While most of the companies we cover on Wall Street have released their top high-conviction ideas for 2017, those usually number just eight to 10 companies. Merrill Lynch is out with the firm’s top stocks picks for 2017 by the firm’s analysts by industry groups. This provides a far greater list of companies that the firm is focused on for alpha generation. Alpha again is the difference a stock provides above the benchmark. If the S&P 500 is the benchmark and it is up 5% and an individual stock’s provides a 7% return, there is 2% alpha.
We screened the list by sector looking for stocks with solid upside and that paid dividends. While rates are clearly going higher, dividends help provide investors total return, which is the gain in the stock added to the dividend. So if the Merrill Lynch picks provide total return and alpha, the upside potential for investors is outstanding.
We chose one stock from each sector and, of course, all are rated Buy at Merrill Lynch.
Basic Material and Industrial
Dow Chemical Co. (NYSE: DOW) makes sense in all markets. This large cap leader is a market-driven integrated, with an industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses. It delivers a broad range of technology-based products and solutions to customers in approximately 180 countries and in high-growth sectors such as packaging, electronics, water, coatings and agriculture. Last year, Dow had annual sales of more than $58 billion and employed approximately 53,000 people worldwide.
In 2016 the company announced a huge merger with DuPont. They are planning to combine into a company valued at about $120 billion. They will then split off into three separate companies, one focused on materials, one on agriculture and one on nutrition and electronics specialty products. Many on Wall Street think that the merger offers a very solid investment for the future, and the sum-of-the-parts total may be far greater than the current value of the stocks.
Dow Chemical investors receive an outstanding 3.09% dividend. The Merrill Lynch price target is $64, and the Wall Street consensus target is $66.06. The stock closed Wednesday at $60.30.
Like other major defense prime contractors, General Dynamics Corp. (NYSE: GD) had a very solid 2016 and remains one the best ideas at Merrill Lynch in defense/aerospace sector. This company is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.
Major products include Virginia-class nuclear-powered submarine and Ohio-class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.
Shareholders receive a 1.7% dividend. Merrill Lynch has a $210 price target. The consensus target is $202.17. Shares closed most recently at $181.03.
A top telecommunications pick at Merrill Lynch for 2017, Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world. Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide. Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide.
Last year Verizon announced the purchase of Yahoo’s core operating business for $4.8 billion in cash, although terms may be changing due to the massive data breaches at the company. The analysts feel the purchase plays into Verizon’s strategic drive to expand into advertising and content, and they also think the transaction is largely immaterial from a financial perspective. There was also some chatter recently that the company may be looking at Charter Communications.
Verizon investors receive a 4.77% dividend. The $59 Merrill Lynch price objective compares with the consensus target of $52.23. The shares closed Wednesday at $48.39.