The Zacks Analyst Blog Highlights: ABB Ltd, Phillip Morris, McDonald, Genuine Parts and Transocean

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Aug 05, 2011, 09:51 ET

CHICAGO, Aug. 5, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: ABB Ltd (NYSE: ABB), Phillip Morris (NYSE: PM), McDonald (NYSE: MCD), Genuine Parts (NYSE: GPC) and Transocean Ltd. (NYSE: RIG).

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Here are highlights from Thursday's Analyst Blog:

Screening for High & Rising Income

Dividend investing is a long-term strategy, and the Zacks Rank is mostly for shorter-term traders, but even long-term investors should not ignore it entirely. It is still a good timing tool for them.

If you are buying a stock for income, the last thing you want to see is a cut in the dividend. The best defense against that is a low payout ratio. Managements generally will try to avoid dividend cuts, but paying out more than you earn each year is not sustainable.

A company needs to retain at least some of its earnings to grow -- not just earnings, but the dividend as well. I therefore required that the company pay out no more than 60% of its earnings so there is a very strong cushion against dividend cuts.

One of the nice things about dividends is that they tend to grow, particularly if the company has a history of raising dividends. It is that dividend growth that can protect you from inflation. That is something that a T-note simply will not do for you.

In the screen I required that dividends increase by an average rate of 5% per year over the last five years. In other words, the dividends have increased by more than twice the rate of inflation over that period.

More significantly, the first cut is the hardest. The five percent growth requirement has the added advantage of eliminating any firm that has cut its dividend in recent years. With a dividend plus dividend growth strategy, it is imperative to avoid dividend cuts. I would not expect some of the historic growth rates to be continued.

It is highly unlikely that ABB Ltd (NYSE: ABB) is going to generate the sort of earnings growth needed to grow its dividend at over 59.7% per year over the next five years. Most, however, have dividend growth rates in the mid-teens or lower, and those sorts of growth rates are probably sustainable, at least for a few more years.

Look Outside the U.S.

Don't be afraid to look outside the U.S. for income stocks. The dollar has been declining, and I think it will probably continue to do so. That would mean that a dividend paid in euros or yen would be translated into even more dollars. I think that the decline of the dollar is a good thing, in that it should help promote growth and reign in our massive and unsustainable trade deficit.

Also, while dividend paying firms are generally larger market cap firms, that is not always the case, as this screen shows. Yes, there are huge firms on the list like Phillip Morris (NYSE: PM) and McDonald's (NYSE: MCD), but there are also five sub-$500 million micro caps as well.

Historically dividend paying companies have far outperformed non-dividend paying stocks, and dividends account for about 40% of the total return from owning S&P 500 stocks over the long term. The combination of high dividends plus short-term estimate momentum just could lead to long-term success in the market. This is not a flashy strategy, but a solidly profitable one. It focuses on both sides of total return, income plus capital appreciation.

Yes it has been a scary couple of weeks in the market, but the time to sell is when all others are greedily buying, and the time to buy is when others are despondently selling. Earnings have been doing very well lately, and at the end of the day, that is still the most important thing for stocks.

Stocks with Zacks Ranks of #1 or #2 are ones that have better recent earnings pictures than the vast majority of stocks out there. I am well aware of the macro-economic problems on both sides of the Atlantic, and recent developments on both sides have not been promising. Still, good solid profitable companies will endure and prosper.

Some of the firms on the list have tended to do better in bad times than in good. For example, Genuine Parts (NYSE: GPC). If the economy stays bad, people are going to try and fix up the old clunker rather than getting a new car. That means more auto repairs and hence replacement parts. In bad times, going out to eat at Red Lobster might seem extravagant, but people will still buy a McDouble or McChicken off the $1 menu.

Transocean Misses, Backlog Weak

Offshore drilling giant Transocean Ltd. (NYSE: RIG) reported bleak second quarter 2011 results, hurt by the decline in utilization rates, lower backlog and higher operating costs.

Earnings per share, excluding expenses associated with the Macondo well incident, tax charges and loss related to impairment of three standard jackups, came in at 65 cents. The figure fell short of the Zacks Consensus Estimate of 77 cents and trailed the year-ago adjusted profit of $1.66.

Total quarterly revenues of $2,334 million missed the Zacks Consensus Estimate by 1.7% and were down 5.8% year over year, mainly due to the reduction in contract drilling sales (due to lower utilization and lower average daily revenue), partially offset by contributions from additional drilling management services activity.

Transocean's high-spec floaters contributed approximately 61% to total revenue, while mid-water floaters and jackup rigs accounted for 16% and 12% of the total, respectively. The remaining revenue came from other rig activities and integrated services among others.

Outlook

Transocean expects market utilization and dayrates for all classes to remain steady or improve over the next few quarters based on continued favorable commodity prices and an improved global economic outlook, which is also expected to create contracting opportunities for the remainder of 2011 and throughout 2012.

Our Recommendation

With its technologically advanced and versatile offshore drilling fleet, strong backlog and considerable pricing power, Transocean offers an unmatched level of earnings and cash flow visibility.

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