Jefferies Makes Major Change to Franchise Picks Stock Portfolio

July 5, 2016 by 247lee

The S&P 500 ended the first half of 2016 up just slightly, duplicating the very weak numbers from last year. This very mediocre showing hurts passive index investors, and it also has the top firms on Wall Street that we cover taking a look at their lists of high conviction stock picks. Almost all the firms are making some changes for the second half of 2016, and we are closely following those changes for our readers.

A recent report from Jefferies includes one big deletion from the firm’s Franchise Picks list of top stocks to Buy. While at this point the team at Jefferies looks reasonably comfortable with the rest of the companies in the portfolio, we will continue to monitor the holdings for changes and commentary.

Pfizer Inc. (NYSE: PFE) is a top pharmaceutical stock that recently made a gigantic bid for Anacor Pharmaceuticals, but Pfizer was removed from the Franchise Picks portfolio. The company has a very strong pipeline, and the fact that it is the world’s largest drug manufacturer by sales value supports the Wall Street notion that the company can generate higher long-term revenues through the accelerated growth of its new drugs over the next five years.

Jefferies continues to like the story but cites the arguments against a corporate separation, the fact that the company will not be able to complete the inversion it wanted to with Allergan and the increase in the stock’s price as reasons for the removal.

Pfizer investors receive a solid 3.43% dividend. The Thomson/First Call consensus price target for the stock is $38.67, and shares were trading at $35.52 Tuesday morning.

In addition, here are the three top yielding stocks in the Franchise Picks portfolio.

AT&T

AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE. The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions.

With its shares trading at a very cheap 14.3 times estimated 2016 earnings, 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.

Jefferies noted that after evaluating three scenarios that address and combat cannibalization, certain new initiatives should be impactful. As over-the-top (OTT) video becomes more prevalent, the analysts examined the per-subscriber economics relative to that of traditional video, and highlight key implications in a streaming video world. With AT&T set to launch new offerings later this year, the analysts provide a case study highlighting potential opportunities and risks. They see the potential for modest accretion in 2020, with further upside should AT&T successfully minimize cannibalization within its existing base.

AT&T investors are paid a huge 4.42% dividend. The Jefferies price target for the stock is $44, and the consensus target is at $39.56. Shares closed Friday at $43.47.

Boeing

This top aerospace industrial is still down over 10% since the beginning of the year. Boeing Co. (NYSE: BA), together with its subsidiaries, designs, develops, manufactures, sells, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services worldwide. The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support and Boeing Capital.

Top Wall Street analysts have increased confidence in continuing good demand, and they note that the company has made announcements in the past that support the thesis that the productivity and margins will continue to improve. 787 execution is good as the company works through the backlog, and cash flow looks to be strong with 787 deliveries and C-17 orders. Some Wall Street analysts also point to continued lower oil prices as a bullish indicator for the top carriers who are Boeing’s big customers.

Boeing investors are paid a 3.36% dividend. The $165 Jefferies price target is well above the consensus target of $148.28 and the most recent close at $129.69.

WestRock

Last summer saw the merger of two top packaging and container companies, and that could provide an outstanding opportunity for investors, as the stock has been absolutely mauled since the merger. WestRock Co. (NYSE: WRK) is the completed and merged entity that combined old Rock-Tenn and MeadWestvaco.

WestRock has become the second-largest U.S. packaging company, valued at $10.7 billion, trailing only International Paper and its market capitalization of just under $15 billion. WestRock is expected to generate net sales of $15.7 billion and adjusted EBITDA of $2.9 billion. This includes the impact of $300 million in estimated annual synergies, to be achieved over three years.

Jefferies notes that the company announced a stock repurchase program last year of 40 million shares, which is equal to 15% of the shares outstanding. It also announced a very generous 17% increase in the company dividend. The current dividend will be $1.50 per share, or $0.375 per quarter.

WestRock trades with a more than 10% free-cash-flow yield, and owing to demand resiliency and lower spending, the Jefferies team believes cash flow can hold up even in a tougher economic environment. They also think that the stock could continue its march off lows printed back in February if container-board prices hold, which they have for the second month in a row.

WestRock investors will receive a very tempting 3.84% dividend. Jefferies has a $56 price target, but note that the consensus target is set at $70.56. Shares closed most recently at $39.05.

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While it looks like the stress from the Brexit vote is over for the time being, other factors like the political conventions could ratchet volatility right back up. Solid dividend-paying stocks make sense for the rest of this year.