Cabot Dividend Investor Issue: February 14, 2024

Profit From a Real and Lasting Boom

The market is having a good year so far. As of Monday’s close, the S&P 500 was up 5.28% only five weeks into the year.

The economy has been stronger than expected. The inflation rate is way down. The Fed is probably done hiking rates. And earnings have been strong. It looks like we got through this Fed rate hiking cycle without much economic pain. It’s a “soft landing” and a new bull market. At least, that’s the way things look right now.

Will the strong economy last? Is inflation really licked? Will interest rates be stuck near current levels for the rest of the year? Will the Fed hang tough against inflation or cave to election-year political pressure?

A year from now we could be in a raging bull market or bounding toward a recession. Interest rates could be high or much lower. And we have to see what will happen with these wars and who will be elected president in November. Nobody knows the answers to these questions.

But a year from now there is one at least one thing we can bank on. Everybody alive will be a year older. That’s a guarantee. It’s an important fact to bear in mind. Interest rates and markets go up and down. But time only moves in one direction. And that fact is continuing to change the world in a massive way.

The population is already older than ever before and will continue to get older at warp speed. One-third of the U.S. population is over 50 years old. On average, 10,000 Baby Boomers are turning 65 every single day. The fastest-growing segment of the population is 65 and older, growing five times faster than any other segment of the population. And the trend is even more advanced in many other countries.

The human race is changing, and fast. It is estimated that in just a few years people 65 and older will represent more than 20% of the U.S. population. In 1930, the over-65 cohort was 5.4% of the population. Between 2011 and 2029, about 76 million Boomers born in the U.S. between 1946 and 1964 will turn 65. That’s about 3.6 million former partiers per year. There will be tens of millions more older people running around in the years ahead.

The inescapable fact about older people is that they spend much more than any other segment of the population on healthcare. That’s just how we’re built. Boomers control about 70% of this nation’s wealth and the aging population has enormous implications for businesses and markets.

In 2012, total healthcare expenditures in the United States were $2.8 trillion. Centers for Medicare and Medicaid Services estimates that total U.S. national healthcare expenditures were $4.3 trillion in 2021. That number is projected to grow to $6.2 trillion by 2028 and $12 trillion by 2040. Deloitte estimates healthcare spending to grow from 16.8% of total GDP in 2019 to 26% by 2024.

That means certain healthcare companies and stocks are positioned ahead of a megatrend and a massive wave of spending. There’s a good reason why two of the best-performing three stocks in the portfolio are healthcare companies.

Instead of chasing the latest headlines around, let’s focus on what we actually know. A sector poised in front of a megatrend that offers both growth and defense is a good way to bet on an increasingly insane world. There are great stocks that should continue to thrive regardless of what the economy or the Fed does or who is elected president.

In this issue, I highlight two “BUY”-rated portfolio healthcare stocks. If you don’t own them already, they are well worth considering. The stocks may not end up being the best performers over the next year. But they are the surest bet over time.

What to Do Now

The economy is strong, and it looks like a “soft landing” is highly likely. It has been a good year so far for the technology stocks and cyclical stocks including Marathon Petroleum Corporation (MPC) and Visa (V). It has also been a great start to the year for healthcare stocks Eli Lilly (LLY) and AbbVie Inc. (ABBV).

But it’s not all good. The trouble with the strong economy is that interest rates are likely to stay high. Economic activity will keep longer-term rates near current levels and the Fed is much less likely to cut the Fed Funds rate anytime soon. The high interest rates are keeping the more defensive stocks, particularly the REITs and utilities, from participating in the rally.

These defensive stocks were on fire in the last two months of last year as interest rates peaked and speculation grew for Fed rate cuts early this year. But that trade has reversed so far this year, and the performance has been languishing again like it has over much of the last two years.

I’m resisting the temptation to dump the REITs and utilities and pile into more cyclical and technology stocks. Things change. It could be a much different environment several months from now. Meanwhile, these stocks are still cheap with limited downside if the economy remains strong, and have defensive attributes in case the economy rolls over. It’s also a good idea to remain diversified in an uncertain environment like this. These stocks should deliver good results over time.

As I mentioned above, I also like the healthcare stocks in the portfolio. However, I only highlighted two of the portfolio healthcare positions. UnitedHealth Group (UNH) and Eli Lilly (LLY) are not highlighted. UNH is still in a funk and has not yet mustered enough positive momentum and is therefore less urgent. LLY has done so well I don’t want to chase it into the stratosphere.

