The electric power utility gave 4% to 6% earnings growth for a few years out as acceptable and it will separate its Ohio businesses. For 2012, AEP sees $3.05 to $3.25 EPS versus Thomson Reuters targets of $3.17 EPS.

AEP has noted a refocus on its transmission business and putting capital to work in the regulated generating fleet to comply with new EPA regulations. The regulated units generate a significant portion of AEP’s earnings and supports its dividend.

The company is filing with the Federal Energy Regulatory Commission to separate its Ohio businesses and it will terminate and then replace its Interconnection Agreement for its eastern generating assets under a new power cost sharing arrangement. The Public Utilities Commission of Ohio approved AEP’s plan back in January to move forward with the separation of its Ohio generation assets.

As far as FERC is concerned, the company expects that the FERC will decide on the implementation of corporate separation and the termination and replacement of the Interconnection Agreement in the first quarter of 2013.

On a day when the DJIA is down 1%, AEP is up 0.3% at $39.50 and the 52-week trading range is $33.09 to $41.98.

AEP’s dividend should not just be safe ahead… it should still grow even with the coal risks which could lie ahead.

JON C. OGG

Dividend investors will be happy as the $0.06 dividend is now a $0.08 dividend after the firm raised the payout today.

Cisco trades at an implied 11.4-times current year earnings estimates, and maybe even a tad less if you factor in the wasted billions used for share buybacks.

We were worried about margin contraction despite the lower SG&A costs as Cisco tries to win more business against competition.  That just did not come about: gross margin rose to 61.3% from 60.2% and the cost of sales rose by more than 7%.  Cisco had given a forecast of 61.5% to 62.0% for the quarter.

Guidance will come in the conference call.  If John Chambers is going to disappoint, it sure did not sound like it when he was speaking with Maria Bartoromo on CNBC.  For the quarter we are already in, the estimates are $0.45 EPS and $11.46 billion in revenues.  For the July year-end, the estimates are $1.77 EPS and $45.83 billion in revenues.

Cisco shares closed up 1.1% at $20.43 and the after-hours reaction has shares up 2.6% at $20.96.  Its 52-week trading range is $13.30 to $22.15.

JON C. OGG

Jon Marino of PEHub.com noted that P.E. firms are hiring and referenced a follow-up report for BDO USA’s third annual private equity “PErspective” report… 57% of private equity executives increased professional staffing and 62% plan to hire again this year.  This is a complete reversal from the layoff waves of prior years.  Here is more detail from that report.

Whether you like millionaires or billionaires or hate them, the one aspect that is so unfairly portrayed about companies bought by private equity firms is as follows: Most businesses bought by private equity firms need to be turned around or need to be run better.  Sure, they get leveraged up and they scrap inefficient operations.  The dirty secret that private equity firms are not defending enough is that many of these companies would have headed for bankruptcy in the long-term if they had not stepped in.  If that results in a liquidation rather than a pure bankruptcy, guess how many jobs get lost at those companies… all of them, rather than some.

The business sector is not just a one-way street.  Companies hire workers in good times and most fire in bad times.  We even ran our own 2011 Layoff Kings.

JON C. OGG

And speaking of turnarounds, this is the second full report after the restructuring efforts have taken effect for Cisco.  It is a leaner company and operating costs (at least compensation in SG&A) should be lower now.  The problem is that Cisco has been wanting to win back much business and to lock out other competitors as it goes after every penny spend of the network (now including datacenters too).  Translation: we just expect longer-term margin compression.

In this last leg of the rally, Cisco is back above $20.00 against a 52-week trading range of $13.30 to $22.15.  Thomson Reuters has consensus estimates of $0.43 EPS and $11.23 billion in sales.  For the quarter we are already in, the estimates are $0.45 EPS and $11.46 billion in revenues.  For the July year-end, the estimates are $1.77 EPS and $45.83 billion in revenues.  In short, Cisco trades at an implied 11.4-times current year earnings estimates.

Cisco unfortunately wastes more money than it should buying back stock and that price level on the buyback plan is probably still just slightly above breakeven.  Analysts have a consensus target of $21.66, but we just saw one target on Tuesday morning from Credit Suisse at $26.00.  Chart and options trading analysis will be made in much more detail on Wednesday ahead of the report.

