Investing

Why It Is Time to Sell the Rally and Buy Safe Dividend Stocks

Lee Jackson

Published: February 5, 2019 7:20 am

Last Updated: January 31, 2020 1:02 am

After the fourth quarter from hell, when looking at brokerage account statements was a nauseating experience, we had the January to remember, with a huge rally that has gone on now for six weeks. The problem is this is still a tired and old bull market, which in about a month will celebrate its 10th anniversary, making it one of the longest on record. Given the reprieve from the near bear market swoon in the fall, now is the time to move to the safe stocks while sitting on more the risk sideline.

We constantly scan the economic and financial landscape here at 24/7 Wall St., and one thing’s for sure: things are starting to look a lot like they did in 2000 and 2007. While we don’t have a massive dot-com or housing bubble to contend with, we do have a late cycle economy and stocks trading at forward valuations that indicate they are fully priced.

There are reasons to stay positive. The Federal Reserve is done raising rates for now, or so it seems. Earnings are decent and trade issues may be improving, though there are technical, and fundamental issues that are screaming stop. Not the least of which may be the long upward trend line that has supported this epic rally has been broken, and that spells trouble.

Given these issues, we think that safe dividend stocks are a good place to move to now. We screened the Merrill Lynch research universe looking for stocks that are rated Buy, pay reliable dividends and posted solid fourth-quarter results. These four fit the bill perfectly.

Altria

This maker of tobacco products offers value investors a great entry point now. Altria Group Inc. (NYSE: MO) is the parent company of Philip Morris USA (cigarettes), UST (smokeless), John Middleton (cigars), Ste. Michelle Wine Estates and Philip Morris Capital Corp. PMUSA enjoys a 51% share of the U.S. cigarette market, led by its top cigarette brand Marlboro.

Altria also owns over 10% of Anheuser-Busch InBev, the world’s largest brewer. In March 2008 it spun off its international cigarette business to shareholders. In December 2018, it acquired 35% of JUUL Labs. Fourth-quarter numbers were solid, and the Merrill Lynch analysts said this:

Altria reported fourth quarter 2018 earnings per share of $0.95, in line versus Merrill Lynch consensus estimates. Smoke-able net sales beat our forecast by $9 million due to stronger price/mix. Altria’s smoke-able shipments were in line. Management provided color on US industry trends, a mid-term category outlook, and insights on its recent investments. We believe that management has made proactive steps to secure long term growth with its evolving platform.

Altria investors are paid a huge 6.48% dividend. The Merrill Lynch price target for the stock is $56, and the Wall Street consensus estimate was last seen at $57.22 The stock closed Monday’s trading at $49.11 per share.

Kraft Heinz

Kraft Heinz Co. (NYSE: KHC) was formed almost three years ago via the merger of H.J. Heinz and Kraft Foods. The company is a leading global food company, with $29 billion of annual revenues generated by well-known brands such as Kraft, Heinz, Oscar Mayer and Maxwell House.

The company is the third largest food and beverage manufacturer in North America, and it derives 76% of revenues from that market and 24% from international markets. The company’s many brands also include ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Ore-Ida, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta.

Shareholders of Kraft Heinz are paid a huge 5.20% dividend. Merrill Lynch has price target of $52 for the shares. But note that the posted consensus target price is higher at $56.33. The shares closed at $47.73 on Monday.

McDonald’s

The fast-food giant does a ton of business overseas but still remains a solid pick for investors seeking dividends and a degree of safety. McDonald’s Corp. (NYSE: MCD) is the world’s leading global food-service retailer with over 37,000 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 businesspersons.

McDonald’s shares have been positive recently as menu price increases and global growth fueled a strong fourth-quarter earnings report. The Merrill Lynch team said this about the results:

McDonalds reported fourth quarter 2018 EPS of $1.97 ($1.82 GAAP), above our $1.90 estimate. U.S. comparisons were a bit light at up 2.3%. Capex guidance for fiscal year 2019 is $2.3 billion with just under $1 billion of that going toward 2,000 U.S. remodels.

McDonald’s shareholders are paid a nice 2.60% dividend. The $200 Merrill Lynch price target compares with a $195.77 consensus price objective, as well as the most recent closing price of $177.55 a share.

Pfizer

This top pharmaceutical stock made a gigantic splash last year with a $5.5 billion purchase of Anacor Pharmaceuticals. Pfizer Inc. (NYSE: PFE) is a global biopharmaceutical company with a diversified portfolio of products and pipeline candidates, and it is one of the largest pharmaceutical companies in the world as measured by market capitalization and revenue. It also is a component of the Dow Jones industrial average.

The company’s commercial operations are bifurcated into two business segments: Innovative Health, which focuses on the development and commercialization of medicines and vaccines, as well as consumer health care products, in various therapeutic areas, and Essential Health, which offers branded generic products, biosimilars, anti-infectives and other products without marketing patent protection.

Pfizer released its quarterly earnings data on Tuesday, January 29. The biopharmaceutical company’s reported $0.64 earnings per share for the quarter topped Wall Street’s consensus estimate by a penny.

Investors in Pfizer are paid a very solid 3.43% dividend. Merrill Lynch has set its price objective at $45. The posted consensus price objective was last seen at $43.79. The shares closed most recently at $42.44 apiece.

These four solid companies have released good earnings and pay consistent and healthy dividends, and their shares are rated Buy at Merrill Lynch. All make more sense going forward for investors getting a little nervous about what the rest of 2019 may hold.