Berko: Which bank and utility stocks should I buy?
Friday, August 02, 2013 7:00 AM
Dear Mr. Berko,
I’ve enclosed the names of five stocks I have personally researched. I have $20,000 to invest, and my goal is principal safety first and then good income and then growth. Please tell me how much to invest in each of these issues.
L.M., Columbus, Ohio
Ares Capital (ARCC-$17.62) was founded in early 2004 and came public at $15 in October. This is a closed-end, non-diversified investment management company that puts its money in non-syndicated, senior debt, mezzanine debt and non-control equity investments. Its focus is middle-market companies with annual earnings before interest, taxes, depreciation and amortization between $10 million and $250 million. The $1.52 dividend, yielding 8.8 percent, was minimally affected during the most recent recession. And a steady share value during the past five years suggests that ARCC is one of the most stable business development companies in the BDC sector. Its huge $60 billion loan portfolio had minimal slippage during the recession and easily outperformed its peers. Morgan Stanley, UBS and Barclays have “outperform” rankings on ARCC. The dividend is likely to be raised this year, so buy 300 shares.
National Grid PLC (NGG-$59.07) is an electric and gas utility company that is home-ported across the pond in the United Kingdom. This $22 billion-revenue company owns and operates high-voltage electricity transmission networks in New York, Massachusetts, Rhode Island, New Hampshire and Canada. NGG also owns enormous storage facilities of liquefied natural gas in the U.K. and electricity interconnectors in France and the Netherlands. It owns and operates the electricity transmission system in England and Wales and operates the national gas transmission pipelines in all of Great Britain. The company has strong earnings and a current $4.02 dividend, yielding 7.1 percent, and it has a good record of annual increases. Reuters, Bank of New York Mellon and Zacks Investment Research all recommend the company. Buy 100 shares.
Telefonica Brasil (VIV-$22.48) is a $17 billion-revenue company that provides fixed-line telecommunications, broadband Internet and pay TV services to 41 million Brazilians. In the past 10 years, revenues have grown fourfold; debt has increased sixfold; earnings have improved from $1.22 to $2.04 a share; and the average share price has doubled. But VIV’s $1.54 dividend, which yields 7.1 percent, is less today than it was a decade ago, and it is as flighty as the country’s politics. Reuters ranks VIV as “outperform.” Market Edge ranks it as “avoid.” And Bank of America is neutral. Frankly, I wouldn’t touch this issue with a very long oar. VIV is not an investment but a rank speculation, like most things in South America. As they say in Portuguese, “esquece-lo.”
Canadian Imperial Bank of Commerce (CM-$75.88), a $12 billion-revenue bank founded in 1867 and headquartered in Toronto, has not been one of the better-managed banks north of the equator. There are only 25 domestic banks in Canada (whereas there are perhaps more than 5,000 in the U.S.), and CM doesn’t butter my bagel. Revenues basically have not changed in the past decade. Profit margins stink. Earnings have been stormy. Those in management seem to have been drunk at the switch. (Perhaps they couldn’t find it.) However, dividend growth has been attractive, and revenues and earnings for this year and 2014 look good. And there’s a good possibility the $3.65 dividend, which yields 5 percent, will be increased. I have passive-aggressive feelings about this bank, but they’re mostly passive, as I believe there are much better fish in the sea.
Kinder Morgan Energy Partners (KMP-$85.08) is the largest midstream energy company in North America, with more than 80,000 miles of pipe connected to 180 terminals. Acquisitions and smart management are likely to ensure continued revenue and distribution growth. Revenues have grown each year since 1994 and are expected to come in at $13.7 billion next year. Dividends (distributions) have increased steadily every year, and in 2014, KMP expects to pay out $5.56 a share, 95 percent of which is not taxable. This year’s $5.20 dividend yields 6.1 percent. And there’s even an unfounded rumor that the share will split 2-for-1. Argus Research Co., Merrill Lynch and Oppenheimer recommend the stock. So put 100 shares of KMP in your portfolio.
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