Cabot Dividend Investor Issue: January 10, 2024

A Cheap Stock for a New Cycle

Last year was a strong recovery from the bear market of 2022. The S&P 500 returned 24% for 2023 and closed out the year within 1% of the all-time high, set in January of 2022. What can we expect in 2024?

It looks good at this point.

After all, inflation has plunged to near 3%, the Fed is done hiking rates, the benchmark 10-year Treasury rate has likely peaked and has fallen from about 5% to less than 4%. And there is no sign of a recession. It appears that we will get through the steepest rate hiking cycle in decades without the usual economic pain. A soft landing is considered likely at this point.

The chief factors holding back the market for most of the last two years, inflation and rising interest rates, are going away. The problems have been slayed, and it didn’t take a recession to do it. At least, that’s how things look right now.

But anything is possible. The recession that had been expected might be just a little further down the road and will hit in 2024. Inflation seems to be licked, but maybe not. It could reignite and send interest rates higher again. There’s also geopolitical risk with these wars going on. And it promises to be a particularly funky election year too.

Predicting the market is a dicey business. No one ever really knows what the future holds. Investors expected more bear market pain going into 2023, but that didn’t happen. They expected more positive momentum going into 2022, and that didn’t happen. It wouldn’t be a big surprise if the Wall Street consensus turns out to be wrong about 2024 too.

Forget about trying to predict the direction of the overall market. However, certain aspects of the current environment and established trends are much more bankable. For example, it is highly likely that interest rates have peaked. Sure, rates could bounce higher than they are now. But that 5% peak level on the 10-year Treasury is unlikely to be eclipsed, at least in this cycle. The situation would have to be completely reversed for that to happen. It’s a good bet that we have already seen the highest interest rates of this cycle.

Artificial intelligence is here to stay. Businesses must spend on it not only for competitive advantage, but as a matter of survival. The new technology will continue to be a strong growth catalyst for technology stocks. And the trend will continue regardless of what the Fed does, or the state of the economy, or who is elected president.

Several of the very best defensive dividend stocks on the market have suffered through a miserable two years as interest rates trended higher. But that move higher has peaked and may even be reversing. Meanwhile, these stocks have strong track records of market outperformance, and are at historically cheap valuations with recent upward momentum, ahead of a likely slowing economy.

In this issue, I highlight a fantastic dividend stock whose long record of strong performance has been interrupted these last two years. It’s also a company that focuses on technology and will surely benefit from the proliferation of AI in the years ahead. The timing for this stock should be outstanding.

What to Do Now

The market is sputtering at the beginning of the year. Last week the S&P’s 1.2% decline marked the end of nine consecutive winning weeks for the index, the longest stretch since 2004. That’s fine. The streak had to end, and it’s normal for the market to take a breather after a 15% spike in just two months.

The November and December rally was remarkable. Prior to that, it had been a lackluster 2022 and 2023 for most stocks. Sure, the indexes were higher for the year before the late-year rally. But index returns were deceiving. Almost all the gains in the S&P 500 were due to just seven large technology stocks, the “Magnificent Seven” stocks, which represent about 30% of the index. The other 493 stocks continued to suck wind.

But the peak and subsequent fall in longer-term interest rates changed everything. The rally in the last two months of the year was far more inclusive. Struggling defensive sectors came alive again. The REIT sector soared more than 20% and utilities returned double digits. And the late rally accounted for most of the S&P 500 gains for all of 2023.

The defensive stocks and sectors performed abysmally over the past two years until November. But those stocks have been moving sharply higher. Meanwhile, they still trade at the historic low range of valuations. They’re great in a slowing economy. And now they have upward momentum.

I love all the BUY-rated defensive stocks in the portfolio. But if you can only buy two and I was forced to name my current favorites, they would be Brookfield Infrastructure Partners (BIP) and Alexandria Real Estate Equities (ARE). Both stocks have had huge upside moves since October, indicating a strong demand when interest rates are no longer rising. But they are both still a long way from the all-time highs with much higher earnings now and newfound positive momentum.

My favorite stock in the technology realm right now is Qualcomm (QCOM). There are lots of good reasons to like Broadcom (AVGO) and Intel (INTC). But QCOM has not had its huge move higher – yet. The AI revolution hasn’t hit mobile devices yet. But it will. And QCOM will be a big beneficiary.

Recent Activity

December 13
Purchased Alexandria Real Estate Equities (ARE)

January 10
Buy American Tower Corporation (AMT)

Featured Action: Buy American Tower Corporation (AMT)

American Tower is a Real Estate Investment Trust (REIT) that owns, operates, and develops an extensive portfolio of cell towers and other communications assets worldwide. It’s a mobile communications infrastructure powerhouse with over 220,000 cell towers in 25 countries on six different continents, as well as 28 data centers in the U.S. American Tower is headquartered in Boston, has been in business more than 28 years, and has roughly $96 billion in market cap.