One last note… Cisco has pledged to raise its quarterly dividend of $0.06 ‘in time.’  It has now had four payments of that rate of $0.06 per share per quarter and that yield comes to only about 1.2% for new investors.  Longer-term, that dividend needs to go over 2% if it wants to entice income-oriented investors.  It is possible that we will get a dividend hike.  If not this quarter, we expect one soon.

JON C. OGG

The prince is a very long-term investor in Citigroup Inc. (NYSE: C).  He is also apparently its largest holder.  This evening he noted that he expects Citi to begin returning capital to shareholders soon.  The stress tests should be finished in March and the prince said is pushing for a dividend hike.  He even noted that he held a conversation with Citigroup CEO Vikram Pandit late last week and his opinion is that the new Citi is doing very well. 

Citi is one of the ‘too big to fail’ banks and it has paid only a one-cent dividend since it has gotten out from the TARP.  After a 1-for-10 reverse stock split, many investors have moved on.  The adjusted dividend back in 2007 was $5.40, but it is going to be quite some time before investors expect that to remain.

Thomson Reuters is predicting that Citi will have normalized earnings at $4.04 EPS in 2012 and $4.70 EPS in 2013.  If the bank is ever allowed to return 40% of its normalized earnings, Citi could pay out $1.60 or so per share in annualized dividends.  That is a big if, but at $33.30 it would generate a dividend yield of 4.8%.

Again, that IF is a really big ‘if’ based on the regulatory climate of today.  The one bank that is expected to be among the very first to raise the common stock dividend is J.P. Morgan Chase & Co. (NYSE: JPM).  Its $0.25 per quarter dividend used to be $0.38 per quarter before the bubble burst.  We also expect a higher dividend coming down the pipe from Wells Fargo & Co. (NYSE: WFC) as its $0.12 per quarter dividend compares to $0.34 before the bubble burst.

JON C. OGG

The surprise winner so far in 2012 after the first month is USG Corporation (NYSE: USG). then there are stocks like Bank of America Corporation (NYSE: BAC), Ingersoll-Rand plc (NYSE: IR), Moody’s Corporation (NYSE: MCO), Intel Corporation (NASDAQ: INTC), Wells Fargo & Co. (NYSE: WFC), and American Express Co. (NYSE: AXP).  Yep, the other winners of these seven holdings are mostly tied to finance.

We have evaluated the performance to date (from FinViz.com) and added in some color on each.  We have also shown how the price compares to the 52-week highs or to the consensus price target as well, and included in some cases whether the position is substantial or not.

USG Corporation (NYSE: USG) is up 32.8% year-to-date and is actually Berkshire Hathaway’s top performing stock.  With so much interest in the bottoming out of housing at some point in 2012, it may not be that ridiculous even if the fundamentals have not changed all that much yet.  The concern here is that at $13.50 it now trades above the consensus $13.30 price target.  Buffett holds over 17 million USG shares.

Bank of America Corporation (NYSE: BAC) is up 32.4% year-to-date and the new large preferred position is back to where Warren Buffett doesn’t look foolish for dreaming up his investment in BofA while in the bath.  At $7.36 there is still plenty of upside to the $8.90 price target and this remains (and is expected to remain) well under book value.

Ingersoll-Rand plc (NYSE: IR) is up 15.5% year-to-date, not bad for what is usually a slower-moving company with a portfolio of industrial and commercial products.  At $35.18, it does not have much upside left to the consensus price target of $37.94 but it is still way off the 52-week high of $52.33.  Buffett’s position is way down from prior periods and is only 636,600 shares as of the last report.  This position just can’t move the entire Berkshire Hathaway Barometer too much.

Moody’s Corporation (NYSE: MCO) is up 11.6% year-to-date.  The credit rating agency has been a controversial position that Buffett has lightened up on through time.  At $37.60, it is close to the consensus price target of $39.60 and under the 52-week high of $41.93.  Buffett did lighten up a bit on this position but still holds roughly 28.4 million shares.

Intel Corporation (NASDAQ: INTC) is up 9.5% year-to-date and is one of the news 2011 investments that Mr. Buffett hid.  It was also his first technology pick as far as pure hardware is concerned.  At $26.55, Intel is very close to its 52-week high of $27.00 and close to its consensus analyst price target of $27.17.

