Investing

Merrill Lynch's Red-Hot Top Q2 Stock Picks Also Pay Dividends

Lee Jackson

Published: May 3, 2017 8:30 am

Last Updated: January 12, 2020 12:23 pm

The top firms we cover on Wall Street all have their lists of high conviction stocks that are sometimes long-term 12-18 month plays, and those portfolios are adjusted as time goes by, often adding and removing companies on a valuation basis. When a firm like Merrill Lynch puts out a list of top stocks to buy for the quarter, in this case, the second quarter, we like to review the picks after the first month and see how they are acting.

The Merrill Lynch picks for the second quarter are doing outstanding and still look like solid choices to add to portfolios as we get closer to the traditionally slower summer months. We found four that still make sense in what is a pricey market, and they all also pay good dividends.

CSX

This one of the top railroad stocks and is a top idea for investors looking to the transports. CSX Corp. (NYSE: CSX) provides rail freight transportation over a network of approximately 21,000 route miles and 36 terminals (and 57 intermodal terminals) across the eastern half of the United States. It controls 4,071 locomotives and 216,000 rail cars on its network (over half are not owned or leased by CSX at any given point), and it has nearly 30,000 employees.

Hunter Harrison, the new CEO of CSX, recently bought a 300,000-share block of the company’s stock at a reported share price of $50.20. The posted total for the buy was a sizable $15 million. The top man making a big purchase like that is about as bullish a statement for the company and shareholders that can be made.

Shareholders receive a 1.55% dividend. The Merrill Lynch price objective is $56, and the Wall Street consensus target price is $56.64. Shares closed Tuesday at $51.49.

Flowserve

This company should get a boost from an improving economy and the proposed infrastructure build. Flowserve, Corp. (NYSE: FLS) is a Texas-based supplier of pumps, valves, seals, automation and related services, primarily for the oil and gas, power and chemical industries.

The company reported solid earnings, and the analysts said this in a recent report:

Flowserve reported a quarter that was ahead of both our and the Street’s low expectations. Bookings growth (the first since the fourth quarter of 2014) was the highlight of the quarter. The first quarter earnings beat, reported bookings growth, and no guidance cut should lead to improved investor sentiment on the stock.

Investors receive a 1.52% dividend. Merrill Lynch has a $63 price target, and the consensus target is $56.54. Shares closed Tuesday at $49.97.

Texas Instruments

This old-school chip tech company has come back into favor big-time. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components to digital light-processing technology and calculators. Some 65% of Texas Instruments sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets.

The company increased its quarterly dividend earlier this year by 32% to $0.50 per share, or $2.00 annualized. The increase reflects its continued strength in free cash flow generation and its commitment to return excess cash to shareholders.

The company reported outstanding first-quarter earnings, and the analysts noted in a recent report:

First quarter beat, and second quarter guidance guide ahead of estimates with broad-based strength across end markets and geographies. Unlike Maxim who signaled some softness in autos, Texas Instruments signaled strength across auto/industrial segments and geographies. Solid balance sheet provides flexibility for mergers and acquisitions or ramping buybacks; we see 15%+ upside to EPS from any US corporate tax reform.

Investors receive a 2.52% dividend. The $95 Merrill Lynch price target compares with the consensus target of $85.33. Shares closed Tuesday at $79.26.

Wells Fargo

This large cap bank is another stock for investors to look at now for safety, dividends and solid upside potential. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding.

First-quarter earnings were somewhat disappointing as spread revenues and efficiency at 62.7% disappointed. The analysts stayed positive on the company while lowering estimates slightly as they feel that bank has many areas and ways to grow earnings. While the analyst alludes to the fact that patience with the bank has waned due to multiple issues over the past 18 months, a positive upcoming analysts day could relieve some of the investor angst.

Wells Fargo shareholders receive a 2.8% dividend. The Merrill Lynch price target is $64. The consensus target is $57.81, and shares closed Tuesday at $54.54.

These four top picks for the quarter are doing well and most likely still have some solid upside potential. With earnings out of the way, it’s probably a good time to buy a partial position and see how the often dangerous month of May plays out.