Roger's Defense: Income and Growth

08/26/2005 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

"The two major risks you face as an income investor are rising rates and credit risks," notes Roger Conrad. "The best defense is to find stocks that not only offer a nice dividend, but also have a growth component." Here, are some of this favorites.

"Some of the big oils are a good place to focus. These give you exposure to downstream components like refining and distribution. And they have very, very strong balance sheets. So that helps counteract some of their exposure to the price of energy. My favorite would be Chevron Corp.  (CVX  NYSE). I think they did an excellent job for their shareholders as far as securing new reserves, which was definitely their biggest need. And its valuation is much lower than those of other major oil companies. It’s a pretty safe place to put some energy money.

"We have taken a lot of profits in REITs and are shifting from the retail part to the residential real estate part. Their performance has been the worst because interest rates have been low and would-be renters have been buying instead of renting. So the pressure has been on rents and there has been a lot of overcapacity. But the stocks that we are now recommending have outperformed the sector and have continued to pay dividends and remained healthy even during the worst of times. Mid-America Apartments (MAA NYSE) is based out of Memphis. They turned in pretty good second-quarter earnings with occupancy rates firming and rent growth picking up. Another one just recommended is Home Properties (HME NYSE). We see the same kind of things going on. We’re also starting to see some interest in private capital taking over these REITs. The fact that there are some deals taking place here is a good sign that we are not the only ones spotting value in this area. If you are involved in REITs, this is where you want to go.

"I’d also suggest three favorites from our Personal Finance portfolio. These are not necessarily our holdings with the biggest yields, but they are very secure yields and the companies are becoming more valuable over time. These are the types of companies that will be giving you more income, better dividends, and by extension, better protection should things divert from this ‘Goldilocks’ environment.

"New Plan Excel (NXL NYSE) is a long-term portfolio holding. We have stuck it out with this company through some grim times, when they merged with Excel and it turned out that the executives of that company weren’t really playing it straight. But the merger did increase their size, they got new management in, and they turned their act around. And what we’ve seen recently is the final phase of this transition from a weakling to being on the comeback. The company entered a deal whereby they sold some of their properties to an Australian company, and they will manage those properties for a fee. The proceeds will be used to reduce debt and pay a special dividend of $3 a share.

"NiSource (NI NYSE) is the owner of a major pipeline system. A recent major piece of legislation was passed in the energy arena. This undoes a 1935 act that forbade just about anyone other than a utility company from buying a utility. Now that that is gone, I think there will be a tremendous number of new potential takeover targets out there, and a lot of major deals in the works. This one looks very attractive to me as a possible takeover. It’s all regulated. It’s an electric and gas utility and also owns one of the larger pipeline systems in the country. And pipelines, of course, are very valuable assets. The stock trades at about 20% above book value, which is very low. The average utility is closer to 2 times book value.

"Perhaps the most misunderstood company on Wall Street is Citizens (CZN NYSE). This is a company that did a lot of deals back in the 1990s. They sold all of their electric utilities and water utilities, their gas utilities, and focused on buying rural-based telecom systems. Of course, everybody hates telecom today because there are all these things that will make us stop using telephones. They have a lot of goodwill as a result of these deals and they have been writing that off. So they haven’t had to pay income taxes. That means they have had more money to buy back debt as well as pay a big dividend. It’s now over 7%."

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