As we expected, with the third quarter winding down, and the market getting ready for earnings and a potential fourth-quarter run, top portfolio managers are making some changes to their holdings, and with good reason. Friday’s hideous trading day aside, the market has fared somewhat better this year than in 2015, and some underweighted areas like utilities and telecoms have made big moves. It’s not unusual to see changes made in front of the final quarter of the year.
The UBS Dividend Ruler portfolio continue to outperform the overall market, and we continue to think that the outperformance will stay in place for the rest of the year and beyond. The analysts focus on stocks with solid dividends that have consistently grown over time, and their performance this year is once again outstanding. Year to date, the portfolio is up 10.7% on a total return basis, versus the S&P 500’s 7.8%.
The portfolio managers make a huge change, removing a venerable blue chip Boeing Co. (NYSE: BA) and adding Praxair Inc. (NYSE: PX), a leader in the industrial gas business.
Praxair’s debut in the portfolio could be very timely. This top company offers atmospheric gases such as oxygen, nitrogen, argon and rare gases, and process gases such as carbon dioxide, helium, hydrogen, electronic gases, specialty gases and acetylene. It also designs, engineers and builds equipment that produces industrial gases, as well as manufactures precious metal and ceramic sputtering targets used primarily in the production of semiconductors. In addition, the company supplies wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders to the aircraft, energy, printing, primary metals, petrochemical, textile and other industries.
UBS is bullish on Praxair as it is in a sector with a very high barrier to entry. The report said:
In short, we believe Praxair is emerging from a challenging period and earnings are poised to begin to grow once again, bolstered by continued favorable trends in end-markets such as healthcare, food and beverages, and electronics. Underscoring the relatively defensive nature of the business, and aggressive cost controls, earnings have fallen by only 12% from the 2014 peak despite very difficult conditions. In addition, management has continued to increase the dividend over the last two years, which suggests confidence in the long term outlook.
Boeing exits the Dividend Ruler portfolio with its shares still down over 10% since the beginning of the year. This top aerospace industrial designs, develops, manufactures, sells, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services worldwide.
The stock has had a very up-and-down year and UBS mentioned this in its report:
The commercial aerospace business is cyclical and there are some indications that airlines may have expanded their wide-body fleets too aggressively in recent years, suggesting a period of weaker demand going forward. In addition, the fall in oil prices reduces the incentive to upgrade to the most fuel-efficient planes. Finally, Boeing is launching refreshed versions of the 737 and the 777 in the next couple of years. New product introductions carry the risk of potential cost overruns. As a result, our confidence in the dividend growth outlook has waned and we are removing the shares from our list.
Praxair shareholders receive a 2.53% dividend. The UBS price target for the stock is $130, and the Wall Street consensus target is $126.38. The shares closed Monday at $118.53.
Boeing shareholders are paid a 3.35% dividend. Its shares are rated Neutral at UBS with a $128 target. The consensus target is higher at $149.27. The stock closed last Monday at $130.12.
In addition, the following are the three top yielding stocks in the current UBS Dividend Ruler portfolio.