Cabot Dividend Investor 720

While everyone is focused on the near-term risks and inconveniences of this pandemic, lasting changes are being forged. Major events have a way of reshaping the American psyche and changing behavior. This pandemic ordeal is forever altering aspects of our culture, creating an a unique opportunity for investors.
In this month’s issue I highlight a stock that directly benefits from the fact that people will continue to do more things from home than they did before the pandemic. It sells popular packaged food brands. Business is booming and should stay good for a long time.

A former slow-growth stock is being transformed into a fast-growing, high-yielding investment that is ideal to hold through the crisis and beyond. Investors are just beginning to realize the opportunity. But you can still get in cheap.

Cabot Dividend Investor 720

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The Pandemic Creates a High-Yielding Superstar
It’s time to look beyond the market disruptions and personal nuisances caused by this pandemic. It will go away sooner or later, and headlines will obsess with something else. But the ordeal of the lockdown and virus may continue to alter our behavior long after it’s gone.

People have been forced to hunker down at home in order to avoid a potentially deadly virus. For four months, our lives have changed dramatically. And the disruption was sudden and without warning. It’s been a surreal experience.

I doubt that this experience will just roll off people, and they’ll go right back living the same way. Lesser ordeals have had a lasting impact on the public psyche. I remember after the 1987 stock market crash, many people continued to be afraid of the market for years afterward. I know a lot of people who still haven’t come back to market after the financial crisis.

Major events have a more profound impact on people. I knew people who lived through the Great Depression, and 50 years later they still wouldn’t throw anything away. They carried a pervasive sense that they could lose everything overnight for their entire lives. That fear affected their behavior on an almost daily basis forever.

How will this pandemic ordeal change things? We’re starting to get a glimpse. I know several people that have no intention of going back to crowded bars and stadiums or getting on an airplane even when this is all over. They’ve been scared solitary. Even the bolder among us will likely be slow to embrace mingling too much with the disease-riddled populace again.

The stay-at-home culture got a huge boost. It also helps that things were trending that way already, and the virus rapidly accelerated the transition. Lots of people were working from home already. But this is ridiculous. Even elderly people I know are now comfortably shopping online and having Zoom calls with their friends. Just about everybody I know streams movies and TV shows online and has some kind of at home gym equipment.

Sure, people will leave home more when this pandemic is over. The massive growth in online shopping, video conferencing and online streaming will slow. But it is a near certainty that people will continue to do more things from home than they did before the pandemic.

Already companies are embracing more employees working from home as technology has made it easier and they can save on office space expenses. Many more people have been converted by the convenience and wide range of choices offered by online shopping. As well, most people surveyed say that they will likely continue to eat more meals at home than they did before the lockdowns.

The world was changing rapidly already, and this pandemic is accelerating many of those changes. The world will be different in certain ways after the pandemic than it was before. As investors, it is important that we spot those changes and take advantage. A crisis is a bummer, but does create change and opportunity.

In this issue I highlight a high yielding, slow growth stock that is being transformed by this pandemic into a much better stock to own. Not only is business booming during the pandemic, but it should benefit in the long term as well as the world shifts in its direction.

What to Do Now
This market continues to hold up well. After an impressive 46% spike from the bottom in record time, the market doesn’t appear destined to give a lot back at this point. Despite the gloom and doom media narrative, investors see a robust recovery in the quarters ahead, even despite an uptick in virus cases and restart stumbles.

The market may continue to forge higher, but I don’t see it running away, and I’m still cautious at this point. There is still virus risk and the possibility of a second wave. The S&P 500 does not have far to go to make new highs. But even if it does I have a hard time seeing how it moves much beyond that, especially as uncertainty regarding the Presidential election comes closer into focus.

Because of my caution in the near term, I’m still being stingy with the BUY ratings. The stocks currently rated BUY are Brookfield Infrastructure Partners (BIP), Verizon (VZ), AbbVie (ABBV) and Altria (MO). All these stocks have resilient earnings and should have limited downside if the market turns south. Any significant market weakness in the near term will likely prompt more BUY recommendations.

ABBV has been the star performer of the portfolio of late. The pharmaceutical giant just broke through to a new 52-week high. That’s a very bullish signal for the near term. It’s also important to note that despite making a new yearly high the stock is still about 40% below the 2018 high and selling at a very modest 11 times forward earnings.