Cell towers are fantastic assets to own. Cell towers are those weird-looking polls you see around with boxy antennas that send and receive signals to and from cell phones and other mobile devices. They are what provide the Wi-Fi for mobile network service. Cell phones can’t work without them.

Telecomm companies lease these towers out rather than go to the added expense of building or acquiring their own. And demand for mobile data continues to grow. Cell phones become more advanced and connected to the internet as do a slew of newly enabled technologies for cars and other devices that connect to the internet. There are rapidly growing applications for video conferences, cloud services, and hybrid working scenarios.

The more advanced 5G infrastructure and the artificial intelligence applications it enables are fueling traffic growth. According to research from telecom company Telefonaktiebolaget LM Ericsson (ERIC), average mobile data usage per smartphone is set to rise from 21 GB in 2023 to 56 GB in 2029. 5G’s share of mobile data traffic is forecast to grow by 76% in the next six years. And total mobile data traffic is estimated to grow by a factor of around 3X between 2023 and 2029.

As demand for mobile data grows, so will demand for wireless infrastructure and American Tower’s properties.

American Tower’s customers include mobile network operators, multinational telecommunications companies, media, and broadband providers. The largest U.S. customers are Verizon (VZ), AT&T (T), and T-Mobile (TMUS). These reliable customers are signed to long-term leases of five to ten years and the towers have exceptionally low churn rates. Revenues are highly dependable, and the business has automatic growth built in.

Of course, American Tower isn’t the only large REIT specializing in cell tower properties. There are also Crown Castle Inc. (CCI) and SBA Communications Corporation (SBAC). Why choose AMT? The main reason is that American Tower has international exposure to far less saturated emerging markets where mobile and cell phone demand is growing faster.

Of the more than 220,000 towers American Tower owns only about 40,000 are located in the U.S. Yet, those 40,000 account for a little bit more than half of the revenues because the number of carriers and volume on each tower is much higher in the U.S. But the growth rate will be higher going forward in these far less saturated markets. Here’s a list of the company’s international towers located overseas:

India 75,000
Latin America 50,000
Europe 30,000
Africa 25,000

Why buy it now? The answer is because it’s cheap after two years of poor performance. The total return from the start of 2022 to the end of 2023 was -20%. That performance is despite the fact that American Tower has grown earnings at better than 10% per year on average for the last three years.

AMT suffered along with the REIT sector over the last two years in the rising interest rate environment. It also hurt performance because the strong dollar, largely the result of Fed rate hikes, resulted in lower international revenues after conversion to dollars. But, as mentioned above, interest rates have likely peaked and may trend lower going forward.

Take rising interest rates out of the equation and you have a cheap stock that has moved strongly off the lows with recent upward momentum that still sells 30% below the all-time high despite having higher earnings. AMT is also a stock that had soundly outperformed the market in the five- and 10-year periods prior to 2022, with 204% and 495% returns over those periods, respectively.

The Dividend

American Tower currently pays an annual dividend of $6.80 per share, which translates to a 3.2% yield at the current price. Reliable revenues have enabled the company to increase the payout every year for the last 12 years. In the past five years, the dividend has been raised 19 times at an average annual growth rate of 15.4%.

Not only can you count on a rising payout in the future, but the ability to consistently raise the payout is proof of highly dependable operating results at the company. Stocks that consistently grow the dividend over time have proven to be among the very best market performers.

Mobile data demand is not only growing, but it is also highly defensive. Even if the economy turns south this year, earnings and revenues are unlikely to be adversely affected. AMT also has a beta of just 0.7, which means it is only 70% as volatile as the overall market. It’s a cheap stock that has been out of favor because of conditions that are now abating. It has a stellar track record and is due to make up for lost time heading into an environment of likely market outperformance.

American Tower Corporation (AMT)

Security type: Real Estate Investment Trust (REIT)
Sector: Technology
Price: $213
52-week range: $154.58 - $235.57
Yield: 3.2%
Profile: American Tower is a Real Estate Investment Trust (REIT) that owns, operates, and develops an extensive portfolio of cell towers and other communications assets worldwide.

Positives

• Demand for mobile data and its infrastructure are growing.
• Exposure to faster-growing overseas markets should boost growth.
• The stock is cheap and the factors that held a good-performing stock down the past two years are abating.

Risks

• It is possible that inflation reignites, and interest rates move higher and push the stock price lower.
• Overseas markets carry much more political risk.

