Cabot Dividend Investor Issue: January 8, 2025

Cash In on the Changing Market

Last year was great for stocks, again. The S&P 500 was up over 23% for the year after returning 26% in 2023. It was the first time in 26 years the index posted consecutive annual returns from over 20%.

While the outlook for 2025 is positive, things are changing.

Sure, this bull market, which began in October of 2022, has driven the S&P 500 nearly 70% higher. But most of the gains are from technology stocks. Until this past summer, nearly all the bull market returns were driven by technology. The rest of the market had done very little.

But the rest of the market is waking up. While artificial intelligence (AI) will likely continue to be a powerful growth catalyst, its dominance over everything else might not be as pronounced in 2025 as it has been in the past. Earnings for other stocks are catching up.

In 2024, the largest technology companies that comprise the “Magnificent 7” stocks grew earnings at an average rate of 33% compared to 4.2% for the other 493 stocks in the S&P 500. But that differential is expected to reduce to 21.3% growth for the Magnificent 7 and 13% for the rest of the market. The earnings growth difference is expected to plummet from 27.8% to 8.3%.

I don’t say this to dump on AI or technology stocks. The AI catalyst is real and will likely drive earnings and the market higher for years to come. It has driven strong returns in current portfolio technology positions including Broadcom (AVGO), Qualcomm (QCOM) and Digital Realty Trust (DLR) in addition to several less directly related stocks.

The AI boom may well continue in 2025 and beyond. The S&P may well have a third consecutive 20%-plus year and there could be many more to follow because of it. I’m a big fan. But the rest of the market has a story too. And that story will likely get hot this year as stocks experience an earnings growth spike that could last for years.

This market has a lot going for it.

The bull market is only 26 months old while the average bull market over the last 100 years has lasted 50 months. And recent bull markets have lasted a lot longer. It’s also a Fed cutting cycle that will likely last for years. Meanwhile, the economy is solid and expected to get stronger with the policies of the new administration. Overall S&P 500 earnings are expected to grow 14.8% in 2025 (according to FactSet), well above the 10-year trailing average of 8%.

The major drawback for the market is that it’s expensive. The S&P price/earnings ratio is well above recent historical averages. That makes another 20%-plus return year in 2025 seem unlikely. But technology stocks, which comprise a large and disproportionate portion of the S&P index, are what make valuations high. And they have the earnings growth to justify high prices. The rest of the market isn’t expensive.

In fact, take technology out of the equation and market returns in this bull market so far would be quite lame. All those wonderful things I mentioned above apply to these other stock sectors. Meanwhile, they are selling at reasonable valuations ahead of an earnings spike. These stocks also have some momentum, and strong performance is overdue.

In this issue, I highlight a healthcare stock that looks highly promising in 2025. It is poised in front of the aging population megatrend, which makes a successful pick so much easier, and it will likely experience a sizable earning spike in the years ahead. It is an existing portfolio stock of which half the shares were sold last year. It’s a great time to buy back the other half.

What to Do Now

Things look good in the market right now. That makes me nervous. There is a lot of truth to the old Wall Street adage that says when things in the market seem good, they’re probably not that good, and when things are bad, they’re not that bad. But one could have said the same thing a year ago and look what happened.

There is uncertainty about the Fed and the new Trump administration policies. Much of the angst centers around inflation. It’s been stickier than expected. And the expected stronger degree of economic growth could amplify the problem. Continuing inflation means continuing high interest rates. Inflation was supposed to be dead and rates were going to come down. Stocks already priced in that scenario to some degree.

Of course, the problematic inflation concern may prove to be folly. But inflation does have a long history of sticking around longer than expected. The market can navigate higher rates for longer and a slower pace of reduction than expected. But that resilience assumes rates have peaked. If rates rise to a new high, it will be a serious problem for the market.

I don’t mention this because I believe it will happen but because it is the one known factor that could topple the market. We should hope for the best but prepare for the worst. If these fears don’t come to fruition, no problem, just about all the portfolio stocks should thrive.

While sector performance is uncertain in the months ahead, I like positions that should do well no matter what happens. For that reason, I favor energy stocks among the BUY-rated stocks right now (in addition to the highlighted stock). The new administration is certain to encourage more energy production. That is a centerpiece of the plan. Higher production and friendlier regulations should benefit the energy positions in the portfolio. Also, these stocks continue to thrive amid inflation and high interest rates as well as a better environment.

