David Rosenberg, Chief Economist & Strategist at Gluskin Sheff, recently appeared on the 5 p.m. post-market trading segment of CNBC to express his views on the fiscal cliff and how one can position their portfolio based on monetary policy for the next several years. Fool.com readers may take note that Gluskin Sheff is located north of the border keep in mind Rosenberg held the top job at Merrill Lynch in the form of Chief North American Economist until the brink of the financial crisis. I have paid close attention to Mr. Rosenberg's commentary since I heard him speak in March 2008 at the University of Dayton (Ohio), when he forewarned about slowing economic growth.
During his recent November 21 interview on CNBC, Rosenberg identified themes for investment based on his view of monetary and interest rate policy into the medium-term. First, Rosenberg believes investors should be focused on companies with a history of dividend growth and yield, although fears over increased taxation with an Obama second term have specifically caused the consensus to turn away from this group. While investors do not have immediate clarity regarding the fiscal issues in Washington, the guidelines given by the Federal Reserve indicate a near-zero interest rate environment for the next three years. Rosenberg succinctly states, If the Fed is going to keep interest rates at zero for at least, let's say, the next three years, that's going to continue to push the income equity segment of the market higher over time.
With the above backdrop and economic considerations in mind, let's focus on translating Rosenberg's thesis to actionable investment ideas for your stock portfolio. Consider subscribing to my posts if you are interested in pursuing the frugality theme, as I will feature my top picks within dollar/discount stores, tobacco, and beverages in the near future. Today I will focus on companies that operate in the defense-aerospace sector, as historically these are considered to be non-cyclical.
Here are six reasons Boeing (BA +2.58%) is a great addition for both value and growth investors:
- The Company reported Q3 earnings on October 24, with a 20% earnings-per-share beat ($1.35 actual vs. $1.13 est.) and 8% guidance raise (full year revenue forecast between $80.5 and $82 billion).
- Mid-point of the $4.80-$4.95 full year guidance for 2012 is now 17% higher than the original guidance provided in January 2012. Analysts see room for more upside due to conservative margin expectations for Boing Commercial Airplanes and Boeing Defense, Space, & Security.
- United Airlines became the first U.S. carrier to fly the new 787 Dreamliner on November 4 with a flight from Houston to Chicago. The multi-year 787 and 737 MAX upgrade cycle should spur backlog growth for Boeing, which saw its overall backlog increase to $378 billion driven by $24 billion in new orders.
- Mid-December board meeting should serve as a catalyst for increasing its 2.4% dividend yield and/or resumption of share buyback. Boeing had over $11 billion in cash and marketable securities at quarter-end, and an announcement to resume stock repurchases during 2013 is likely to be announced at this time.
- Greater clarity regarding pension headwinds. Although pension expense continues to dominate the bear thesis on Boeing, the positive growth outlook and strong core operating performance are financially more significant a positive.
- Any weakness in the stock as a result of prolonged union deliberations or strike should represent a buying opportunity. Although the union may continue to dominate media coverage in the near-term, existing pension obligations are a more meaningful concern for Boeing. At least four questions on the Oct. 24 earnings call pertained to pension, while no questions from research analysts related to labor expense/union.
For defense/aerospace investors looking for more current income, Lockheed Martin (LMT +0.98%) offers a richer 5% dividend and raised its quarterly payout from $1.00 to $1.15 recently on September 27. Lockheed has sold off in recent weeks due to concerns over the fiscal cliff, which if breached could affect defense spending and also the dividend tax rate on Lockheed's distributions. I feel Lockheed is a buy in accordance with the belief that tax shifts should not have an enduring impact on dividend growth and yield over the long term.
Investors who prefer to diversify their risk across the broader defense-aerospace sector may consider the Invesco PowerShares Aerospace & Defense ETF (PPA +2.66%), which offers a 1.56% yield and has outperformed Boeing and underperformed Lockheed on a 1-year basis. Top holdings include Boeing Co., Honeywell, Lockheed Martin, United Technologies, and Precision Castparts, among others.
Consider subscribing to my posts if you are interested in pursuing the frugality theme, as I will feature my top picks within dollar/discount stores, tobacco, and beverages in the near future.