Portfolio Recap

Brookfield Infrastructure Partners (BIP – yield 5.0%) – It was a subpar year in 2023 for BIP. A return of just 6.55% for the year badly lagged all the market indexes as interest rate-sensitive stocks were under pressure most of the year. But interest rates have likely peaked and are moving lower and BIP has come alive again. It’s up a whopping 45% since late October. BIP had been a superstar dividend performer until 2022. Now the high distribution and highly reliable infrastructure earnings are catching on again. It looks like the storm for BIP is over and 2024 should be a great year. (This security generates a K-1 form at tax time). BUY

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

Enterprise Product Partners (EPD – yield 7.5%) – Even when most dividend stocks struggled last year, EPD kept forging ahead with solid returns. This midstream energy partnership comes as advertised with a solid 17.45% return in 2023 after a strong bear market return of 15% for 2022. That massive 7.6% is very well supported and safe. Adding capital appreciation to that makes a fantastic income investment. The growth in profits and distributions is likely to continue as the partnership is expanding operations in the high-growth Permian basin. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD)
Next ex-div date: January 30, 2024

ONEOK Inc. (OKE – yield 5.4%) – This more volatile midstream energy company stock made a new 52-week high last week. It has been bouncing around on an upward trend that started last June. But OKE is still priced below the pre-pandemic high despite having higher earnings now. The stock should be on stronger footing in the improved market environment. ONEOK reported solid earnings and raised the guidance on projected consolidated earnings going forward. It should deliver solid results in just about any kind of economy. BUY

ONEOK Inc. (OKE)
Next ex-div date: January 31, 2024, est.

Realty Income (O – yield 5.2%) – After a terrible 2023, REITs have come alive again and O is doing even better. Since the market rallied on peak interest rates at the end of October, the sector benchmark Vanguard Real Estate Index Fund (VNQ) is up 22% and O is up more than 27% over the same period. Receding inflation and interest rates remove the main downside catalyst that has been in place for the past two years. And its retail staple properties and new data center acquisitions should produce reliable revenue in just about any economy. BUY

Realty Income (O)
Next ex-div date: January 31, 2024, est.

The Williams Companies, Inc. (WMB – yield 5.0%) – Returns have been solid and just what you hope for in a high-dividend stock in a challenging market environment. The natural gas pipeline company has been very bouncy in an upward trend that began more than six months ago. It’s a stable high-yield stock and the company should deliver solid and dependable earnings in just about any economy. Business remains solid 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. BUY

Williams Companies, Inc. (WMB)
Next ex-div date: March 8, 2024, est.

AbbVie (ABBV – yield 3.8%) – ABBV finished 2023 about even with a total return of -0.45%. But it was a challenging year with Humira losing patent protection in the U.S. Things should improve from here. In fact, ABBV has moved 17% higher since late November and is near the 52-week high. The market likes that AbbVie is purchasing biotech company ImmunoGen (IMGN) for $10.1 billion and Cerevel Therapeutics (CERE) for $8.7 billion. Both deals should enhance the already strong pipeline longer term. The longer-term situation is very positive. It’s just a matter of time until the market looks past the Humira revenue squeeze and starts pricing in a superstar. BUY

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

Broadcom Inc. (AVGO – yield 1.9%) – This former solid dividend-paying technology infrastructure stalwart turned into a sex symbol after artificial intelligence spending exploded last spring. AVGO has exploded 75% higher since then. The stock tends to surge higher, then bounce around sideways for a while until the next surge higher. The latest surge was because the company reported earnings that impressed the market. Earnings remained solid and Broadcom also cited future earnings gains from its recent VMware acquisition as well as the potential to double AI revenue from $4 billion in 2023 to over $8 billion in 2024. Until the pattern changes, I expect AVGO to have another surge higher in the next several months. HOLD

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

Digital Realty Trust, Inc. (DLR – yield 3.6%) – This data center REIT has pulled back a little from the recent high. Even though REITs had a terrible 2023, DLR returned 39% for the year. It looks like REITs have bottomed out and are on their way higher as interest rates have likely peaked and have been falling. Digital also has the additional catalyst of increasing AI spending and is getting a boost from the AI craze. DLR has been taking a breather while other REITs catch up but it should have a solid 2024 with REITs performing better 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%) – This superstar big pharma stock has been a lot like AVGO. It periodically surges higher and then consolidates by going sideways for a while until the next surge higher. LLY closed with a 2023 return of 60% and an average annual return of 52% over the last three years. Weight loss drug Mounjaro was approved by the FDA in November. Some analysts estimate it could potentially be a $20 billion per year drug. That would match the best-selling drug ever. It still has its Alzheimer’s drug up for FDA approval in the months ahead. Earnings are expected to grow at about a 25% per year clip over the next several years, but that number could be higher with the new drugs. HOLD