Midstream energy companies Enterprise Product Partners (EPD), ONEOK (OKE), and The Willliams Companies (WMB) benefit from more oil and gas sloshing around the country. That’s why the stocks took off after the election. Cheniere Energy (LNG) and Cheniere Energy Partners (CQP) should also benefit from the next administration’s plans to export more natural gas, not to mention the increasing demand for it around the world.

Recent Activity

December 11
Purchased Ally Financial Inc. (ALLY) - $38.42

December 18
AbbVie Inc. (ABBV) – Rating change “HOLD” to “BUY”

Broadcom Inc. (AVGO) – Rating change “BUY” to “HOLD”

SOLD American Tower Corporation (AMT) - $184.85

January 8
ONEOK Inc. (OKE) - Rating change – “HOLD” to “BUY”

AbbVie Inc. (ABBV) – Buy Half

NextEra Energy (NEE) – Rating change “HOLD” to “BUY”

Featured Action

Buy AbbVie Inc. (ABBV)

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 that specializes in small-molecule drugs. It’s a cutting-edge company with a terrific pipeline.

AbbVie became an industry giant because of its mega-blockbuster drug Humira. It’s an autoimmune medication that became the world’s bestselling drug with annual sales of $20 billion. But the tremendous success of that drug became a problem as Humira lost its patent overseas a few 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 first half of 2024. But the company is turning it around. AbbVie has long planned for this eventuality and has done a stellar job launching new drugs capable of replacing the diminishing Humira revenue.

It’s worth noting a couple of things at this point. First, AbbVie is well-positioned ahead of a megatrend. The population is aging at warp speed. The main industry beneficiary of the aging population is healthcare. In 2012, total healthcare expenditures in the United States were $2.8 trillion. Since then, spending in the sector has increased about 80% and now accounts for a staggering 20% of total U.S. GDP. Spending is likely to continue to increase going forward.

Second, despite the steep patent cliff (Humira accounted for 75% of revenue a few years ago), the stock has still performed well. The patent cliff was well known by investors, yet ABBV has returned 50% over the past three years and 151% over the last five versus returns for the S&P 500 of 32% and 97% over the same periods respectively. That’s because even impatient investors realize that the company has stellar new drugs and a pipeline capable of overcoming Humira.

AbbVie’s new immunology drugs, Skyrizi and Rinvoq, are expected to replace Humira’s peak revenues in a short period of time. In fact, management estimates that the combined revenue of these two drugs will be over $19 billion in 2024 and $27 billion by 2027, far exceeding Humira’s peak sales. The pipeline is strong as well, and the company estimates that at least five new programs will get regulatory approval in 2025. Also, Humira, as a biotechnology drug, doesn’t fall off a cliff like regular drugs after a patent loss. Humira is still estimated to generate over $5 billion per year late into the decade.

The past year was supposed to be a tough one as revenues continued to struggle. Longer-term investors planned on enduring 2024 en route to greener pastures ahead. But ABBV endured the year with a respectable 15.3% total return. Revenue in the first nine months of 2024 turned the corner and rose 3% over the same period in 2023. Management’s expectation of a return to moderate growth in late 2024 has already come to fruition, and the company expects earnings to accelerate to “robust growth” in 2025 and beyond.

ABBV also pays a strong dividend, currently $6.56 per share annually, which translates to a 3.6% yield at the current price. But the payout has more than quadrupled since the spinoff in 2013. Companies that consistently grow the dividend have been the best-performing group in the market over time.

Another pharmaceutical company faced a huge patent cliff years ago. Eli Lilly and Co. (LLY) endured a huge revenue decline from a patent cliff in 2014. But the strong pipeline overcame the shortfall. In the ten years since, LLY has returned over 1,200%. While that level of performance is unlikely, AbbVie also has strong R&D and a promising pipeline.

AbbVie is a cutting-edge company with a stellar pipeline of new drugs and recently launched drugs and treatments. The company is officially moving past the Humira patent expiration that has held the stock back for years. Imagine how the stock will perform without a patent cliff and with strongly growing sales.

Portfolio Recap

AGNC Investment Corporation (AGNC – yield 15.5%) – This mortgage REIT is coming off a rough period of inflation and rising interest rates. The storm is over. Although AGNC is not moving meaningfully higher, it has traded relatively flat for most of the last two years. It also held up okay despite the deterioration of the interest rate narrative in the last few months. It should be poised ahead of much better times as interest rates have likely peaked and should trend lower from here over the next year. But even sideways price performance isn’t bad as the massive yield alone provides a good return. BUY

AGNC Investment Corp. (AGNC)
Next ex-div date: January 31, 2025, est.