LLY has delivered staggering returns. Since being added to the portfolio in August of 2020, LLY has returned over 400%. It’s having a good year so far and is up over 24% YTD. It is currently rated a “HOLD” because it just keeps going higher. However, it does occasionally sell off, at least it used to. If that happens it will be upgraded like it was last February after a decline in price.

Recent Activity

January 17
AbbVie Inc. (ABBV) – Rating change “BUY” to “HOLD”

February 7
Visa Inc. (V) – Rating change “BUY” to “HOLD”

February 14
AbbVie Inc. (ABBV) – Rating change “HOLD” to “BUY”

Featured Actions

Investing in front of a megatrend is like putting a fix in. It’s much easier to win. A company positioned in the right place only has to do things half right to be a good stock with such a tailwind. A mediocre stock becomes a great one. A good stock pick can be one of the best investments of a lifetime.

All this growth is happening to an industry that is already defensive. People will continue to take their medications and get health issues treated regardless of the state of the economy. People will continue to spend their money on healthcare in any environment. There’s really no choice. The massive increase in the number of older people also makes healthcare a growth industry. That’s a big deal. Usually, you must choose between defensive stocks and growth stocks. And the relative performance of the two groups is highly dependent on the market environment.

Buy McKesson Corporation (MCK) Yield: 0.50%

(A consistent superstar performer with low risk)

The pandemic aftermath made us acutely aware of the importance of supply chains, as disruptions caused short supplies and skyrocketing prices. Efficient distribution is what makes this whole consumer economy work.

Producers and retailers are not distribution experts. This vital function is mostly done by companies that specialize. Maintaining supply chains is crucial to a functioning economy. In some cases, it is vital to maintaining people’s health and survival, such as with the delivery of vital medicines and pharmaceuticals.

McKesson Corporation (MCK) is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. The company operates a supply chain that delivers products from 1,300 drug manufacturers to over 180,000 points of dispensation throughout the country by using 29 strategically located distribution centers throughout the country. It has a solid base of over 40,000 customers and supplies about one-third of the U.S. drug distribution market. It’s a goliath with $284 billion in annual revenues.

McKesson buys drugs from manufacturers, delivers them, and resells them to retailers at a profit. Established in 1833, the company has been honing the process for nearly two centuries. Naturally, it has strategic partnerships with companies like CVS (CVS), Walmart (WMT), and Rite Aid (RAD).

The extensive distribution network and enormous scale provide tremendous bargaining leverage with suppliers and customers that can’t be easily duplicated by would-be competitors. That’s why the company is an oligopoly. McKesson along with Cencora Inc. (COR) and Cardinal Health (CAH) account for 90% of the drug wholesale distribution market in the United States. There are very high switching costs among the providers, so they rarely lose business to the other two companies.

The dividend is rather lame with a 0.50% yield. But it’s easily supported, and McKesson has grown the payout by an average of about 12% over the last three years. And companies that consistently grow the dividend tend to be the best-performing stocks on the market over time.

High performance has certainly been the case with this stock. Here’s how McKesson’s business has translated into stock total returns over the past several years compared to the overall market.

MCK has delivered more than three times the return of the S&P over the last five years and more than five times the return over the last three. But this isn’t a high-growth technology stock that’s been clobbering the market. This is a steady defensive stock with highly reliable earnings that has performed so well with far less risk and volatility than the overall market. MCK has a beta of just 0.59, which means the stock is only about 60% as volatile as the market.

There are reasons to believe the stock can continue to deliver market-beating performance going forward. The company plans to buy back $3.9 billion worth of shares in fiscal 2024. McKesson is also focusing on high-growth areas in oncology and biopharmaceutical services. Management knows the business and where the best opportunities are to deliver pharmaceuticals and services. The company also has plenty of free cash flow it can use to expand and make acquisitions.

But generating growth is easy when pharmaceutical demand continues to rise every year at a solid pace because of the aging population. It has a huge share of a business that grows all by itself every year in any economy.

Buy AbbVie Inc. (ABBV) Yield: 3.6%

(Cleared for takeoff beyond Humira expiration)

AbbVie is a U.S.-based biopharmaceutical company formed in 2013 as a spinoff from Abbott Laboratories (ABT). AbbVie is a research-based pharmaceutical company specializing in small-molecule drugs.

AbbVie became an industry giant because of its mega-blockbuster drug Humira. It’s an autoimmune drug that became the world’s best-selling drug by far with a peak of $21 billion in annual sales. But the tremendous success of that drug is now a problem because it lost its patent overseas of couple of years ago and it lost its U.S. patent in 2023. Because of shrinking Humira sales, AbbVie posted lower year-over-year revenues in 2023 and the shrinkage will likely continue for more quarters.

