Investing

Merrill Lynch's 4 Contrarian Blue Chips to Buy That Yield 4% or More

Lee Jackson

Published: April 27, 2018 8:25 am

Last Updated: January 12, 2020 12:22 am

The earning season giveth and it also taketh away. For some of the stocks that recently reported, it has been a very rough April. However, with the stock market still very rich, and multiples right at all-time highs, maybe, just maybe, it makes sense to look at the top companies that have suffered some. When you combine a poor or so-so quarter, or even a quarter where numbers are good but the market shuns the sector, with a big dividend payout, you might have the makings of a great total return play.

We screened the Merrill Lynch research database for companies that have reported and posted earnings that either were poorly received or just slightly missed the mark. We found four stocks that are rated Buy, pay at least a 4% dividend and would be good long-term holds for more aggressive growth and income portfolios.

Altria

This maker of tobacco products and wine has been hit hard and offers value investors a great entry point. Altria Group Inc. (NYSE: MO) is a top mega-cap consumer discretionary stock to buy on Wall Street, and the company’s Marlboro brand remains one of the most recognizable in the world. Many Wall Street analysts concede that the stock has solid downside support owing to the generous dividend yield, which remains at a huge premium in relation to the 10-year Treasury rate.

Cash flow generation and the return of cash to Altria shareholders remain key facets of the company’s total shareholder return, and the analysts expect support of the strong dividend, which they believe will continue to climb along with strong share repurchase activity.  The board also raised the dividend by 8.2% in 2017.

To diversify away from cigarettes and cigars, Altria has expanded its portfolio into new categories like wine, e-cigarettes and a 27% stake in brewer SABMiller.

Altria released earnings for its first quarter that rose from the same period last year. The company’s earnings came in at $1.89 billion, or $1.00 per share. This compares with $1.40 billion, or $0.72 per share, in last year’s first quarter. Excluding items, Altria reported adjusted earnings of $1.80 billion or $0.95 per share for the period. Despite the strong report, the stock was hit and now trades near a 52-week low.

Altria investors are paid a hefty 5.11% dividend. The Merrill Lynch price target for the shares is $70, and the Wall Street consensus estimate was last seen at $74.77 The stock closed Thursday’s trading at $54.77 a share.

IBM

This blue chip leader may still be offering investors the best entry point in years. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.

IBM’s five major segments are: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for their positive outlook going forward.

For the first quarter, IBM actually beat analyst expectations on both the top line and the bottom line, but Wall Street didn’t take very well to its four-cent miss on expectations for full-year 2018 earnings per share, which to many seemed like a huge overreaction.

IBM shareholders are paid a large 4.28% dividend. Merrill Lynch has $200 price target on the stock, while the posted consensus target is $170.75. The shares closed most recently at $146.72 apiece.

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Qualcomm

This company also was recently added to the Merrill Lynch US 1 list. Qualcomm Inc. (NASDAQ: QCOM) designs, develops and supplies semiconductors and collects royalties on wireless handheld devices and infrastructure based on its dominant position in CDMA and other related technology patents.

In addition, Qualcomm provides systems software and components to wireless handset vendors and promotes applications and services that run on high-speed wireless networks. The company operates primarily through two segments: CDMA Technologies and Technology Licensing.

The company ended up finishing the fiscal second quarter with a positive earnings surprise, reporting earnings of $0.80 per share, compared to the $0.70 per share expected by analysts. The company generated $5.23 billion in revenue, compared to $5.19 billion expected by Wall Street.

The company has had a plethora of headline issues, not the least of which was a proposed buyout by Broadcom that the government put the kibosh on. That is in addition to ongoing issues with Apple that have kept a lid on the share price.

Shareholders of Qualcomm are paid a very hefty 4.91% dividend. The $75 Merrill Lynch price target is well above the consensus target of $69.98. The stock closed at $50.47 on Thursday.

Verizon

This top telecommunications company has been among the worst performing Dow Jones industrial average stocks for much of this year, with shares still down over 10%. Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world.

Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide. Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide.

The company reported better-than-expected first-quarter results last Tuesday, as the wireless carrier lost fewer monthly phone subscribers than feared and the company’s chief financial officer said it was continuing to explore a new video service. On an adjusted basis, the company earned $1.17 per share. Total operating revenue rose to $31.77 billion from $29.81 billion a year earlier.

Despite the stellar numbers, investors yawned and the stock continued to trade lower. An earnings miss by rival AT&T did not help other.

Verizon investors are paid an outstanding 4.74% dividend. Merrill Lynch has set its price target at $58, The posted consensus target is $55.88, and the stock closed trading on Thursday at $49.50 per share.

These four quality companies all came in with solid reports but their shares continue to be sold off by investors. While nobody can be sure if they will trade lower, they all offer good long-term value for patient investors willing to collect dividends until their fortunes reverse.