Failing To Get Traction
The bulls would like to extend the Dow’s winning streak to a seventh consecutive year, but the going has been considerably tougher of late. To wit, a balanced investment in the stocks that make up the Dow Jones Industrial Average has not posted two consecutive monthly advances since November of last year. That also happened to mark the end of a four-month winning streak. Meanwhile, the Dogs of the Dow (the 10 Dow stocks with the highest yields at the start of the year) have not done any better. They haven’t had two in a row in the win column since August of 2014 (ending a seven-month streak).
Indeed, March proved to be a challenging month for all Dow stocks, as an equally weighted investment in all 30 issues would have been down 2.4% for the month. By comparison, the Dogs shed 2.9% over the period, while the 20 remaining stocks fared best, down 2.2%. Notably, only one of the Dogs, Pfizer (PFE), was spared from the market’s general backpedaling, managing to advance 1.4% for the month. The next three best performers in the group came in about three percentage points behind: McDonald’s (MCD), (-1.5%), Chevron (CVX), (-1.6%), and Verizon (VZ), (-1.7%). At the bottom of the list, we find Coca-Cola (KO), (-6.4%), AT&T (T), (-5.5%), General Electric (GE), (-4.5%), and Exxon Mobil (XOM), (-4.0%).
(Note: Although Apple (AAPL) has replaced AT&T (T) in the DJIA, all results and comparisons for this year will include only the original 30 components.)
Top Dogs For The Year To Date
For the first quarter, an equal investment in the original Dow 30 would have shown a modest setback of 0.8%. The 10 Dogs stocks, meanwhile, fell further behind, to a decline of 1.5% for the period. As was the case for the month of March, the 20 Dow stocks excluded from the Dogs fared the best, with a decline of 0.5%.
On the plus side, we had Pfizer shares up 11.7% through the first three months. In early February, the New York-based drug maker announced that it planned to acquire Hospira (HSP, Financial), a leading manufacturer of specialty injectable pharmaceuticals, in a deal valued at around $17 billion. The union would boost Pfizer’s generics division and be accretive to earnings by about $0.10 per share in its first full year. Pfizer also expects to generate $800 million in annual cost synergies by 2018. Subject to customary approvals, the transaction is slated to close in the second half.
A bit further behind, but still ahead of the curve, McDonald’s and Verizon were each ahead 4.0% for the first quarter. Earnings at the fast-food restaurateur fell 13% in 2014, to $4.82 a share, reflecting the negative effects of the strong U.S. dollar, intense competition, and lingering supplier issues in Asia. However, investors appear to be optimistic that McDonald’s earnings will begin to rebound in 2015. For one thing, McDonald’s supplier problems in China are receding further into the rear-view mirror, as sales there are recovering. Meanwhile, the company has scaled back its expansion plans and expects to open fewer restaurants in the most challenging markets.
Elsewhere, the market appears to approve of Verizon’s latest shareholder-friendly initiatives. The telecom company agreed to sell its local wireline operations in California, Florida, and Texas to Frontier Communications (FTR) for about $10.5 billion. Meanwhile, it recently closed a $5.1 million deal with American Tower Company (AMT) involving the sale of 165 Verizon towers and the rights to lease, acquire or otherwise operate and manage 11,450 wireless communications sites. Notably, $5 billion of the proceeds were earmarked to fund an accelerated share-repurchase program in the June quarter.
Back of the Pack
The aforementioned share-price advances, however, were more than offset by sizable declines in Caterpillar (-12.6%), Exxon Mobil (-8.1%), and Chevron (-6.4%). Caterpillar closed out 2014 with weak sales and earnings comparisons for the fourth quarter. Results at the leading manufacturer of earthmoving equipment were impacted by lower commodity prices (most notably oil), which hurt business in its key Resource Industries segment. Moreover, the outlook for 2015 is for more of the same, with sales likely posting a third consecutive year of decline. However, restructuring activities, along with some improvement in petroleum prices, should help earnings turn the corner by next year.
Not surprisingly, lower oil prices will have a major impact on the other two companies bringing up the rear. For its part, Exxon Mobil plans to continue investing so that it’ll be well positioned for the next industry up cycle. Indeed, the recent drop in stock prices for oil producers may turn up an acquisition opportunity or two for the company. Also, share repurchases are being scaled back to about $1 billion per quarter this year (versus $3 billion per interim in 2014). Meanwhile, Chevron has halted its share-repurchase program altogether, trimmed its capital spending budget by 13% (to $35 billion), and will likely undertake additional cost-cutting measures in the quarters ahead.
Looking Ahead
Despite the choppy start to the year, the economic and monetary background continues to favor equity investments. Namely, GDP remains likely to post a respectable advance of 2.5% to 3% this year. Meanwhile, there is just enough uncertainty to suggest the Federal Reserve will wait a bit longer before it starts to raise short-term interest rates, which, on the whole, should be favorable to stocks. Also, at the time of this writing, our proprietary Timeliness Ranking System indicated that all but three of the Dogs of the Dow stocks were pegged to at least match the broader market’s performance for the year ahead.
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
