These are uncertain times with the election coming up and Covid still hanging around. But instead of trying to navigate the unpredictable twists and turns in the near term, let’s focus on things that are sure to last beyond the current headlines. This is a great time to focus on issues that will drive business and the markets long beyond 2020 while no one else is looking and bargains can be had.
One issue that is certain to remain is the aging of the population. The U.S. and global populations are older now than ever before and getting older still at a break-neck pace. The trend is even more pronounced in other parts of the world.
Regardless of who is elected president, the population will get older. No matter what course the virus takes, the population will continue to age. You can take that to the bank. In this issue, I identify two of the very best health care companies in the world that are perfectly positioned to benefit from the aging trend.
Cabot Dividend Investor 1020
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Amidst the Uncertainty, Bank on the Aging Population
It’s certainly been a weird year. In fact, it’s probably the craziest year I’ve ever lived through. And it’s not over yet.
No one could have predicted a pandemic would sweep the globe and crash the economy. That’s a new one for me. Of course, the market doesn’t seem to mind. It’s close to the all-time high.
Then, there’s the election coming up in a few weeks. Elections always carry uncertainty, but this one is special. Because of mail-in voting there is a strong possibility that the election results won’t be known until long after Election Day. I can’t imagine that today’s polarized political parties will handle it well. And don’t forget Covid. The virus is still hanging around. And no one really knows the course it will take over the next several months.
You may be understandably perplexed as to how to invest in this environment. It’s hard to muster a lot of enthusiasm for a market near all-time highs ahead of so much uncertainty. But it’s important to remember that these issues are temporary.
Remember the fiscal cliff? How about the global economic slowdown and oil price crash? Remember the near bear market at the end of 2018 and fears of recession?
These issues were such a big deal at the time. But nobody cares anymore. It was mostly just noise, as the market continued to forge higher. Admittedly, this pandemic is more serious and will leave a much bigger scar. But Covid too will fade, as will this election.
Instead of trying to navigate the unpredictable twists and turns in the near term, let’s focus on things that are sure to last beyond the current headlines. This is a great time to focus on issues that will drive business and the markets long beyond 2020 while no one else is looking, and bargains can be had.
One issue that is certain to remain is the aging of the population. The U.S. and global populations are older now than ever before and getting older still at a break-neck pace. The fastest growing segment of the population is 65 and older, as an average of 10,000 baby boomers are turning 65 every single day. The trend is even more pronounced in other parts of the world.
Regardless of who is elected president, the population will get older. No matter what course the virus takes, the population will continue to age. You can take that to the bank. With that trend in mind, in this issue, I identify two of the very best health care companies in the world that are perfectly positioned to benefit from the aging trend.
What to Do Now
After pulling back nearly 10% in September, the S&P 500 has gotten its mojo back. The index has recovered nearly all the losses and appears poised to make new all-time highs. This is looking remarkably like June, when the market stumbled temporarily and then resumed its uptrend.
While it’s hard to see how the market can surge past the old highs and well beyond ahead of the uncertain election and ongoing Covid worries, the market certainly seems to want to go higher. It’s hard to get excited about this market but it doesn’t make sense to fight the tape either.
Certain portfolio positions are breaking out and we’ll let them ride. Most notably, IIPR and QCOM have soared to brand new all-time highs over the past three weeks and could continue to run higher for a while. Additionally, CCI and ARE, as well as DLR, have all started to move higher after a long sideways period. They might continue to move in the near term.
While several positions are perking up, there’s a couple that haven’t been working and still aren’t working, namely EPD and VLO. The choppy market hated these stocks just as much as the good market, and there are no signs of life. However, both companies will report third-quarter earnings in the weeks ahead, and I’m hoping the report will act as a catalyst for improved performance in the months ahead.
Featured STOCKs
The very demographic properties of the human race are changing before our eyes. And this tectonic shift in consumers will massively affect the economy and the markets for a long time. Consumption is 70% of the economy, and the consumer is changing.
Certain companies will benefit from this trend in a major way. While many investors are running around chasing the latest vaccine news and poll numbers, two of the world’s very best health care companies remain dirt cheap and perfectly poised in front of a megatrend that will leave today’s short-term concerns in the dust.
It’s not hard to figure out what the older consumer will demand. They’ll need more health care. It’s how we’re built.
According to the Centers for Medicare and Medicaid Services, health care spending in this country will increase by $200 billion to $300 billion every year for the next six years. Spending is expected to increase from $4.1 trillion per year in 2020 to $5.7 trillion by 2026. That’s trillion with a T. And that’s just in this country.