Although the portfolio is performing well, there are still some laggards, notably Altria (MO), Enterprise Product partners (EPD) and Valero (VLO). The recent performance may be frustrating but all these stocks are great values at current prices and they all have safe dividends as well. A year from now I expect those prices to be a lot higher, and you get paid to wait.

Featured STOCK

This month’s pick comes from the world of the ultimate consumer staple, food. People tend to eat regardless of the state of the economy or who’s President. Food is one of those things that never goes out of style. That survival thing wins out every time.

But things can change within the food universe in terms of preferences and habits. Changes in food consumption are rare and tend to develop slowly, but not this time. The nature of American food consumption has changed within just the last few months. The way Americans eat is significantly different now than it was in February.

The government imposed lockdowns that have forced people to hunker down at home have penetrated the American psyche and altered our behavior. Necessity has brought about a new appreciation for eating at home. And like any major event, this pandemic will cause lasting changes.

B&G Foods Inc. (BGS)
New Jersey-based B&G Foods is an American food manufacturer that sells familiar shelf-stable and frozen foods in the U.S., Canada and Puerto Rico. In business since 1889, the company sells 50 well-known and popular food brands including Cream of Wheat, Green Giant Vegetables, Ortega, Dash, Accent, Crock-Pot and others.

For several years the stock has been a market underperformer that paid a high dividend yield. The company managed slow earnings growth, aided by acquisitions, as it struggled to contain costs. Revenues remained steady while the company managed all the other moving parts into a barely growing bottom line. For the last five years earnings grew at an annual rate of 3%.

But the pandemic has radically altered the dynamic.

Business is booming. During the lockdown, people have been confined to their homes and eating there. Many are stocking up on nonperishable items as they want to limit visits to the store. B&G’s is right there with its stable of popular food brands, and circumstances are having a huge impact.

In the first quarter, BGS earnings grew 8.9% over last year’s quarter. But that only included a few weeks of the lockdown. A few weeks ago, the company provided a glimpse into second quarter performance so far. And the results are staggering. Overall sales for April and May were 58% higher than the same period last year.

Management has also stated that sales and earnings for the year will be exponentially higher than previously anticipated. Analysts are expecting 31% year-over-year earnings growth for 2020. That’s a big leap from the 3% growth of years past.

Okay, so the company is cashing in on the pandemic. Won’t things just go back to normal when it ends? Sure, sales will likely slow down, but there is good reason to believe a higher level of demand will persist. It may be a long time before people overcome their squeamishness and boldly interact the same way they used to. And many have gained a new appreciation for eating at home with today’s modern kitchens and variety of quality food choices.

A recent survey conducted by investment firm Piper Jaffray found that 2/3 of respondents said they intended to eat at home more after the virus. The survey also predicted a sustainable 15% lift in at home food consumption. Berkshire Hathaway also weighed in on the topic stating that the packaged food industry will experience stable growth through 2026.

The dividend
This stock still pays a massive 7.7% dividend yield at the current price. BGS has long been a high yielding stock, but in the past it did not live up to my standards for safety. The payout ratio was high and the company often failed to cover the quarterly dividend with net income. It did however cover the dividend with cash flow, but the high payout consumed an overly burdensome level of profits.

I believe the dividend is safe now for a couple of reasons.

One is that management has proven a commitment to the dividend. It has been paid for 63 consecutive quarters and the quarterly payout has grown by 179% over the past ten years. The other reason is soaring profits along with a likely higher level of growth for several years. Having committed to and maintained the payout through several slow growth years, it doesn’t make any sense that management would turn around and cut it as it becomes much more affordable.

Value and momentum
The stock has already had a nice move higher. It’s up 46% in the last three months and it’s close to the 52-week high. That said, BGS is still 50% below the 2016 high and still sells at less than 13 times forward earnings, and that number doesn’t factor in the newfound torrid growth. And now the stock has some upward mojo.

This is a highly defensive stock at a time of uncertainty. It has a beta of just 0.28, meaning it is only about a quarter as volatile as the overall market. The country may be in a recession but B&G Foods isn’t. Business is booming. The pandemic has transformed this stock from a lazy performer with a too high dividend to a defensive and fast growing high yield superstar.

