To many investors, this may seem like a virtual replay from 10 years ago. The Federal Reserve resorted to a tactic not used since 1995 when it lowered interest rates 25 basis points at the end of July. This despite the economy still being in solid shape with unemployment at the lowest levels in 50 years.
In a new research note, Goldman Sachs adds a third 25 basis point rate cut to the Federal Reserves so-called mid-cycle adjustment, most likely in October, following another 25 basis point cut in September. This would take the federal funds rate to the 1.50% to 1.75% level.
The analysts noted this in their report:
For rate cuts to stop, Fed officials will eventually have to withstand White House demands and perhaps bond market expectations as well. But by the December meeting we think the FOMC is likely to stop. By that point we expect core personal consumption expenditures to stand at 1.9% as of the October print, with tracking estimates based on the November consumer price index at 2%.
The bottom line is, with much of the European sovereign debt trading with negative rates, demand may continue for U.S. Treasury debt, pushing yields even lower. That could mean a return to bond proxy stocks for investors seeking income. Here we have five that are rated Buy at Merrill Lynch and make solid sense for investors now.
This is the telecom component on the Merrill Lynch US 1 list. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV. The company has 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 shares trading at a very cheap 9.4 times estimated 2019 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.
AT&T reported solid operating results in the second quarter, including consolidated revenue growth, expanding operating income margin and record operating and free cash flow. AT&T’s consolidated revenues for the second quarter totaled $45.0 billion, up 15.3% from a year ago, primarily due to the Time Warner acquisition.
Declines in revenues from legacy wireline services, Vrio, domestic video and wireless equipment were more than offset by the addition of WarnerMedia and growth in domestic wireless services, strategic and managed business services, IP broadband and Xandr.
AT&T shareholders receive a rich 6.01% dividend. Merrill has a $37 price target, and the Wall Street consensus target is $34.42. The shares closed trading Tuesday at $33.96.
This maker of tobacco products offers value investors a great entry point now, and it took a hit recently as cigarette sales have slowed. Altria Group Inc. (NYSE: MO) is the parent company of Philip Morris USA (cigarettes), UST (smokeless), John Middleton (cigars), Ste. Michelle Wine Estates and Philip Morris Capital. PMUSA enjoys a 51% share of the U.S. cigarette market, led by its top cigarette brand Marlboro, one of the most valuable brands in the world.
Altria also owns over 10% of Anheuser-Busch InBev, the world’s largest brewer. In March 2008, it spun off its international cigarette business to shareholders. In December 2018, the company acquired 35% of Juul Labs. The company also has purchased a 45% stake in cannabis company Cronus for $1.8 billion.
Shareholders receive a 6.93% dividend. Merrill has set a $66 price target, higher than the consensus target of $58.13. The stock closed at $46.16 on Tuesday.