AbbVie Inc. (ABBV)
AbbVie is a cutting-edge company specializing in small molecule drugs. After AbbVie’s spinoff from Abbot Laboratories (ABT) in 2013, it has grown into the eighth-largest pharmaceutical company in the world, primarily on the strength of its blockbuster biologic auto immune drug Humira, the world’s number one drug by far with annual sales of about $19 billion.
But the stock is cheap. ABBV is selling about 30% below the 2018 high. It is also selling at a microscopic 8 times forward earnings.
It’s cheap because of issues with its blockbuster drug, and therein lies the opportunity. Humira is facing increasing competition overseas and will face generic competition in this country (which accounts for three quarters of sales) in 2023. The stock is discounted because of fears that it might not be able to make up the revenue lost from patent expirations.
But I believe AbbVie has more than enough in the hopper to fill the void.
The company has one of the very best pipelines of new drugs in development in the industry as well as hugely promising, newly launched drugs. The company believes recently launched cancer drugs Imbruvica and Venclexta can generate $9 billion in annual sales by 2025. It also launched two drugs last year that were rated among the top three launched of the year by EvaluatePharma, and AbbVie thinks they could bring in another $10 billion a year by 2025.
To further diversify away from its dependence on Humira, AbbVie purchased Ireland-based Allergan (AGN) for $63 billion last year. The company is about half the size of AbbVie and features blockbuster facial treatment drug Botox. The acquisition will diversify the company away from Humira in the near term while the stellar pipeline gains traction.
I believe investors are realizing that AbbVie’s ability to overcome Humira competition had been underestimated. Having fallen 50% from the 2018 high, ABBV rallied 50% from the summer of 2019 until just prior to the pandemic bear market. It then quickly rebounded from the March lows to a new 52-week high this past summer, has since taken a breather and consolidated from the summer highs, yet still remains in an uptrend.
The recent hiccup and an uncertain market present an excellent opportunity to get into the stock while it’s still cheap. It’s also worth noting that ABBV pays the highest dividend in all of big pharma, with a yield that is currently 5.4%.
Eli Lilly and Company (LLY)
LLY was initially recommended in the August issue. I mention it again here because I believe it’s particularly timely.
Founded in 1876, Indianapolis-based Eli Lilly is a global pharmaceutical giant with $23 billion in annual revenues, 34,000 employees and sales in 120 countries. It stands out from the rest of the large pharmaceutical companies in that it invests much more heavily in research and development and its new drugs and pipeline reflect that fact.
The stock has been in the news lately for having one of the leading Covid-19 drug candidates. It’s good press and it is reflective of Lilly’s innovation and powerful pipeline. But I’m not buying it because of that. The main reason to consider the stock is the fact that it has lots and lots of potential new drugs.
The company spends 25% of sales on R&D every year. The segment employs 23% of its workforce and spends $5.5 to $6.0 billion annually. That’s a significantly larger commitment than its peers. The pipeline is the key to this business. New drugs are how these companies succeed and grow. And Lilly has been spectacular.
Lilly specializes in developing drugs and treatments for unmet medial indications, where there is a higher chance of FDA approval and higher market share and profit margins. The drug company has a very strong presence in Diabetes (Trulicity, Basaglar, Jardiance), Oncology (Alimta, Cyramza, Vezenio) and new drugs in Immunology (Taltz and Olumiant).
Of particular note, Diabetes treatment Trulicity reported 29% sales growth in the first half of this year with revenues of $2.5 billion. Retevmo recently received FDA approval as a treatment for lung cancer, but also reported very positive phase III results in preventing the recurrence of breast cancer. That could make the drug a blockbuster. The stock popped over 15% on news of the phase III study.
Although sales slowed in the second quarter during the pandemic, Lilly managed to beat earnings forecasts with 26% growth over last year’s quarter and raised 2020 guidance by 11% to reflect anticipated 21% earnings growth over 2019.
LLY has been one of the very best big pharma performers, returning about 40% over the past year. It has also significantly outperformed the market YTD and over the past one-year and three-year periods. Yet, it still sells at a very reasonable valuation. The stock has pulled back 12% from the high in early July but still remains in a longer-term uptrend.
The stock tends to thrust higher and then consolidate for a while before doing it again. This should be an ideal time to get in. It’s also worth noting that LLY was highly resilient during the bear market selloff in March. It’s a solid down market performer that you can confidently own in uncertain times.
Lilly has a proven ability to actually execute. And I trust it.