Portfolio at a Glance

Portfolio Updates

High Yield Tier

The investments in our High Yield Tier have been chosen for their high current payouts. These investments will often be riskier or have less capital appreciation potential than those in our other two tiers, but they’re appropriate for investors who want to generate maximum income from their portfolios right now.

Brookfield Infrastructure Partners (BIP – yield 4.7%) – The global infrastructure partnership is still cheap at 17% below the 52-week high. It may be that investors have shunned MLPs because they associate them with the beleaguered energy sector. But this stock should have nice upside going forward. In an uncertain economy, the company has reliable income generating assets that are 95% contracted or regulated. It should have solid growth in the future with its asset rotation strategy of replacing mature assets with higher margin new ones. The infrastructure subsector should also become increasingly in vogue as private money is increasingly being raised to accommodate the world’s desperate need for new and upgraded infrastructure. And the yield is rock solid. BUY

Enterprise Product Partners (EPD – yield 10.1%) – This is one of the largest U.S. midstream energy companies involved in the piping, storage, processing, and transportation of oil and gas. More than 85% of revenue is fee based and not dependent on volatile commodity prices. Earnings are both more resilient than the overall energy sector and will rebound faster as the economy gains traction. American energy isn’t going away. But you wouldn’t know that by looking at how the market is treating this stock. The partnership is extremely financially sound and the dividend is safe. Enterprise has 1.6 times coverage on the distribution while 1.2 times is considered solid among its peers. I don’t know when the market will wise up. But it will. In the meantime, you get 10%. HOLD

STAG Industrial (STAG – 5.0%) – This monthly dividend payer is a newer and smaller REIT that is smaller than most of its peers. But it is actually one of the very few REITs to be benefitting from the E-commerce trend. It offers warehouse space that is low cost and remarkably in demand as online shopping continues to trend higher—and with the pandemic much higher—at a fast clip. The company has pulled back on growth acquisitions during the recession but it should still benefit from the economic restart. HOLD

Verizon Communications (VZ – 4.5%) – Verizon has the best wireless network in the U.S. and is a leader in the 5G rollout. This pandemic has made cell phones and communication even more crucial. Verizon will continue to collect dependable revenues and should get a big boost as more and more 5G devices hit the market and use their extensive network. VZ significantly outperformed the market during the downturn and then underperformed as the recovery gained traction. It’s a good stock to own in case things get dicey again. It should also gain more growth stock appeal as the 5G rollout provides a catalyst for earnings growth. I like this now and for the future. BUY

Dividend Growth Tier

To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.

AbbVie (ABBV – 4.8%) – This biopharmaceutical giant just hit a new 52-week high. Over the past year, ABBV is up over 35% while the S&P 500 is up just under 5% over the same period. The recently completed merger with Allergan diversifies AbbVie from Humira. At the same time, it’s recently launched drugs are doing gangbusters and look increasingly able to replace Humira’s lost revenue when it comes off patent in the U.S. in 2023. Despite the fact that the stock hit a 52-week high, it is still selling about 40% below the 2018 high and at just 9.2 times forward earnings. Healthcare is also one of the best places to be in this uncertain market and ABBV pays a solid dividend with growth ahead and a 4.8% yield. BUY

Altria (MO – 8.4%) – This stock is cheap. It’s down about 21% so far this year and selling at an absurd 9 times forward earnings. To provide perspective, MO was selling at over 20 times forward earnings a couple of years ago. The $12.8 billion stake in E-cigarette maker JUUL has been a disaster and Altria has already written off $8.6 billion of the investment. But people are smoking more during the pandemic, and the company’s earnings remain resilient. Even if the JUUL investment goes to zero, Altria will still produce positive earnings and pay the dividend. It also has growth potential in marijuana, a joint venture with PM for IQOS (a cigarette alternative), and anything it gets from JUUL. The stock is a great value with possible upside surprises and a huge dividend. BUY

Crown Castle International (CCI – yield 2.8%) – This is a simple story and a great one. This REIT owns cell towers and fiber optic cables as the new 5G technology rolls out in haste. It is the leader in small cell towers which will be needed in huge numbers as 5G has limited range and towers will need to be supplemented. It’s a highly profitable business as multiple providers can share the same towers. The 5G rollout should provide ample demand and growth opportunities for a long time. The stock performance reflects that. CCI is up 25% so far this year while the S&P 500 has a negative return over the same period. Although the stock is somewhat pricey, it appears poised for a technical breakout to the upside in the near term. HOLD

