Investing

UBS Makes Huge Q4 Addition to Popular Dividend Ruler Portfolio

Lee Jackson

Published: October 13, 2016 9:45 am

Last Updated: January 13, 2020 2:27 am

With the fear of higher rates weighing on many of the bond proxy sectors like telecom, real estate investment trusts and utilities, it is important to remember that dividends are a critical part of total return, and that can be the key for investment success. Again total return is the combined increase in a stock’s value plus dividends. For instance, if you buy a stock at $20 that pays a 3% dividend, and it goes up to $22 in a year, your total return is 13% — 10% for the increase in stock price and 3% for the dividends paid.

The UBS Dividend Ruler portfolio continues to outperform the overall market, and we continue to think that the outperformance will stay in place for the rest of the year and beyond. The analysts focus on stocks with solid dividends that have consistently grown over time, and their performance this year is outstanding. Year to date the portfolio is up 9.9%, compared with the S&P 500’s 7.2%.

The portfolio team added top retail stock CVS Health Corp. (NYSE: CVS) to the portfolio. The stock has been hit hard recently and is down almost 20% since May. CVS provides integrated pharmacy health care services. Its Pharmacy Services segment offers pharmacy benefit management solutions, such as plan design and administration, formulary management.

The Retail/LTC segment sells prescription and over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, seasonal merchandise and greeting cards, as well as provides photo finishing services.

The company operates 9,655 retail stores in 49 states, the District of Columbia, Puerto Rico and Brazil, primarily under the CVS Pharmacy, CVS, Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre names; online retail pharmacy websites; and 32 on-site pharmacy stores, long-term care pharmacy operations and retail health care clinics.

The analysts noted this in the report:

CVS shares have underperformed this year (–10% vs. +7% for the S&P 500) largely due to fears about the growth outlook for its pharmacy benefit manager or PBM, which accounts for about one-third of segment profits. Investors fear greater competition, especially from managed care organizations developing their own PBMs. However, as one of the largest PBMs, with a unique hybrid business model, we believe CVS has the scale and product differentiation to continue to defend and increase its market share in the PBM marketplace.

Some think that Warren Buffett may have his eye on the company. CVS investors are paid a 1.95% dividend. The UBS price target is set at $107, and the Wall Street consensus price target is $108.74. The shares closed Wednesday at $87.47.

In addition, here are the four highest yielding stocks in the portfolio that are rated Buy at UBS

Coca-Cola

This company remains a top Warren Buffet holding and offers not only safety, but an incredible strong worldwide brand. Coca-Cola Co. (NYSE: KO) is the world’s largest beverage company, refreshing consumers with more than 500 sparkling and still brands.

Led by Coca-Cola, its portfolio features 20 billion-dollar brands, including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade and Minute Maid. Globally, it is the top provider of sparkling beverages, ready-to-drink coffees and juices and juice drinks. Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy its beverages at a rate of more than 1.9 billion servings a day.

Despite reporting second-quarter earnings that came in above some estimates, slower growth and flat volumes brought out the sellers and they tagged Coke stock big time. It is important to remember though that the company owns 31.5% of Monster Beverage, which continues to deliver big numbers.

Coca-Cola investors receive a 3.35% dividend. UBS has a $50 price target, while the consensus figure is $47.17. The stock closed Wednesday at $41.78.

Exxon Mobil

This company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa, Asia, Australia and Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas, and petroleum products.

Top Wall Street analysts are very positive on the long term as the overall corporate strength of this massive integrated giant plays a significant part in the company’s usually solid earnings reporting pattern and in maintaining dividend coverage.

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. It 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. This is a sound investment to buy and hold forever.

Exxon investors receive a 3.45% dividend. The consensus price objective is $89.63. Shares closed on Wednesday at $87.13.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers and power management integrated circuits, and tablet, phone and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions and interoperability tests, as well as home gateway and set-top box components.

The company pre-announced better than expected revenues for the quarter, and the UBS report said:

We keep a Buy rating as better PC sales remain a key driver for the stock as we estimate PCs are still 53% of Intel’s total sales. Intel reported its total third quarter 2016 sales would be higher than its original guidance by $700M, or 5%. We estimate Intel’s third quarter 2016 PC sales will be up 12% quarter-over-quarter.

Shareholders are paid a 2.8% dividend. The $43 UBS price target compares with a consensus estimate of $40.47. The shares closed at $37.13.

McDonald’s

The fast-food giant has been hit hard since earnings were released, but it remains a solid pick for investors seeking dividends and a degree of safety. McDonald’s Corp. (NYSE: MCD) is the world’s leading global foodservice retailer, with over 36,000 locations serving approximately 69 million customers in over 100 countries each day. More than 80% of McDonald’s restaurants worldwide are owned and operated by independent local business persons.

The company reported solid second-quarter results, but the U.S. store comparable sales growth of just less than 2% disappointed investors. Merrill Lynch noted that charges and refranchising gains make the earnings numbers a bit dicey, so the firm lowered its GAAP numbers to $5.40 from $5.60.

McDonald’s shareholders receive a 3.28% dividend. The UBS price target is $138. The consensus target is $128.33, and shares closed Wednesday at $114.71.

A nice value added in the portfolio, and four additional stocks that make good sense for long term growth and income portfolios. With volatility spiking, moving to these lower risk companies may be a solid plan for the rest of the fall.