Wells Fargo & Co. (NYSE: WFC) is up 8.9% year-to-date and is up the least of the big money-center banks.  It is also the only one of the money-center banks trading above book value because the restructuring regulatory climate over future earnings will create the least amount of change at Wells Fargo. Buffett keeps adding here and now holds over 361 million shares as one of his biggest positions ever.

American Express Co. (NYSE: AXP) is up 7.7% year-to-date, which is lower than many financials. The recent earnings report showed improvement but perhaps a trend towards peaking of the improving credit metrics of AmEx customers.  Buffett’s position is roughly 151.6 million shares.

Berkshire Hathaway’s most recent holdings in entirety can be found here.

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JON C. OGG

As we noted this morning, “The company said that fourth quarter pre-tax operating profit was $1.1 billion, or 20 cents per share, a decrease of $189 million from fourth quarter 2010. Ford has posted a pre-tax operating profit for 10 consecutive quarters. Revenue for the period was $34.6 billion up $2.1 from the year before’s quarter.”

Asia seems like a spot where Ford should not be weak on the surface, but again that was explained a in recent weeks (when CNBC accidentally called for a loss at Ford rather than a loss in operations in much of Asia due to the ongoing Thai flood issues). 

Our question is simple.  Can the dividend save Ford?  Ford was originally expected to reinstate its dividend at some point this year or even in 2013.  Unlike General Motors Co. (NYSE: GM), Ford is not under government restriction and it does not owe any bailout funds back to Uncle Sam.

New investors entering today will get a dividend yield of 1.5% now that shares are down 3.5% at $12.30.  Shares are still up handily in 2012 after closing at $10.76 on December 30.

The next boost is the coming replacement cycle here in the United States.  Maybe this is not as large of a growth market as Asia and Latin America, but the drastic age of the U.S. car fleet owned by Joe Public is the oldest it has been in our lives.  People can keep pouring a few hundred dollars here and a few hundred dollars there every few months to keep a clunker from clunking out, but eventually it is just cheaper to buy a new a car.

As long as the economy doesn’t fall apart rapidly, Ford’s dividend, the recovery after the Thai flooding, and the U.S. replacement cycle should all help Ford shareholders.

JON C. OGG

On an adjusted basis, P&G sees Fiscal 2012 earnings of $4.00 to $4.10 EPS and total sales up about 3% to 4%.  Thomson Reuters has a consensus earnings estimate of $4.17 EPS and $86.15 billion.  That would be a tad light on earnings and up to $1 billion light on revenues.

Higher commodity costs are expected to be a drag on third quarter earnings and a unfavorable product mix and an unfavorable geographic mix are all also dragging on earnings for the current quarter.  For the rest of the year, foreign exchange is expected to hurt sales by about 3% to 4%.

Rival Kimberly-Clark Corporation (NYSE: KMB) already took it on the chin this week after its earnings, while Colgate-Palmolive Company (NYSE: CL) has traded higher after its earnings.  Many investors have been moving to more risk-trade investments rather than defensive stock trades this week after Ben Bernanke telegraphed that the FOMC believes interest rates will remain exceptionally low through the end of 2014.

Kimberly-Clark now yields almost 4% and P&G yields about 3.2%, while Colgate-Palmolive yields almost 2.7%. 

P&G shares are indicated down 1.3% at $63.95 and the 52-week trading range is $57.56 to $67.72.

JON C. OGG

What was new and unexpected was the comments on how long exceptionally low interest rates will remain in place.  Rather than through mid-2013, the FOMC now has language that will accommodate that near-zero rate stance at least through late 2014.  If that is not a dovish Fed, there never has been one.

Everyone has been wondering if quantitative easing would expand via QE3 (or QE2.5)… Let’s just be honest.  This is more like QE4.

Fed governor Lacker sought to leave out the expected time period for the incredibly low interest rate horizon.  The Fed will also regularly review the size and the composition of its holdings and it is currently maintaining the plan to reinvest mortgage debt principal payments.

The Fed will also continue expanding the maturity of securities, which was that “operation twist” that has been in effect.

The wording was that global financial markets still pose significant risks and the unemployment rate is likely to decline only gradually with a modest pace of economic growth in the coming quarters.  Inflation is subdued and expectations remain stable for inflation.

