Merrill Lynch Gets Nervous: Buy Only High-Quality Stocks Now

October 6, 2015 by 247lee

It’s probably no surprise that some on Wall Street are starting to lose their bullish bias. After a huge run off the lows in 2009, the market has tread water this year, and with the sell-off that started in August factored in, all of the major indexes are down for the year despite the recent big rallies.

In a new report from Merrill Lynch and the firm’s highly regarded strategist Savita Subramanian, not only is the year-end target for the S&P 500 significantly lowered, they also deliver a pretty somber overall picture for investors. While not calling for any huge bear market reversal, they do stress one big point to investors: buy quality for now.

We screened the Merrill Lynch research universe and found five high-quality stocks that all pay an outstanding dividend.

AT&T

This company posted solid second-quarter numbers, and many on Wall Street think the third quarter will be good as well. AT&T Inc. (NYSE: T) has to be one of the most ignored dividend plays on Wall Street. In fact, it is the third most underweighted security, and the most under-owned by active fund managers, according to Merrill Lynch. While growth has been admittedly slower over the past few years, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic, but increased device financing plans, an area that many on Wall Street believe could lead to some earnings weakness.

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Late last month the company reiterated 2015 guidance for double-digit revenue growth and continued consolidated margin expansion. Management expects capital spending to increase sequentially and they also estimate that free cash flow could be better than $4.5 billion. Third-quarter wireless subscriber additions are also expected to come in slightly higher than the Merrill Lynch estimates.

AT&T investors are paid an outstanding 5.76% dividend. The Merrill Lynch price target for the stock is $40, and the Thomson/First Call consensus estimate is $37. Shares closed Monday at $33.43.

Altria

The maker of tobacco products and wine has posted very solid numbers through the first half of the year, and the third quarter is looking good as well. Altria Group Inc. (NYSE: MO) is a top mega-cap consumer discretionary stock to buy on Wall Street, and the company’s Marlboro brand remains one of the most recognizable in the world.

Many Wall Street analysts concede that the stock has solid downside support owing to the generous dividend yield, which remains at a huge premium in relation to the 10-year Treasury. Cash flow generation and the return of cash to Altria shareholders remain key facets of its total shareholder return, and analysts expect support of the strong dividend, which they believe will continue to climb, and strong share repurchase activity. And Altria recently reaffirmed its full-year adjusted earnings outlook.

Altria investors are paid an outstanding 4.06% dividend. Merrill Lynch has a $59 price target. The consensus target is $59.50. The stock closed on Monday at $55.73.

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Coca-Cola

This is the absolute epitome of high quality, and it is one of the top holdings of Warren Buffett’s Berkshire Hathaway. Coca-Cola Co. (NYSE: KO) is the world’s biggest brand and largest manufacturer of soft-drink concentrate and syrups. It enjoys a 50% share of the world’s carbonated soft drink market and 44% share of the U.S. market.

The company continues to grow its portfolio of brands as consumers’ diets shift. Over 70% of its profits are derived outside of the United States. The iconic beverage company sells many well-known brands, including Coca-Cola, Diet Coke, Fanta, Sprite, Minute Maid, Georgia, PowerAde, Del Valle, Schweppes, Aquarius, Minute Maid Pulpy, Dasani, Simply, Glacéau Vitaminwater, Bonaqua/Bonaqa, Ayataka, Gold Peak and FUZE Tea.

Coca-Cola investors are paid a solid 3.22% dividend. The Merrill Lynch price target is $48, and the consensus target is $44.58. The stock closed Monday at $41.01.

General Electric

This blue chip industrial has lagged the market for years, but Norman Peltz’s Trian Partners fund recently made a huge $2.5 billion investment and that sent shares higher. General Electric Co. (NYSE: GE) is a highly diversified, global industrial corporation. The company’s products and services include power generation equipment, aircraft engines, locomotives, medical equipment, appliances, commercial leasing and personal finance. The Merrill Lynch analysts also feel that the American giant will be a large player in the efficient energy field.

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The Merrill Lynch team recently pointed to the fact that the industrial giant has moved into the positive earnings and price momentum quadrant, indicating potential outperformance in the quantitative analysis model. While its earnings momentum has been volatile since the GE Capital announcement in April due to accounting adjustments, the analysts say that quant model is starting to capture the positive operating momentum inside GE. Add that to a huge stock buyback program, and things finally may be shaping up for the company.

In addition, with the European Union approving the Alstom plan recently, the stock could be poised for a run.

GE investors are paid a solid 3.43% dividend. The Merrill Lynch Price target is $33, and the consensus target is $30.23. Shares closed Monday at $26.82.

3M

This top industrial could really jump with an economic pickup, and it is also a member of the Merrill Lynch US 1 list. 3M Co. (NYSE: MMM) is closely correlated to U.S. leading economic indicators. The more the indicators continue to improve, the higher the likelihood of strong earnings performance for the company the rest of the year. And with a huge portfolio of products in multiple silos, 3M certainly has staying power.

One issue for 3M is that it has a higher than sector average share of earnings from overseas, so any continued rally of the U.S. dollar against other currencies could lead to a decline in Wall Street earnings estimates and guidance. With that said, any pickup domestically could help to offset currency headwinds.

3M investors are paid a 2.85% dividend. The $181 Merrill Lynch price target is well above the consensus target of $159.07. The stock closed Monday at $146.32.

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These are the kind of quality stocks investors can put into a portfolio and, for the most part, forget about. They have mature and long track records and aren’t going anywhere. While fast money momentum investors may not have any interest, long-term growth investors should be rewarded nicely by owning them.