Portfolio at a Glance
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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.
B&G Foods (BGS – yield 6.6%) – B&G will report third-quarter earnings around the end of this month. Those earnings are likely to be very strong and the company has guided that 2020 earnings will be significantly higher than the year before. The stock pulled back during the selloff in early September but has since climbed back. Despite the fact that BGS has returned over 70% YTD, it is still reasonably valued. This was a 50 stock a few years ago (currently 29). The good earnings and likely continuing strong results post Covid should make this one a solid performer. BUY
Brookfield Infrastructure Partners (BIP – yield 4.1%) – This is a great stock if the pandemic drags on, and even better if it doesn’t. Investors are gravitating towards the defensive business and high dividend in these uncertain times. BIP seems to continue to climb slowly no matter what. It’s also true that infrastructure is an increasingly popular subsector as countries scramble to get it up to snuff. It’s also a great play no matter who wins the election. The chart tells an amazing story. BIP continues to slowly forge higher with no signs of stopping. It’s not breaking any speed records but it certainly trends in the right direction. BUY
Enterprise Product Partners (EPD – yield 10.3%) – Growth in the midstream energy space has evaporated. Demand for oil and gas fell off a cliff during the lockdowns and still hasn’t come back to normal yet. Growth projects have largely been canceled as these companies hold on for dear life, but so what. The stock is already selling near an all-time low valuation. It would have to be at least 25 per share (currently 17) before the diminished near term growth prospects become a legitimate headwind. Oil and gas aren’t going away anytime soon. This company will rebound very quickly. In the meantime, the distribution is rock solid and this in one of the best income stocks I’ve ever seen. Earnings at the end of the month should prove this company’s resilience and may be a catalyst in the near term. HOLD
STAG Industrial (STAG – yield 4.3%) – This stock is a bit of a strange bird. Sure, it’s a high income REIT that offers a fat, and monthly, payout in a low interest rate world. But STAG is more cyclical than its peers. It isn’t immune to market pullbacks and corrections. But the higher trending market is a benefit. Like the overall market, STAG is flirting with all-time highs at this point. Industrial properties are a fantastic niche as demand remains quite strong relative to supply. Sure, the stock can bounce around a little, but the trend is unmistakably higher. HOLD
Verizon Communications (VZ – yield 4.2%) – This stock is a like a modern day utility. It seems to fit the stereotype. It underperforms the up market but kind of chugs along and pays a fat dividend. It’s also great when the market gets ugly. Those facts alone make VZ a nice addition to a dividend portfolio. But it’s better than that. Boring old utilities don’t have a huge catalyst to look forward to. VZ has 5G. As the premier facilitator of wireless cellular technology, VZ most certainly stands to benefit from the fact that cellular is about to become much more widely used. You can slice and dice it any way you want, but VZ will surely find a way to collect more fees as new technologies use its networks. Boring now with growth later is a keeper in this uncertain environment. 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 – yield 5.3%) – I love this stock, almost as much as I love NEE. It’s cheap and pays a high dividend, and the future looks magnificent. With the enormous tailwind of an aging population, AbbVie probably only has to get things half right to thrive. But it’s so much better than that. It’s a cutting-edge company with a fantastic pipeline. But health care has been stuck in the mud of late. It might be nervousness about the election. But that’s shortsightedness—and the kind that can’t be corrected with glasses. All you have to do is collect the big fat dividend and wait for this company to inherit the future. BUY
Altria (MO – yield 8.5%) – I never truly understood what it is to be unloved until I owned this stock. Sure, it has a high and safe yield and sells at an enormous discount that’s unjustified. But the market hates its guts. As long as the market focuses on other things, MO trends higher. But when the market starts paying attention again, MO gets knocked back and put in its place. I’m beginning to wonder if the market will ever come around. This might just be a great income stock and nothing more. But that ain’t so bad in a world where the 30-year Treasury yields 1.58%. BUY
Crown Castle International (CCI – yield 2.9%) – This cell tower REIT had been trending slowly downward since July, but it had a nice up move in the past couple of weeks and may have broken the pattern. Cell tower infrastructure is a great business and I think CCI will benefit on the other side of the election and pandemic as investors will again focus on the opportunities surrounding the 5G rollout. Sure, this stock can bounce around. It can go sideways for long periods of time. But CCI, through it all, trends ever higher over time, just like demand for its cellular infrastructure. HOLD