Other notes: Housing remains depressed, business investing has slowed, household spending continues to improve.

The Fed left the Discount Rate flat at 0.75% and the vote was 9-1 for the Fed Funds Rate action with the sole dissenter being Lacker.

JON C. OGG

SPDR Barclays High Yield Bond (NYSE: JNK) carries a 7.7% listed yield and is up 0.25% at $39.00 against a 52-week range of $34.09 to $40.93 and it is the primary ETF we look at when it comes to the world of high-yield or junk bonds.  Then there is the iShares iBoxx High Yield Corporate Bond (NYSE: HYG) up 0.1% at $89.69 with close to a 7.7% yield and a 52-week range of $77.90 to $92.85, followed by the PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSE: PHB) that is flat at $18.34 with a yield of about 6% and a 52-week range of $17.00 to $18.76.  You have to consider that the 10-Year Treasury yields close to 2%, but high-yield and junk bonds often pay 7%, 8%, or more.  Here are some of the top closed-end funds, although there are many more out there:

• Blackrock Corporate High Yield (NYSE: HYV): market cap of $396 million with shares up 0.3% at $12.02; 52-week trading range of $10.10 to $12.60; implied yield of 8.5%.
• Pioneer High Income Trust (NYSE: PHT): market cap of $480 with shares up 0.7% at $17.07; 52-week trading range of $14.12 to $18.08; implied yield of 9.6%.
• PIMCO High Income Fund (NYSE: PHK): market cap of $1.5 billion with shares down 0.1% at $12.62; 52-week trading range of $10.52 to $14.88; implied yield of about 8.5%.
• AllianceBernstein Global High Income Fund, Inc. (NYSE: AWF): market cap of $1.2+ billion with shares up 0.9% at $14.47; 52-week trading range of $12.43 to $15.41; implied yield of 8.3%.
• Western Asset High Income Fund II Inc. (NYSE: HIX): shares are up 0.4% at $9.84; 52-week trading range of $8.35 to $10.45; implied yield of about 10.0%.
• Western Asset High Income Opportunity Fund Inc. (NYSE: HIO): shares are up 0.8% at $6.32; 52-week trading range of $5.34 to $6.63; implied yield of 8.0%.

We do advise investors to study the current premium and discount that each closed-end fund trades at compared to the net asset value.  Some are discounts and some are premiums, and these can fluctuate wildly through time for a myriad of reasons.

While that is a composite and while the “BB” is now under 500 basis points over Treasuries, the “B” spread is now under 750 basis points over Treasuries.  Maturities matter here as the longer-dated notes and bonds command higher spreads than most shorter-dated instruments.  Still, this could be the beginning of a wave of continued interest in junk bonds.

What is interesting is that rising yields in Treasuries implies losses on the face value of bonds.  If the yields are rising because of an improving economic picture rather than because of inflation or because of a lack of faith in the underlying creditworthiness of the government, then the bond spreads are likely to contract further and that would drive the interest into high-yield junk bonds.

Be advised that not all junk bond funds are created equally outside of the ETFs.  Some closed-end funds use domestic junk bonds only, while some use international bonds.  Some include foreign-issue sovereign debt at junk levels or trading as though they are junk.  Aslo, some use a bit of leverage while others do not.  The dividend yields are “implied” because ethe closed-end funds pay monthly.

Another caveat needs to be mentioned… Some of the yields on financial quote screens also will differ from our implied yields because we do not include the capital gain distribution that comes with many of these.  They of course count toward your total return, but we like to look at the most recent ‘regular dividend’ when calculating yields.

We have provided a chart for the “JNK” ETF Below so you can see how much this sector has risen since Thanksgiving and then again since the selling climax of stocks and risk instruments (including junk bonds) in early October.

A true chartist would tell you to watch this current level closely.  If prices do not rise from here, it could be representative of a false break-out and that would imply a near-term top.  As long as the “risk-on” mentality prevails, these should do well.  The trick is watching longer-term Treasury yields.  With close to a 2% yield on the 10-Year Treasury Note, investors will seek higher returns as long as those returns are likely to have at least some degree of price stability.  If investors think that Treasury yields are likely to climb suddenly to 3% or even 4%, junk bonds will have some competition from the risk-free trade again.

As you would expect, there is no such thing as a free lunch in the financial markets.

JON C. OGG