That’s the bad news. The good news is that AbbVie has one of the best pipelines of new drugs in the business and can replace those lost Humira revenues in the next couple of years. This Humira patent expiration has been known and feared for a long time. Despite this bullet coming, ABBV still managed to significantly outperform the market since being added to the portfolio in 2018, with a 138% total return in that time. That’s because of the market’s confidence in the pipeline.

The company is expected to resume modest earnings growth this year and robust growth next year. And the market tends to anticipate six to nine months into the future. AbbVie’s new immunology drugs, Skyrizi and Rinvoq, are expected to replace Humira’s peak revenues in a short period of time. Sales of the drugs grew 52% and 63% in the fourth quarter respectively. In fact, management estimates that combined revenue of the two drugs will be $16 billion this year and $27 billion by 2027, far exceeding Humira’s peak sales.

AbbVie also has a strong oncology drug portfolio led by recent stars Imbuvica and Venclexta. Imbruvica has about $5 billion in annual sales. The company also has over 50 drugs in mid- and late-stage trials. There’s also Botox, which it got from a 2019 acquisition, which remains dominant in the cosmetic industry.

It’s also important to note that ABBV pays a solid 3.7% dividend yield at the current price. The company also consistently grows the payout. In fact, going back to when it was part of Abbott Laboratories, the company has raised the dividend every single year for 52 consecutive years. You get paid to wait for a bright future.

Although performance has been strong, ABBV has been held back because of the Humira expiration. The revenue shrinkage will likely last several more quarters. However, once the company turns that corner, or investors anticipate the turning, the stock could make up for lost time. It’s also worth noting that Eli Lilly had similar patent expiration problems after it was added to the portfolio.

Portfolio Recap

Brookfield Infrastructure Partners (BIP – yield 5.1%) – The infrastructure partnership isn’t doing much of late. But that’s good. Most defensive dividend stocks are taking it on the chin again this year. But BIP has just gone sideways YTD. Eventually, the interest rate trade will go Brookfield’s way. In the meantime, the company is producing solid results. Profits are in line with what the company expected and the distribution was raised by 6% as planned. The last two years were crummy for defensive income stocks, but this year should be a lot better and BIP is one of the best. (This security generates a K-1 form at tax time). BUY

Brookfield Infrastructure Partners (BIP)
Next ex-div date: February 28, 2024

Enterprise Product Partners (EPD – yield 7.6%) – This midstream energy partnership has been bouncing around and is now near the low end of the recent range. Enterprise reported earnings that beat expectations in a tough year for energy. The company should deliver solid growth this year with anticipated steady hydrocarbon demand and $3.5 billion in recent growth acquisitions coming online. EPD has produced solid and steady returns in different market environments with a 17.45% return in 2023 after a strong bear market return of 15% for 2022. It should deliver another solid year in 2024. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD)
Next ex-div date: April 30, 2024, est.

ONEOK Inc. (OKE – yield 5.6%) – This more volatile midstream energy company stock will bounce around more than its peers. It was up more in the last two months of 2023, and it’s down more so far this year. It is still in an uptrend that began last June. OKE is still priced below the pre-pandemic high despite having higher earnings now. The stock should be on stronger footing now that interest rates have likely peaked, and it continues to generate solid profit growth in just about any economy. ONEOK raised the guidance on projected consolidated earnings going forward. Earnings are reported at the end of this month. BUY

ONEOK Inc. (OKE)
Next ex-div date: April 30, 2024, est.

Realty Income (O – yield 5.8%) – This is a legendary monthly income stock that has historically been a fantastic holding for income investors. It had a lousy two years as interest rates rose. But it soared at the end of last year after interest rates peaked. And O has had a crummy start to this year as the interest rate trade has reversed, for now. It is still a great stock at a cheap price. Receding inflation and likely peak interest rates remove the main downside catalyst that has been in place for the past two years. Market sector performance always rotates, but Realty’s reliable revenues keep coming. BUY

Realty Income (O)
Next ex-div date: February 29, 2024, est.

The Williams Companies, Inc. (WMB – yield 5.5%) – The midstream energy stock has bounced around and gone sideways for the last four months. But returns haven’t been negative, which is outperformance for a high-dividend stock in a challenging market environment for similar stocks. It’s a stable, high-yield stock and the steady natural gas business should deliver solid and dependable earnings in just about any economy. Business remains steady and predictable and not dependent on commodity prices. It pays a well-supported dividend (with 2.38 times cash flow coverage). Recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. Williams will report earnings this week. BUY

Williams Companies, Inc. (WMB)
Next ex-div date: March 7, 2024

Rating change “HOLD” to “BUY”

AbbVie (ABBV – yield 3.6%) – ABBV hit another brand-new all-time high last week. The stock had bounced around in a range since the beginning of 2022, but it has finally broken out to a new level. The company beat earnings expectations and raised guidance and indicated that moderate revenue growth would return this year and robust growth next year.