Digital Realty Trust (DLR – yield 2.8%) – Look up “niche player” in the dictionary and you’ll see DLR’s picture. These are weird properties that didn’t even exist a few years ago. Data centers house technology systems, and technology only gets bigger and bigger. DLR got into the business a few years ago and has become one of the largest REITs on the planet. It might be a good business. In addition to that, the stock doesn’t care what the overall market does. It has a beta of 0.25. The world can go to hell in a hand basket and DLR couldn’t care less. This is a great stock that should continue to trend higher no matter what. BUY
Eli Lilly and Company (LLY – yield 1.9%) – Lilly has been in the news as its Covid drug advances and gets a lot of press. That’s great. But that’s not why I’m buying it. Lilly has lots and lots of promising new drugs. The company spends more of its budget on developing new drugs than any of its competitors. And the results reflect that fact. Sure, health care is stuck in the mud of late. But this company is one of the very best. And it will move higher again. Unlike most of its big pharma competitors, Lilly has a proven ability to actually execute. And it’s a great bet going forward. BUY
Innovative Industrial Properties (IIPR – yield 3.5%) – It’s happened. This marijuana farm REIT has run up to a new all-time high. The stock soared to 130 in the summer of 2019, only to fall all the way back to about 70 by the end of the year, as the marijuana sector sold off. But the selloff was never justified. I don’t care what else is going on in the sector. IIPR is making money and growing earnings hand over fist. Making money is always a winner over time. I don’t know how much farther IIPR will continue to rise from here. But it’s on a roll and it doesn’t make sense to fight the tape. HOLD
Qualcomm Inc. (QCOM – yield 2.1%) – Guess what: Apple (AAPL) is rolling out its new 5G phone. Sure, this was anticipated. You could see it coming a mile away. But somehow the actual reality on the ground juices the stock price. The Apple phones use Qualcomm’s chip, and Qualcomm gets royalties as each phone is sold. QCOM stock has coincidentally run up to a new all-time high. This was always going to happen. And now it is happening. Let’s see how far this stock will run. It’s still on a huge uptrend and I’ll bet there’s a lot more gas left in the tank. HOLD
Valero Energy Corp. (VLO – yield 9.1%) – After such good news regarding IIPR and QCOM something had to spoil the party, and VLO is the man for the job. This refiner stock continues to be an absolute dog. After rebounding from the March lows, it deteriorated right back near those same lows, despite the fact the business is rapidly improving. The recovery that is firmly underway will inevitably boost business for this refiner. But the market doesn’t seem to give a damn. I’m waiting for earnings at the beginning of November. It should be the last crummy quarter out of the way. This stock can move higher fast and the visibility toward much better quarters in the future could drive the stock higher. HOLD
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 2.5%) – Oh, sweet Alexandria. We wanted a safe and reliable dividend stock and we got it. It may bounce around a little in the short term, but it keeps trending higher no matter what. It’s just a good business. The research lab and life science niche isn’t going out of style. This stock will keep increasing your net worth while boring the heck out of you at the same time. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.5%) – This short-term bond ETF is a beautiful thing in markets like this. It’s nice to have something in the portfolio that you don’t have to worry about. It still has a yield that’s better than you’ll get in most traditional safe-haven investments. BSCL is a safe port in a stormy market and owning it provides much needed comfort as risk and uncertainty abound. BUY
Invesco Preferred ETF (PGX – yield 5.5%) –This preferred stock ETF is rock solid in all but the most tumultuous market selloffs. It’s trending right back to all-time highs as yield-starved investors can’t get enough. It is less volatile than the market in general and provides a high yield and excellent diversification from both the stock and bond markets. HOLD
NextEra Energy (NEE – yield 1.8%) – The market hates oil and gas. But it embarrasses itself by fawning all over alternative energy. This regulated and alternative energy utility has now eclipsed Exxon (XOM) in market cap. This company is really feeling its oats and it’s making like Apple (AAPL) and Amazon (AMZN) and splitting its stock four for one, effective October 26. After a terrific 2019, the stock is up almost 30% YTD. The stable earnings combined with growth from alternative energy is making this stock a superstar. HOLD
Xcel Energy (XEL – yield 2.4%) – “Junior NEE” is acting like it. The alternative energy stock made a strong move higher in the past couple of weeks and achieved a brand new all-time high. The cost of producing alternative energy is getting cheaper while demand continues to grow. Clean energy also captures the imagination of investors as it is the energy source of the future. As much as the market despised MO and VLO, it’s infatuated with XEL and NEE. HOLD
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 November 11, 2020.
Cabot Wealth Network
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