Innovative Industrial Properties (IIPR – yield 4.7%) – Legal marijuana use is increasing at a huge clip. This legal marijuana farm REIT continues to make money and grow like crazy. It now has 58 properties in 15 states. It added 12 new properties in 2020 alone. At the beginning of 2019 it had 19 properties. You get a rapidly growing dividend and a REIT with an enormous growth rate. The stock may get knocked around with the market in the near term. But it’s hard to see how the trajectory of the stock price isn’t higher in the years ahead, and perhaps a lot higher. Consider also that the stock still trades at 96, which is well off the 52-week high of 139. HOLD

Next ex-div date: Sept. 30, 2020 est.

Qualcomm Inc. (QCOM – yield 2.8%) – Shares of this chip maker are up 5% so far in 2020. That’s not bad considering that semiconductor stocks are notoriously cyclical and this is a recession. At the same time Qualcomm does a lot of business in China at a time when there are trade frictions, especially regarding technology. The stock is still relatively cheap just ahead of a huge boon for earnings. Qualcomm has the only good 5G chip for smartphones and has deals with 30 OEM manufacturers. The demand for its chips should explode as 5G really starts to roll out later this year and next. This stock should inherit the post pandemic world as 5G will likely be one of the biggest stories of the market and this company will be a primary beneficiary. HOLD

Next ex-div date: September 3, 2020 est.

Valero Energy Corp. (VLO yield 7.0%) – Refiners are volatile and cyclical. A deep recession is a terrible time to own one. That said, Valero is the best in the business with a resilient business model, a solid balance sheet and low cost of production relative to its peers. Energy will fuel the inevitable recovery and Valero will benefit. Of course, the stock will likely bounce around with every advance and setback of the economic restart in the near term. But I believe a big recovery in the stock awaits in the quarters ahead. In the meantime, the dividend is safe as the company has a modest 38% payout ratio and the financial strength to endure the recession. HOLD

Next ex-div date: August 13, 2020 est.

Safe Income Tier

The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.

Alexandria Real Estate Equities (ARE – yield 2.6%) – This a defensive REIT with a great niche in the real estate market. It owns a portfolio of properties in life science and research lab facilities for medicine and technology. The model works as the stock has beaten the performance of the overall market for the past five-year, two-year, one-year and year-to-date periods. It has also vastly outperformed the more volatile market over the past month. It’s a great stock to own through the rest of the crisis and beyond. HOLD

Next ex-div date: Sept. 29, 2020 est.

Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – This is a nice yield for what it is. It is a very short term, investment grade bond ETF. It holds up great when the market turns south. BSCL is a safe port in a stormy market and owning it provides much needed comfort in this highly uncertain environment. BUY

Next ex-div date; July 20, 2020 est.

Invesco Preferred ETF (PGX – yield 5.4%) – This preferred stock ETF holds up like a rock in all but the most tumultuous market selloffs. And even then it goes down much less than the market. At the same time, it provides a very nice yield from an asset class that is diversified from the stock and bond markets. HOLD

NextEra Energy (NEE – yield 2.3%) – This is the world’s largest utility company. It’s actually a combination of two companies, regulated electric utility Florida Power and Light and alternative energy company NextEra Energy resources. The regulated utility provides great steady cash flow and the alternative energy business provides a higher level of growth. It’s a hot summer in Florida. And people are cranking those air conditioners. Business is good and should stay good as alternative energy production costs continue to decrease. This is a great stock to own through the recession and beyond. I’m still waiting for some weakness in the stock to upgrade it to a buy. HOLD

Next ex-div date: Sept. 1, 2020 est.

Xcel Energy (XEL – yield 2.3%) – This smaller alternative energy utility is a fantastic way for conservative income investors to play the clean energy trend. After selling off with the market in March, the stock seems to be back on track and resuming its longer term uptrend. It’s a low beta stock that I’m comfortable owning if the market gets dicey and it’s still a good stock for the recovery as well. The stock performance in the portfolio has been fantastic. And I expect more of the same going forward. I’ll raise this to a BUY on any significant weakness. HOLD

Next ex-div date: Sept. 12, 2020 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 estimated.

The next Cabot Dividend Investor issue will be published on August 12, 2020.

Cabot Wealth Network
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