Brookfield Infrastructure Partners (BIP – yield 5.0%) – Like most other utilities, BIP was riding high until the middle of October when the interest rate narrative changed for the worse. The business itself is solid with remarkably stable revenues and a growing dividend. The company expects to continue growing funds from operations (FFOs) at a 10% annual rate. BIP was a superstar performer before inflation and rising interest rates. But it has been a slave to the interest rate narrative for the last two years. While it is likely that interest rates have peaked, the odds of significant declines have diminished of late. Things change, and the longer-term trend for rates seems to be going in the right direction and BIP should improve going forward. (This security generates a K1 form at tax time.) BUY

Brookfield Infrastructure Partners (BIP)
Next ex-div date: February 28, 2025, est.

Cheniere Energy Partners, L.P. (CQP – yield 6.5%) – This high-income natural gas export partnership had a strong move last week, up 2.7%. Investors are likely realizing the opportunity in natural gas again after a rough December. CQP is still up 13.5% since the election because the improving regulatory environment is good news. The next administration is highly encouraging of natural gas exports and Cheniere is the country’s largest exporter. The longer-term situation was always strong as the rest of the world desperately needs U.S. natural gas. Now, the short-term situation is improving. (This security generates a K1 form at tax time.) BUY

Cheniere Energy Partners (CQP)
Next ex-div date: February 5, 2025, est.

Enterprise Product Partners (EPD – yield 6.6%) – This high-yielding midstream energy partnership has regained its footing after a steep early-December selloff following a huge post-election surge. Despite all the bouncing around, EPD is still up 9% since the election. And the future is still bright. There should be more oil and gas sloshing around the country in the years ahead. And EPD can move higher. The stock is still well below the all-time high set in 2014. And now earnings are much higher. (This security generates a K1 form at tax time.) BUY

Enterprise Product Partners (EPD)
Next ex-div date: January 30, 2025

FS KKR Capital Corp. (FSK – yield 12.9%) – This Business Development Company (BDC) is one of the few cyclical stocks to not have an awful December after rallying strongly after the election. It did come off the high but it’s back in business over the past couple of weeks. It even endured an ex-dividend without a selloff. FSK is a strong beneficiary of the Trump victory. The perception of high economic growth going forward is exactly what FSK needed to make a new high. It has a portfolio of smaller companies that tend to be economically sensitive. The prognosis is bullish going forward. BUY

FS KKR Capital Corp. (FSK)
Next ex-div date: March 4, 2025, est.

Main Street Capital Corporation (MAIN – yield 7.0%) – MAIN is perhaps the best monthly dividend-paying stock on the market. As a BDC, this story is very similar to that of FSK. Main’s portfolio of companies not only makes high-interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC. MAIN is a rare stock that didn’t have a December swoon, and it made another new all-time high last week. It’s making highs despite the pullback in many cyclical stocks. The improved economic outlook leaves room for further appreciation. BUY

Main Street Capital Corp. (MAIN)
Next ex-div date: January 8, 2025

Rating change – “HOLD” to “BUY”

ONEOK Inc. (OKE – yield 3.9%) – This more volatile midstream energy company has been true to form. After a huge surge in the summer and fall, it has fallen 14% from the November high. Despite the recent pullback, OKE is still up since the election and returned 49% in 2024 while the energy sector was flat for the year. I’m still bullish. The market loves the new acquisitions of Medallion Midstream and Enlink Midstream (ENLC), as the new additions will be accretive immediately. The story remains strong as recent actions will enhance earnings into a future that just got better with the election.

OKE soared 50% from early August until late November. The midstream business is good, especially for those involved in natural gas, but not that good. The price spike got a little silly, which is why OKE was downgraded to a HOLD in November. But the excess has since been priced out, and it should resume an upward trajectory this year. It is upgraded to a BUY. BUY

ONEOK Inc. (OKE)
Next ex-div date: February 1, 2025, est.

The Williams Companies, Inc. (WMB – yield 3.4%) – Yeah, WMB is down 7.6% from the November high, but so what. It’s still up 6% since the election and it returned a whopping 59% in 2024. WMB is also climbing up from the December bottom. It did that despite a flat energy sector because the natural gas business is hot. The spigots should unleash in the years ahead with the “drill, baby, drill” policies of the new administration. Williams guided to the upper half of 2024 estimates and the future looks great. BUY

Williams Companies, Inc. (WMB)
Next ex-div date: March 12, 2025, est.

