Thus far in 2015, the performance of the Dogs of the Dow has not been particularly inspiring, with the 10 highest-yielding Dow components at the start of the year up 5.0% in February, versus a 5.7% increase in the overall Dow and a 6.1% jump in the remaining 20 companies that make up the Dow Jones Industrial Average.
The Leaders Of The Pack
Pfizer (PFE - Free Pfizer Stock Report) was the best performing pup in February, advancing a strong 9.8% for the month. This is a bit of a surprise, given that the company’s fourth-quarter performance was certainly nothing to write home about. To wit, the company reported adjusted earnings (which exclude one-time gains, charges, and other nonrecurring items) of $0.54 a share, versus the $0.56 a share posted the prior year. Meanwhile, management scaled back its expectations for 2015, which caused the stock to dip slightly. For the year ahead, Pfizer now expects sales will come in between $44.5 million and $47.5 million, down from an earlier call of $47.5 million. A lion’s share of the top-line pressure can be attributed to the combined effects of patent losses and an unfavorable foreign-exchange environment. Nevertheless, Pfizer’s core lineup gained traction in 2014, and its annual sales decline was narrowed considerably year over year as a result. While growth in the core product line has been encouraging, it appears that many investors feel a more significant rebound will eventually come from M&A activity of business development deals. Indeed, the company has a pretty impressive amount of cash on hand, and after its failed attempt to buy AstraZenca (AZN) last year, there is still talk on the Street that the company will be active on the acquisition trail in 2015.
General Electric (GE - Free General Electric Stock Report) is very much a company in transition. And investors have seemingly taken notice, with GE stock up 8.8% in February. Of late, the company is spinning off underperforming assets, while bolstering its industrial core. In September of last year, the household products division was sold, and then in January of this year, its stake in Asia Satellite Telecom Holdings was divested. Additionally, late last year, GE agreed to purchase subsea drilling technology from Oceaneering International, and subsequently inked an agreement to purchase Alstom’s gas and steam turbine business for approximately $17 billion. These two transactions ought to close in the first and second quarters, respectively. Certain pundits were unimpressed that GE was delving further into the drilling arena, given what has happened to crude oil prices over the last few months. However, GE is thinking long term, and using history as a guide, oil prices will bounce back, eventually.
All told, we are optimistic about the company’s prospects over the coming year. Goals included double-digit earnings growth in industrial operations, organic revenue growth of between 2% and 5% on the industrial front, $12 billion to $15 billion in free cash flowing including dispositions, and more than $10 billion returned to shareholders. Moreover, revenue should hit the $153 billion mark in 2015, which should translate into earnings of about $1.75 a share.
Coming in third place with a gain of 8.2% was Verizon (VZ - Free Verizon Stock Report). The telecommunications giant finished off last year with a hefty 18% jump in year-over-year share net, with much of the good news attributable to Verizon Wireless. VZ Wireless added 2.0 million retail postpaid net subscribers during the final stanza of 2014, bringing Verizon’s total number of retail connections to 108.2 million, up 5.3% from the year-earlier figure. And although VZ Wireless margins came under pressure during the December period, due to the combined effects of strong customer growth, ongoing promotions, and a higher-than-expected equipment upgrade rate, we are confident that Verizon will post 2015 earnings of $3.70 a share, down a dime from our earlier call, yet a 10% improvement on the 2014 figure. This, in conjunction with the stock’s impressive yield and above-average appreciation potential, make it appealing to investors of all ilks.
Elsewhere, McDonald’s (MCD -Free McDonald's Stock Report) fourth-quarter results were not overly impressive, as the company continued to struggle with a strong United States dollar, a challenging competitive environment, an overhang from supplier issues in Asia, and weakness in certain European markets. Moreover, Don Thompson retired from his role as CEO on March 1st, and was replaced with company veteran Steve Easterbrook. Yet, investors seem optimistic that a management change augurs well for the company’s performance going forward, and we remain optimistic that sales and earnings will bounce back in the current year. All told, shares of MCD stock were up 7.0% in February.
Naturally The News Wasn’t All Good
Only one of the Dow dogs finished the month in negative territory. Merck (MRK - Free Merck Stock Report) started off the year with a bang, yet faltered during February, when it fell 2.9% in value. This New Jersey-based drugmaker posted a relatively flat year-over-year earnings comparison, which can be attributed to increases in generic competition in several key franchises, which was partially offset by ongoing cost-control initiatives. However, the stock took a bit of a tumble when management issued a rather uninspiring 2015 forecast, which will likely be tempered by patent losses and the negative impact of the stronger dollar. Indeed, the company now expects to post 2015 earnings of $3.32 a share to $3.47 a share, down from the previous range of $3.50 to $3.60
Nevertheless, we continue to like the company’s prospects. Although the reduced 2015 earnings outlook will likely be on investors’ minds for a while, easing generic pressures and a promising new product cycle should lead to a turnaround over the coming 3 to 5 years. Moreover, the issue holds a top grade for Safety (1) and a top-notch Financial Strength score (A++). Lastly, this neutrally ranked stock’s 3.1% dividend yield is likely to appeal to income-seeking investors.
Changes To The Dow
In early March, the Dow Jones Indices announced that Apple Inc. (AAPL - Free Apple Stock Report) was going to join the exclusive Dow Jones Industrial Average, replacing telecommunications giant AT&T. Apple, the largest company in the world (with a market cap of $750 billion) and a leader in technology, subsequently joined the Dow as of the end of trading on March 18th. AT&T was replaced after falling approximately 4.5% in value in 2014, and the recent change will boost the number of tech-related companies in the Dow to 6, including Microsoft (MSFT - Free Microsoft Stock Report), Intel Corp. (INTC - Free Intel Corp. Stock Report), International Business Machines (IBM - Free International Business Machines Stock Report), Cisco (CSCO - Free Cisco Stock Report) and Visa (V - Free Visa Stock Report). However, for our purposes, we will continue to track AT&T as part of the original 2015 Dogs of the Dow. (Just as a reminder, this year’s Dog of the Dow are: AT&T (T), Caterpillar (CAT - Free Caterpillar Stock Report), Chevron (CVX - Free Chevron Stock Report), Coca Cola (KO - Free Coca-Cola Stock Report), ExxonMobil (XOM - Free ExxonMobil Stock Report), General Electric, McDonald’s, Merck, Pfizer, and Verizon.