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

Intel Corporation (INTC – yield 1.0%) – This previously beleaguered and left-for-dead chipmaker stock has been reborn. INTC soared over 50% between late October and the end of the year and finished 2023 with a spectacular 93% return. Earnings indicate that Intel’s turnaround is well on track. It has promising new chips coming out in high-growth areas and its foundry business could be huge. The stock got dirt cheap, and investors are increasingly willing to bet on the company’s future. I expect this to be another strong year for Intel as the turnaround to profitability comes to fruition. BUY

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

McKesson Corporation (MCK – yield 0.5%) – Quietly, this pharmaceutical distributor company stock recently rose to a new all-time high after rising 24% in a crummy year for the healthcare sector. This is a company with earnings that should continue to thrive even if the economy hits the skids this year. It’s also encouraging that it performed well in a 2023 market that left most healthcare stocks behind. The company is basically an oligopoly in a market that grows all by itself with the aging population. The stock has an amazing track record, and it should continue to thrive in 2024. BUY

McKesson Corporation (MCK)
Next ex-div date: February 28, 2024, est.

Marathon Petroleum Corporation (MPC – yield 2.1%) – This newly added oil refiner caught fire last week as oil prices moved higher and it crossed the 160 per share mark. It has since pulled back with oil stocks. But the stock is always bouncy like this. In a hot energy market, it does great. In an OK energy market, it does good. Even though the energy sector posted a negative return for 2023, MPC returned a solid 30% for the year. While the environment can vary from quarter to quarter, it should remain an overall profitable environment for refiners over the next several years. BUY

Marathon Petroleum Corporation (MPC)
Next ex-div date: February 15, 2024, est.

Qualcomm Inc. (QCOM – yield 2.3%) – The mobile device chip maker had a bad time of it from the beginning of 2022 until the end of last year. But it has come alive again lately. Although returns lagged that of the overall technology sector in 2023, it still returned over 38% for the year, and 33% of that return came in November and December. This is a company that will benefit from the AI revolution later than the 2023 movers and shakers. But the revolution will come to mobile devices. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers next year. When QCOM moves it can make up for lost time. BUY

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

UnitedHealth Group Inc. (UNH – yield 1.4%) – This healthcare insurer has a spectacular long-term track record but has struggled somewhat with just a 1% return in 2023. Prior to 2022, UNH had blown away the returns not only of the healthcare sector but the overall market in every measurable period over the prior ten years. Most healthcare stocks struggled in the 2023 market for a host of reasons. But those reasons are unlikely to persist going forward. This stock can perform well in a slowing economy and should make up for lost time as different stocks continue to come back into favor. BUY

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

Visa Inc. (V – yield 0.8%) – It’s another new high! This payment processing company stock enjoyed the late-year rally. V has soared 15% since late October, making a series of new all-time highs. Visa is loving the soft landing euphoria. It has been one of the very best financial companies to own but was held back by the pandemic and last year’s bear market. But earnings have been stellar. International business and travel are thriving and driving earnings higher. It has a strong business that should remain solid in all but a recessionary environment. HOLD

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

Alexandria Real Estate Equities, Inc. (ARE – yield 4.0%) – ARE has soared more than 40% since the low of late October. But we didn’t miss the boat. The stock is still more than 40% below the all-time high and at a historically cheap valuation. The company also has a highly reliable and growing business that should thrive in any economy. It’s cheap with strong momentum ahead of a period of likely strong performance as interest rates abate. It has leveled off in the past couple of weeks but should have another leg higher before long. BUY

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

NextEra Energy (NEE – yield 3.0%) – After a rotten couple of years, NEE has been trending sharply higher since early October. It’s up over 30% from the 52-week low and it looks like we have seen the bottom of this cycle. The clean energy utility delivered solid earnings and management reiterated previous growth projections and said the company expects to deliver earnings near the top of the expected range through 2026. This stock is still very oversold. It is a good stock that has been very beaten down. BUY

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

USB Depository Shares (USB-PS – yield 5.7%) – Recent developments have been great news for this and other fixed-rate investments. Interest rates appear to have peaked which means the selling is over in fixed income and prices are likely to rise as rates fall. The price has soared 24% since late October. And USB-PS has now returned 10% since being added to the portfolio a little over a year ago despite the rising interest rate environment. BUY

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

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.7%) – Falling interest rates are also a huge positive for VCLT, as evidenced by the recent 17% 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 are trending lower. After two of the worst years ever for the bond market, the rebound should continue next year. BUY

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

Xcel Energy (XEL – yield 3.3%) – 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. The last two crummy years are not what this stock is about. XEL has been trending higher since the beginning of last month and it’s had a convincing 18% move off the low. This is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. XEL still sells near the lowest levels of the past several years and now has positive momentum. BUY

Xcel Energy Inc. (XEL)
Next ed-div date: March 15, 2024, 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 February 14, 2024.