Watching Bloomberg last week, one idea stood out as the top advice echoed by many in the market. Interest rates have come down almost half a percent in just two months and the pain that many felt in their bond and high-yield portfolios has lessened quite a bit.
Don’t look a gift horse in the mouth
Recent economic data has been sluggish, at best, and the government shutdown put the odds of a Fed taper around March of next year. This has taken the pressure off of bond prices and most of my favorite dividend-payers. The fact that the Utilities Select Sector SPDR (XLU) has rebounded 6% from September only partially absolves the 12% plunge it took in the two months following the Fed’s May taper talk.
The painful truth in all this is that there isn’t much keeping this market alive but the roughly $4 trillion pumped into the system by the Federal Reserve over the last few years. While the central bank was able to find a reason to delay tapering in September, I doubt that they will get the same opportunity in March.
If March Fed meetings sound painfully familiar, it’s because the March 2000 meeting was the beginning of the end for the tech bubble. Within three weeks of the meeting on the 21st, the Nasdaq composite had dropped by a third and was on its way to wiping out 80% of its previous high.
Be fearful when others are greedy
While I am not expecting anything like the selloff we got in 2000 or 2008, there is a good chance that markets may come out weaker in 2014. If nothing else, rising rates are going to weigh on a lot of the best dividend sectors and payers.
But there are pockets of strength in individual stocks. I am looking at stocks with good dividend yields and beta that is low relative to the market. Beta is a mathematical measurement of how volatile a stock’s price is relative to the rest of the market. A beta of 1.0 means that a stock generally moves up and down with the market while a lower beta means the stock is relatively less volatile.
Since many of the strongest dividend sectors and companies, i.e. utilities and consumer staples, have been bid up in the search for yield, I am also looking at price premiums on the five-year average earnings multiple. Five-years into a bull market, most stocks are going to trade at P/E values higher than their average but some have gotten way too expensive.
General Mills (GIS) should hold up well in a market selloff or any increase in rates. The stock has a beta of just 0.22, one of the lowest in the market, and pays a 3.0% dividend yield. The price-earnings multiple of 18.9 is 21% above its longer-term average but still lower than the 20.8 average for industry peers. The company announced last week that it had agreed to buy a controlling stake in Yoplait SAS for $1.15 billion to expand its presence in emerging markets. General Mills had held the license for U.S. sales of the yogurt products but the larger ownership should help to add to future growth.
Cigarette-makers like Altria Group (MO) are always good bets for low-risk and high dividends. The shares have a beta of just 0.37 and pay a 5.1% dividend yield. The earnings multiple of 14.5 times trailing is just 4% above the five-year average of 13.9 times. Since the company spun-off its international business in 2008, growth has been fairly modest. The largest U.S. cigarette maker is planning an electronic cigarette next year to compete in the faster-growing segment. The company’s strong brand name should help it to carve out a significant amount of market share and drive cash flows.
Both of the stocks above still saw market losses in the worst of the selloff to March of 2009. Altria lost about 17% and General Mills dropped by just under 25%, but neither got hit as hard as the 35% tumble seen in the overall market and both kept returning cash to shareholders. They should hold up well during a light market correction but expect larger losses if the market tanks. Instead of panicking, know that the companies will be relatively safe and use the opportunity to pick up other names at discounted prices.
I’d like to get some more exposure to the consumer staples like GIS, KRFT…you know they’re going to continue selling more product and for slightly higher prices year after year. MO wouldn’t be that bad right now but the potential legislation overhang always keeps me from investing there. Of course they’ve shown over the last 3+ decades that that isn’t an issue for owners.