Buy Half

AbbVie (ABBV – yield 3.6%) – While this pharmaceutical and biotech company is 13% below the high made this past fall, it still returned over 15% in 2024. All things considered, the stock has performed well, and the future looks bright. This was supposed to be a tough year with revenues falling from the Humira patent expiration. But the company is turning the corner as newer drugs are taking over and revenues are expected to soar in 2025. The main thing holding ABBV back will fade next year. It performed well in a crummy year and much greener pastures lie ahead. BUY HALF

AbbVie Inc. (ABBV)
Next ex-div date: January 15, 2025

Ally Financial Inc. (ALLY – yield 3.3%) – Financial stocks gave back most of the robust post-election gains in December as investors changed their tune and started worrying about higher rates for longer. But next year looks very good for the sector. Short-term interest rates will move lower, the economy is expected to be solid, and the regulatory environment will be much better. Unlike many of its peers, ALLY is still cheaply valued ahead of better times. It is the nation’s leading online bank, and it is well positioned in the high-growth area of a promising sector. Analysts are expecting earnings growth of 40% in 2025. ALLY’s spike may still be ahead. BUY

Ally Financial Inc. (ALLY)
Next ex-div date: February 1, 2025, est.

Broadcom Inc. (AVGO – yield 1.2%) – Sure, AVGO came off the high. But it had to. That’s why it was downgraded to a hold. But it is hanging tough near the top of the range, indicating that it is likely to hold the recent gains. This semiconductor, software and artificial intelligence juggernaut really got a boost from earnings earlier last month. AVGO soared 38% in the two days following the report. The company said demand for its AI chip (XPU) is booming and expects it to generate revenues between $60 billion and $90 billion by 2027. Revenue was $12.2 billion in fiscal 2024. The revelation has captured the imagination of investors. The stock has returned 116% in 2024 and the future for the stock still looks bright. HOLD

Broadcom Inc. (AVGO)
Next ex-div date: March 20, 2025, est.

Cheniere Energy, Inc. (LNG – yield 0.9%) – This liquid natural gas (LNG) exporter is a definite beneficiary of the Trump election. Like most energy stocks, it soared after the election but pulled back in December. But it has quickly gained back those losses and is up over 16% since the election. Cheniere stands to benefit from a friendlier regulatory environment, more natural gas production, cheaper domestic prices, and encouragement of natural gas exports. The longer-term trajectory should be strong as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter. The short-term situation just got better too. BUY

Cheniere Energy. Inc. (LNG)
Next ex-div date: February 8, 2025, est.

Constellation Energy Corporation (CEG – yield 0.6%) – It was a big week for Constellation. The nation’s largest nuclear energy producer was awarded more than $1 billion in contracts to provide 13 government agencies with electricity beginning this year. The contract is the largest of its kind ever and underscores the desirability of carbon-free electric power that is in high demand as electricity use skyrockets from AI. CEG soared over 13% in just two days after the announcement of the contract. Tech companies must secure power sources for the massive energy demand of AI. Constellation is a prime candidate with dependable carbon-free power. The new administration will likely bring a friendlier regulatory environment, making more deals likely. HOLD

Constellation Energy Corporation (CEG)
Next ex-div date: February 15, 2025, est.

Digital Realty Trust, Inc. (DLR – yield 2.7%) – This data center REIT made a huge jump after the company stated that demand for data center AI space is booming in the last earnings report. DLR was downgraded to a HOLD last month on price alone. The stock has pulled back since, but it’s still up 37% in 2024 and 60% since being added to the portfolio in July of 2023. DLR doesn’t trade with the ebb and flow of the interest rate narrative like most REITs. It trades more like a tech stock because of the AI growth catalyst. The future still looks bright as data centers are booming. HOLD

Digital Realty Trust, Inc. (DLR)
Next ex-div date: March 12, 2025, est.