Management expects combined sales of immunology replacement drugs Skyrizi and Rinvoq will be $16 billion this year (Humira peak sales were $21 billion) and $27 billion in 2027. AbbVie appears closer to turning the corner than analysts expected. The market tends to anticipate six to nine months into the future and the stock may already be starting to price in that robust growth down the road. As ABBV has broken out rather than consolidated, it is upgraded to a BUY. BUY

AbbVie Inc. (ABBV)
Next ex-div date: April 12, 2024, est.

American Tower Corporation (AMT – yield 3.6%) – This newly added cell tower property REIT had a very big move at the end of last year. Rising interest rates had been holding it back, along with the rest of the REIT sector, but the peaking and falling of interest rates reignited AMT more than its peers. That’s because it was dirt cheap with growing earnings. But the trade has reversed so far this year and AMT has been sucking wind. But this high and rising interest rate situation is unlikely to last. It should at the least moderate. And AMT is trading light years below the all-time high with higher earnings now. BUY

American Tower Corporation (AMT)
Next ex-div date: March 27, 2024, est.

Broadcom Inc. (AVGO – yield 1.7%) – What inflation? What consolidation? This artificial intelligence winner keeps on going. The stock price has more than doubled since AI turned into a sex symbol after the Nvidia (NVDA) earnings report last spring. AVGO tends to surge higher, then bounce around sideways for a while until the next surge higher. Even after fantastic returns in 2023, AVGO is up 17% YTD and 40% since early December. AI provides certain technology companies with a huge growth catalyst that should last for years. Broadcom doesn’t report earnings until late February or early March. Anticipation is lifting the stock still higher. Hopefully, the party will continue. HOLD

Broadcom Inc. (AVGO)
Next ex-div date: March 19, 2024, est.

Digital Realty Trust, Inc. (DLR – yield 3.4%) – This data center REIT has been kicking butt since last spring. It’s up 65% since. DLR had leveled off since the beginning of November but has reignited recently. It’s up about 7% YTD while the REIT sector is struggling. That’s because it trades more like a technology stock than a REIT. In a rotten 2023 for REITs, DLR posted a stellar 36% return. I believe REITs are poised for a better 2024 and DLR also has the additional catalyst of increasing AI spending. DLR should have a solid 2024 with REITs performing better (eventually) and AI still in focus. BUY

Digital Realty Trust, Inc. (DLR)
Next ex-div date: March 15, 2024, est.

Eli Lilly and Company (LLY – yield 0.8%) – Lilly again killed on earnings this week and guided higher for 2024. LLY, like AVGO, surges higher and then levels off for a brief period before the next surge higher. The big pharma superstar crushed expectations on earnings. It’s highly watched, newly approved weight-loss drug Zepbound more than doubled sales expectations for the quarter. The mega-blockbuster potential is enormous and Lilly just opened a $2.5 billion plant in Germany to crank up production to meet soaring demand. The company also has an important Alzheimer’s drug awaiting FDA approval in the next few months. HOLD

Eli Lilly and Company (LLY)
Next ex-div date: February 14, 2024

Intel Corporation (INTC – yield 1.2%) – The red-hot chipmaker finally cooled off after earnings guidance disappointed and the stock fell from the recent high. But it has since leveled off and the selling may be over for now. The bounty from the new chips and the foundry business might not come as soon as optimistic investors had been hoping. The future is still bright. There are great days ahead. But the recent spate of good news had investors hungry for more. They didn’t get it from the earnings report. But headline risk favors the upside for this stock in the months ahead. BUY

Intel Corporation (INTC)
Next ex-div date: May 6, 2024, est.

McKesson Corporation (MCK – yield 0.5%) Earnings – This supply chain pharmaceutical goliath reminded investors why it is such a great stock. It soundly beat earnings expectations last week with 15% revenue growth and 12% earnings growth over last year’s fourth quarter. McKesson also raised guidance for 2024. Results were driven by 18% higher prescription pharmaceutical volumes mainly because it dominates a market that grows all by itself because of the aging population. MCK pulled back after the report but has since rebounded and still remains in a strong uptrend that began last spring. It should continue to be a solid stock regardless of what interest rates or the economy do. BUY

