A tiring quarter
Stocks are stumbling toward the close of the first half of the year like an exhausted World Cup team in extra time. As we approach the second half, the S&P 500 average is down 11% for the insipid current quarter and off 7% for the year-to-date. My emphasis on dividends has kept us ahead of these returns but 2010 has been an unusually frustrating investment period.
Dividend trends indicate possible relief in the next few months. This year so far, 136 companies in the Standard & Poor’s 500-stock index have boosted their dividends with only two downsizing. This contrasts with 2009 when 78 cut their payouts and the increases in the first half already almost equal last year’s total of 157.
Much of the damage took place among financial companies. Their stocks attract a lot of publicity but I have been avoiding them as I feel their depressed stock price levels are fully deserved. Citigroup alone has required several government resuscitations since the 1930’s.
The House of Morgan, split in two by the bank reform legislation that followed the Depression has thrived through numerous trials. Despite the prevailing fears, the global economic recovery continues. Europe’s current fiscal problems will give a short-term lift to U.S. markets and it’s banks. J.P. Morgan Chase (JPM-$37) is sound enough but will have its hands full with post-merger and balance sheet cleanup issues for another year. Its cousin, Morgan Stanley (MS-$24), is ready for takeoff.
It is competing successfully with Goldman Sachs, which must devote some energies to legal and reputation issues. ((Goldman should be grateful to BP for taking its place in the ducking stool of public rage.) Morgan Stanley will soon be reporting earnings for the June quarter. Analyst forecasts are unusually uncertain now but I expect the company’s results will show close to $3.00 earnings ahead for the full year, which should ignite favorable stock price action
Earnings reports are quite likely to spark widespread price moves upward. The summer is usually a lazy period for stocks as they mark time until the second half is well underway. Historical patterns are somewhat favorable for stocks during the second half of the year. After a period of rising dividends, the outlook is encouraging as increasing dividend declarations reflect assessments by company managers that the futures of their business look better.
Unfortunately, these futures look better now in manufacturing, medical and technology companies than in consumer-related sectors burdened by continuing high unemployment. The Federal Reserve and the central banks of Europe will hold interest rates down for months, if not years, enhancing investment opportunities in dividend-rich stocks. Valuations are approaching historical bargain levels but successive waves of bad news are keeping buyer optimism underwater.
That is unlikely to change for a few more weeks until we get some good news like a capped oil spill or some favorable earnings reports but it will come. In the meantime, careful buying will be rewarding. Bristol-Myers (BMY-$25) is an exemplary buy candidate. It yields 5%, has boosted its dividend for 9 straight years and will earn around $2.17 this year, up 17%, a promising combination of growth at a very reasonable valuation.
Restrictions on offshore oil drilling mean increased business for oil tanker companies. Nordic American (NAT-$28), which now operates 20 supertankers, pays a variable but high dividend. It will announce its next dividend on August 6 and I expect the resulting annualized yield will exceed 10%.
Despite the current market weakness, I still expect positive returns for the year. That means price targets at least 8-10% ahead of current levels.