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Dogs of the Dow: A Positive April Showing
The Dogs Welcome Spring
April proved to be a solid month for the 10 Dow stocks that started the year with the highest yields. An equally weighted investment in these issues would have been up 1.2% for the month. This compares to a loss of 1.4% for the 20 remaining Industrials components, and a 0.6% decline for a balanced position in all 30 Dow Industrials.
Heading the list of top performers for the month were telecom giants Verizon Communications (VZ - Free Verizon Stock Report), and AT&T (T - Free AT&T Stock Report), with their respective stocks rising 5.6% and 5.4%.
Verizon reported first-quarter earnings that were nearly 16% higher than the prior-year period, with a good part of it fueled by the Wireless segment, where operating revenues increased 8.2%, to $18.3 billion. In the meantime, wireless subscribers continue to consume bandwidth at an impressive clip, driving data revenues 21% higher than the year-earlier figure, to $6.6 billion. Moreover, the quarter marked the company’s most rapid rate of growth in mobile service revenues in three years, largely thanks to the increased popularity of smartphones.
Data revenues are likely to keep growing at a rapid clip, as Verizon Wireless is rolling out its 4G LTE (fourth-generation, Long-Term Evolution) mobile broadband network. As of mid-April, the company’s 4G LTE service was available to roughly two-thirds of the population, making it the largest network of its type in the country. Meanwhile, the stock’s 5.6% rise in April erased the 4.7% decline it incurred in the first quarter, moving investors to the positive side of the ledger by 0.6% (excluding dividends) for the year to date.
Over at AT&T, investors were pleased to see earnings nudge a few cents higher for the March quarter, thanks to better-than-expected wireless margins, some stability in the traditional wireline business, and an aggressive move on the share repurchase front. (The company bought back 67.7 million shares in the interim, for $2.1 billion.) With its April advance, the stock is now up 8.8% through the first four months.
The Bigger Picture
The year-to-date performance of the Dogs of the Dow strategy has been pretty good by most any measure, with an overall gain of 6.4% for the portfolio.
Intel (INTC - Free Intel Stock Report) has continued to lead the pack, with its share price rising 17.1% through the first four months of the year. The company is a leading manufacturer of semiconductors across the globe, commanding about an 80% share of the microprocessor market. Although Intel’s first-quarter share net came in a few cents short of the prior-year period, at $0.53, it was more than Wall Street expected. Meanwhile, revenues nudged up to $12.9 billion, which was especially impressive, given the somewhat uneven economic recovery. The top line benefited from full-quarter contributions from last year’s acquisitions of McAfee (a manufacturer of computer security technology) and Infineon Wireless Solutions (which helped expand Intel’s current Wi-Fi and 4G WiMax offerings). Based on the better than expected results, we’ve added a nickel to our 2012 earnings estimate, and now look for the company to achieve a record $2.45 a share.
Meanwhile, DuPont (DD - Free DuPont Stock Report) remained fairly close on Intel’s heels, with its stock posting a 16.8% advance through April. DuPont is one of the largest chemicals companies in the world, serving a wide variety of markets, including automotive, construction, agricultural, and electronics. For the first quarter, it reported share net of $1.61, topping the year-earlier tally by 5.9%, while sales increased 12%, to $11.2 billion. The Agricultural segment experienced seed sales growth due to strong North American corn sales, an early start to the European season, and commercial success in Brazil’s Safrinha season. Also, strength in insect control product sales and higher prices across the board helped boost revenues from Crop Protection products. Elsewhere, the Performance and Coatings business continues to benefit from strong demand for original equipment manufacturer (OEM) motor vehicle and industrial coatings. We continue to look for earnings to advance nearly 10% this year, to $4.30 a share.
On the other side of the coin, the main drag on the Dogs performance so far this year has been Procter & Gamble (PG - Free Procter & Gamble Stock Report), whose shares have backpedaled 4.6% through April. The world’s largest manufacturer of branded consumer packaged goods reported somewhat mixed results for the March quarter. Profits in the Baby & Family Care division increased a solid 9%, to $573 million, while the Beauty segment’s earnings expanded 3%, to $523 million. However, operating margins narrowed considerably in Fabric & Home Care, P&G’s largest segment, due to volume declines and unfavorable product category and geographic mixes. This sent unit profits down 9%, to $716 million. In all, we estimate P&G’s share earnings will come in a couple of cents lower this year, at $3.85.
Overall, the Dogs of the Dow’s 6.4% advance through the first four months of 2012 fell a bit short of the broader market’s performance (the S&P 500 Index was up 11.2% for the period). Still, it was a decidedly good showing compared to historical stock returns and, considering the portfolio’s all-blue-chip composition, along with its above-average yield, the numbers look even better on a risk-adjusted basis. Moreover, these puppies gained some ground in April and, with two-thirds of the year left to go, they still have plenty of room to run.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.