McKesson Corporation (MCK)
Next ex-div date: February 29, 2024

Marathon Petroleum Corporation (MPC – yield 1.9%) – This oil refiner stock reported earnings that beat expectations last month and the stock has since made a new all-time high. Despite the beat, earnings and revenues were significantly lower than last year’s quarter, which was expected as historically high margins from a year ago were never going to last. Yet, earnings and revenues remain very solid by historical standards. The company is flush with cash from the boom times and still making a strong profit. MPC is still up over 11% YTD, despite the fact that the energy sector is negative for the year so far. It is also poised to rise on continuing tension in the Middle East, which tends to lift all energy stocks. BUY

Marathon Petroleum Corporation (MPC)
Next ex-div date: February 20, 2024

Qualcomm Inc. (QCOM – yield 2.1%) – After a strong start to this year, QCOM pulled back after a solid earnings report. The pullback was more about the absence of exciting news rather than bad news. But the stock has since rebounded sharply. It should be a good year. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers this year. BUY

Qualcomm Inc. (QCOM)
Next ex-div date: February 28, 2024

UnitedHealth Group Inc. (UNH – yield 1.5%) – This is a great healthcare stock that has gone nowhere in the last two years. It’s still down slightly YTD as Wall Street didn’t like its fourth-quarter earnings report. The company reported double-digit earnings and revenue growth, but costs were higher than expected. The reasons were more elective surgeries after covid, extra vaccine activity, and inflation. But the company doesn’t expect costs to have a negative impact on 2024 projections. The stock should ultimately rise because the fundamentals are so solid. It also offers strong defensive qualities. UNH is always up on bad days in the market where practically everything else is down. It offers a good long-term trajectory plus downside insurance. BUY

UnitedHealth Group Inc. (UNH)
Next ex-div date: March 1, 2024, est.

Visa Inc. (V – yield 0.8%) – Visa is thriving in the current environment. The economy is still strong and consumers, which showed signs of weakening late last year, are bounding with optimism again. That’s why V has spent this year making a series of new all-time highs. Earnings last month beat estimates with upbeat guidance through 2024. As long as the environment remains positive with a resilient consumer, V could continue to run higher from here. But the stock has moved above the ideal buy range. HOLD

Visa Inc. (V)
Next ex-div date: May 8, 2024, est.

Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – The life science property REIT has a unique and growing property portfolio. But it has been trading like a volatile REIT, which has been a bad thing lately. It was down more than its peers the last two years. It rallied much more than the sector the last two months of last year. And ARE is down more in the rough start for REITs this year as interest rates have spiked higher in the better-than-expected economy. But the company is strong operationally, and the stock sells at a compelling valuation with reliable earnings and should have a solid year as interest rates peak and perhaps trend lower. BUY

Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: March 28, 2024, est.

NextEra Energy (NEE – yield 3.3%) – This beleaguered stock had been a superstar performer before inflation and rising interest rates. It provides both safety from its best-in-class regulated utility business and growth from its considerable clean energy business. The utility reported strong earnings that exceeded expectations again last month and reiterated its growth projections for this year, near the top of the estimated range. The interest rate-related weakness should at least diminish going forward as rates have likely peaked. This stock is still oversold. It should have its day in the sun again, and probably before long. BUY

NextEra Energy Inc. (NEE)
Next ex-div date: February 22, 2024, est.

USB Depository Shares (USB-PS – yield 5.5%) – The party isn’t over for fixed income. Rates have still peaked and may well trend lower later this year. The price has soared 25% from the low of late October and has provided a 17% total return since being added to the portfolio in October of 2022. After the worst two years ever for fixed income, this preferred issue is well positioned for a further rebound. BUY

U.S. Bancorp Depository Shares (USB-PS)
Next ex-div date: April 15, 2024

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.7%) – Ditto for VCLT, as evidenced by the recent 20% price surge. This long-term bond fund is very sensitive to interest rates. It held up relatively well in the rising rate environment and now rates may continue to trend lower. If the economic strength lasts, VCLT should remain stable and deliver a strong income. If the economy weakens, and/or rates move lower, there should be more upside for the price. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT)
Next ex-div date: March 2, 2024, est.

Xcel Energy (XEL – yield 3.5%) – Utilities are still remarkably reliable revenue generators in any economy. Alternative energy is still the wave of the future. A combination of safety and growth is still highly desirable. But XEL has been a dog. It had a rotten two years until November and December when it turned sharply higher. But January has seen a return of ugliness as investors walked away from interest rate-sensitive stocks. But Xcel reported solid earnings on lower operating expenses. This is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. BUY

Xcel Energy Inc. (XEL)
Next ed-div date: March 27, 2023, est.

Dividend Calendar

Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates are estimated.

The next Cabot Dividend Investor issue will be published on March 13, 2024.

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