Eli Lilly and Company (LLY – yield 0.8%) – The superstar drug company stock has been in a funk since the summer. It’s down 20% from the high made in early September. But LLY still returned 31% for 2024. Consolidation is probably healthy. The company also announced a $15 billion stock repurchase program and a 15% dividend hike. It is the seventh consecutive year of a 15% dividend hike. There is also some trepidation in the sector regarding the nomination of RFK Jr. for HHS Secretary. But LLY is unlikely to stay down for long. It is on track to grow earnings by around 70% per year in the years ahead. BUY

Eli Lilly and Company (LLY)
Next ex-div date: February 14, 2025

McKesson Corporation (MCK – yield 0.5%) – While McKesson recovered all the summer and fall dip, it is still at the same price it was back in June. The pharmaceutical distributor took a plunge after second-quarter earnings missed because of supply disruptions. But the third-quarter earnings alleviated that concern, and the stock took off again. The healthcare sector is reeling somewhat from the RFK nomination right now. But hopefully, MCK will get back to slowly trending ever higher in the year ahead as its customer base grows all by itself because of the aging population. BUY

McKesson Corporation (MCK)
Next ex-div date: March 2, 2025, est.

Qualcomm Inc. (QCOM – yield 2.1%) – QCOM rallied on Friday and the first two days this week, along with most other technology stocks, as AI growth has come front and center after bullish statements issued by Nvidia (NVDA). The company also revealed a new chip for mid-range PCs. But QCOM had fallen back in the summer and has been basically stuck in the mud since. It’s way below the June high and still at the same price it was last March. It’s worth being patient because when this stock moves it easily makes up for lost time. And it will take off at some point. The market wants to see strong U.S. smartphone sales from an AI upgrade cycle. But that doesn’t appear to be happening yet, although analysts think it is a strong possibility sometime this year. BUY

Qualcomm Inc. (QCOM)
Next ex-div date: March 5, 2025, est.

Toll Brothers, Inc. (TOL – yield 0.6%) – The luxury homebuilder stock has fallen 26% from the late November high. In addition to the overall market rolling over in December, there was some bad news on the home-buying front. There are industry-wide affordability concerns, and mortgage rates have risen back near the highs. But Toll Brother’s results are still stellar as luxury homes are somewhat insulated from the trends.

Earnings beat expectations with revenues up 10.3% and earnings up 12.6% over last year’s quarter. Toll Brothers also reported that unit sales were up a whopping 25% for the full year versus 2023. The news is also improving. Pending home sales were up for the fourth straight month in November and increased 6.9% over the past year. TOL will bounce around with the housing market news in the near term, but the longer-term trends are strong. BUY

Toll Brothers, Inc. (TOL)
Next ex-div date: January 10, 2025, est.

UnitedHealth Group Inc. (UNH – yield 1.6%) – After soaring to a new high in early November, it’s been one thing after another for this health insurer. The stock was down 16% in December and returned -4.74% in 2024. UNH initially fell because of trepidation over the RFK nomination. Then the CEO was assassinated. Then, President-elect Trump made comments about “eliminating the middleman” in the healthcare industry. We’ll have to see if the regulatory environment changes for the worse. The stock can overcome everything else. UNH has also come off the bottom and can hopefully get some upside traction in the new year. BUY

UnitedHealth Group Inc. (UNH)
Next ex-div date: March 9, 2025, est.

Rating change “HOLD” to “BUY”

NextEra Energy (NEE – yield 2.9%) – This is a great stock to own right now. It’s cheap and well-positioned as interest rates have peaked and electricity demand is booming. NEE was a superstar stock until 2022 when inflation and rising interest rates kicked in. But it recovered in 2024 and returned about 20%. The recent souring of the interest rate narrative has likely run its course along with the downside for NEE. It is upgraded to a “BUY.”

The recent volatility is from the macro environment and not the internal operations of the company. The regulated and clean energy utility is doing great. NextEra expects to deliver 10% average earnings and dividend growth over the next several years, and it has a long track record of successfully delivering. The utility also stands to benefit from the increased electricity demand from AI and data centers. BUY

NextEra Energy Inc. (NEE)
Next ex-div date: February 22, 2025, est.

USB Depository Shares (USB-PS – yield 5.5%) – The environment is still good for fixed income despite the recent change in interest rate expectations. These securities love falling interest rates. And interest rates are at least not likely to trend higher and may even move lower in the quarters ahead. Everything looks good for this high-yielding fixed-income security. It’s been through the worst bond market ever and now interest rates are trending down. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.2%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates. The long-term bond ETF doesn’t have the upside leverage that USB-PS does. But the trend is likely to serve this security well over the next year. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT)
Next ex-div date: February 1, 2025, 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 12, 2025.

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