.0 billion and approximately 44,900 megawatts of generating capacity, which includes megawatts associated with noncontrolling interests related to NextEra Energy Partners.

Headquartered in Juno Beach, Florida, NextEra Energy’s principal subsidiaries are Florida Power & Light Company, which serves approximately 4.8 million customer accounts in Florida and is one of the largest rate-regulated electric utilities in the United States, and NextEra Energy Resources, which, together with its affiliated entities, is the world’s largest generator of renewable energy from the wind and sun.

Top analysts feel the company may very well be one of the top total return plays out of the large cap regulated space in the sector. One of the key drivers of NextEra’s growth has been the renewable energy development program, which continues to expand as the company adds new projects to its backlog. Those projects are expected to help grow 6% to 8% compound annual growth in adjusted earnings per share through 2018. Most on Wall Street feel that the steady earnings growth should also provide consistent dividend growth over that same time frame.

Shareholders receive a 2.74% dividend. The Merrill Lynch price target is $149, and the Wall Street consensus target is $133.94. The stock closed Tuesday at $126.79.

Jack in the Box Inc. (NASDAQ: JACK) was removed from the US 1 list, but it remains rated a Buy at Merrill Lynch. It looks as though the removal is more of a valuation call. The stock sold off last year has been on a tear since March, and the entry point here still looks very solid.

The company operates and franchises Jack in the Box restaurants, one of the nation’s largest hamburger chains, with more than 2,200 restaurants in 21 states and Guam. Additionally, through a wholly owned subsidiary, the company operates and franchises Qdoba Mexican Eats, a leader in fast-casual dining, with more than 600 restaurants in 47 states, the District of Columbia and Canada.

Shareholders receive a 1.22% dividend. The Merrill Lynch price target is $108. The consensus target is $108.23. Shares closed most recently at $98.24.

The following are the three highest dividend yielding stock in the Merrill Lynch US 1 portfolio.

AT&T

This stock has had an incredible run this year but is off over 10% in less than a month. 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 14.3 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.

AT&T has several major catalysts that likely will drive strong network traffic demand: DirecTV Now and Mobile, “Data-Free TV” for DirecTV/U-verse subscribers and increasing penetration of unlimited data plans. Many on Wall Street believe that the company is well-positioned to address ongoing traffic requirements, with additional LTE capacity available and the ability to leverage small cell deployments.

Other top Wall Street analysts have cited the company’s positive commentary on free cash flow, and improving video/broadband trends later this year with single truck-roll and new converged offerings are expected to be coming next month.

AT&T investors receive a 4.63% dividend. Merrill Lynch has a $46 price target, and the consensus price objective is at $42.83. Shares closed Tuesday at $41.46.

Eli Lilly

This top company remains a solid large cap pharmaceutical to Buy. 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.

Eli Lilly reported mixed second-quarter results that were slightly under consensus and reiterated its full-year guidance. While the overall numbers were unremarkable in some analysts’ views, Merrill Lynch is still very focused on the company’s outstanding late-stage product pipeline, which it views as very undervalued.

Shareholders receive a 2.52% dividend. The $105 Merrill Lynch price target is well above the consensus target of $95.67 and the most recent close at $80.88.

Qualcomm

This is a top technology stock that has done very well this year. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies. The company includes the 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, as well as substantially all of its products and services businesses, including its semiconductor business, QCT.

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.

Qualcomm reported third-quarter revenue and earnings that beat Wall Street estimates. Fourth-quarter guidance was also better than expected. In China, new semiconductor products are gaining share and management is making better progress with royalty collections.

Qualcomm investors receive a 3.35% dividend. Merrill Lynch has a $68 price objective. The consensus target is at $62.52. Shares closed Tuesday at $63.31.

While the US 1 list has slightly underperformed the S&P 500 year to date, it has outperformed since inception by a large margin. The stocks are among the highest conviction picks at Merrill Lynch and make good additions to any growth portfolio.