Investing

5 Stocks to Load Up on Now That Interest Rates Continue to Plummet

Lee Jackson

Published: August 7, 2019 7:20 am

Last Updated: January 30, 2020 5:40 pm

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.

AT&T

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.

Altria

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.

Coca-Cola

This company remains a top Warren Buffet holding and offers not only safety but also an incredibly strong worldwide brand. Coca-Cola Co. (NYSE: KO) is the world’s largest beverage company, refreshing consumers with more than 500 sparkling and still brands.

Led by Coca-Cola, one of the world’s most valuable brands, the company’s portfolio features 20 billion-dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Globally, it is the number one provider of sparkling beverages, ready-to-drink coffees and juices and juice drinks.

Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy Coca-Cola beverages at a rate of more than 1.9 billion servings a day. With coolers getting packed for picnics, parades and vacations you can bet that they will be stuffed with products from this iconic American company. Also remember that the company also owns 16.7% of Monster Beverage, which continues to deliver big numbers.

Coca-Cola investors receive a 3.06% dividend. The $60 Merrill price target compares with the $57.22 consensus figure and the most recent close at $52.27.

First Energy

This higher-yielding stock also may have among the best total return potentials. FirstEnergy Corp. (NYSE: FE) is a conglomerate of 10 electric utilities, including Ohio Edison, Cleveland Electric Illuminating, Pennsylvania Power, Toledo Edison, Jersey Central Power & Light, Metropolitan Edison and Pennsylvania Electric.

FirstEnergy is dedicated to safety, reliability and operational excellence. Its 10 electric distribution companies form one of the nation’s largest investor-owned electric systems, serving customers in Ohio, Pennsylvania, New Jersey, West Virginia, Maryland and New York. The company’s transmission subsidiaries operate more than 24,500 miles of transmission lines that connect the Midwest and Mid-Atlantic regions.

The dividend yield is 3.50%. The Merrill price objective is $51. The consensus target price is $47.33, and shares closed at $43.42.

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Simon Property

Simon Property Group Inc. (NYSE: SPG) invests in the real estate markets across the globe. It engages in investment, ownership, management and development of properties. The company primarily invests in regional malls, premium outlets, mills and community/lifestyle centers to create its portfolio.

Through its subsidiary partnership, it owns or has an interest in about 230 properties in the United States and Asia. The company also has a 28.9% interest in Klepierre, a European REIT with over 260 shopping centers in 13 countries.

One key driver of growth will include the more than $1.0 billion of development/redevelopment planned over the next few years. Merrill Lynch also feels that the company’s high-quality portfolio has weathered the retail storm much better than most.

Shareholders receive a 5.134% distribution. The Merrill price target of $188 is a bit lower than the $189.11 consensus target. Shares ended trading at $153.46 on Tuesday.

The bottom line is that despite the market rally on Tuesday, we remain in very volatile waters, and the likelihood for a deal with China seems to be slipping away. With rates going lower, income-starved investors should be returning to these top companies.