CHICAGO, Aug. 5, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: ABB Ltd (NYSE: ABB), Phillip Morris (NYSE: PM), McDonald (NYSE: MCD) Genuine Parts (NYSE: GPC) and Viacom Inc. (NYSE: VIA.B).
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Here are highlights from Thursday's Analyst Blog:
Screening for High & Rising Income
The threat of a S&P downgrade is wildly overblown. Sure it would cause some disruptions, but institutions would probably just change their policies and prospectuses to allow them to hold T-notes even if they are not AAA.
However, I digress. The point still remains that income is very hard to find, and dividend paying stocks are the best available replacement. I set the bar at a dividend yield of over 2.8%, comfortably more than the 10-year today. The dividend yields, incidentally, are from last night (8/4/11), before today's big sell off, so they are probably higher than shown.
It is, however, a mistake to only look at the dividend. Buying a stock because it yields 4.0% and seeing the stock fall by 5.0% right after you buy it is not going to make you either happy or wealthy. You want to find both a good steady income, and some potential for near-term appreciation. Therefore, I looked for stocks that are currently rated either #1 (Strong Buy) or #2 (Buy) based on the Zacks Rank.
Dividend investing is a long-term strategy, and the Zacks Rank is mostly for shorter-term traders, but even long-term investors should not ignore it entirely. It is still a good timing tool for them.
If you are buying a stock for income, the last thing you want to see is a cut in the dividend. The best defense against that is a low payout ratio. Managements generally will try to avoid dividend cuts, but paying out more than you earn each year is not sustainable.
A company needs to retain at least some of its earnings to grow -- not just earnings, but the dividend as well. I therefore required that the company pay out no more than 60% of its earnings so there is a very strong cushion against dividend cuts.
One of the nice things about dividends is that they tend to grow, particularly if the company has a history of raising dividends. It is that dividend growth that can protect you from inflation. That is something that a T-note simply will not do for you.
In the screen I required that dividends increase by an average rate of 5% per year over the last five years. In other words, the dividends have increased by more than twice the rate of inflation over that period.
More significantly, the first cut is the hardest. The five percent growth requirement has the added advantage of eliminating any firm that has cut its dividend in recent years. With a dividend plus dividend growth strategy, it is imperative to avoid dividend cuts. I would not expect some of the historic growth rates to be continued.
It is highly unlikely that ABB Ltd (NYSE: ABB) is going to generate the sort of earnings growth needed to grow its dividend at over 59.7% per year over the next five years. Most, however, have dividend growth rates in the mid-teens or lower, and those sorts of growth rates are probably sustainable, at least for a few more years.
Look Outside the U.S.
Don't be afraid to look outside the U.S. for income stocks. The dollar has been declining, and I think it will probably continue to do so. That would mean that a dividend paid in euros or yen would be translated into even more dollars. I think that the decline of the dollar is a good thing, in that it should help promote growth and reign in our massive and unsustainable trade deficit.
Also, while dividend paying firms are generally larger market cap firms, that is not always the case, as this screen shows. Yes, there are huge firms on the list like Phillip Morris (NYSE: PM) and McDonald's (NYSE: MCD), but there are also five sub-$500 million micro caps as well.
Historically dividend paying companies have far outperformed non-dividend paying stocks, and dividends account for about 40% of the total return from owning S&P 500 stocks over the long term. The combination of high dividends plus short-term estimate momentum just could lead to long-term success in the market. This is not a flashy strategy, but a solidly profitable one. It focuses on both sides of total return, income plus capital appreciation.
Yes it has been a scary couple of weeks in the market, but the time to sell is when all others are greedily buying, and the time to buy is when others are despondently selling. Earnings have been doing very well lately, and at the end of the day, that is still the most important thing for stocks.
Stocks with Zacks Ranks of #1 or #2 are ones that have better recent earnings pictures than the vast majority of stocks out there. I am well aware of the macro-economic problems on both sides of the Atlantic, and recent developments on both sides have not been promising. Still, good solid profitable companies will endure and prosper.
Some of the firms on the list have tended to do better in bad times than in good. For example, Genuine Parts (NYSE: GPC). If the economy stays bad, people are going to try and fix up the old clunker rather than getting a new car. That means more auto repairs and hence replacement parts. In bad times, going out to eat at Red Lobster might seem extravagant, but people will still buy a McDouble or McChicken off the $1 menu.
Earnings Preview: Viacom
Viacom Inc. (NYSE: VIA.B) is slated to release its third quarter 2011 results on Friday, August 5, 2011, before the opening bell. The current Zacks Consensus Estimate for the third quarter is pegged at 84 cents per share, representing an annualized growth of 23.82%.
With respect to earnings surprises over the trailing four quarters, Viacom has outperformed the Zacks Consensus Estimate in all the four quarters. The average earnings surprise was a positive 8.43%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Second Quarter Recap
On April 28, 2011, Viacom reported its second quarter 2011 financial results. Quarterly net income from continuing operation was $376 million or 63 cents per share compared with $255 million or 42 cents per share in the prior-year quarter.
However, adjusted (excluding debt extinguishment cost) EPS of 72 cents was significantly higher than the Zacks Consensus Estimate of 61 cents.
Total revenue in the quarter was $3,267 million, up 20% year over year and was well above the Zacks Consensus Estimate of $2,984 million. Significant revenue growth was primarily attributable to improved performance by the Media Networks and Filmed Entertainment segments.
Agreement of Estimate Revisions
In the last 30 days, out of the 10 analysts covering the stock, 1 analyst increased the EPS estimate for the third quarter of 2011 while 1 reduced the same. Similarly, for the fourth quarter of fiscal 2011, 2 out of the 10 analysts covering the stock increased their EPS estimates while none moved in the opposite direction.
For fiscal 2011, in the last 30 days, out of the 10 analysts covering the stock, 1 analyst increased the EPS estimate but 1 analyst revised the estimate downward. Likewise, for fiscal 2012, out of the 9 analysts covering the stock, 1 analyst increased the EPS estimate while 1 reduced the same.
Magnitude of Estimate Revisions
During the last 30 days, the Zacks Consensus Estimate was a penny above the current estimate of 84 cents per share for the third quarter of 2011. Likewise, for the fourth quarter of 2011, the Zacks Consensus Estimate was a penny short of the current estimate of $1.02 per share. Similarly, for fiscal 2011, the Zacks Consensus Estimate was a penny below the current estimate of $3.59. For fiscal 2012, the Zacks Consensus Estimate was 3 cents short of the current estimate of $4.07.
In the previous quarter, Viacom reported EPS of 72 cents, which was well above the Zacks Consensus Estimate of 60 cents. The current Zacks Consensus Estimates for the ongoing quarter contains a 1.19% upside potential while for the fourth quarter, it reflects a 2.94% upside potential (essentially a proxy for future earnings surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate upside potentials are 1.11% and 1.72%, respectively.
Viacom is well positioned for long-term growth as it continues to benefit from its predominately cable networks-based business model, strong affiliate fee revenue growth, global brands, multi-platform content, and is one of the fastest growing traditional ad media. Moreover, hit movie releases during this summer will drive box-office success going forward.
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