While the S&P 500 continues to post solid gains, many investors nonetheless are watching carefully for any signs that rising trade tensions will rein in economic growth, a prospect raised by President Trump's deep disagreements with other world leaders at the recent G-7 meeting. For stock investors, one approach is to look for solid dividend payers trading at reasonable valuations. Jenny Van Leeuwen Harrington, CEO and portfolio manager at Gilman Hill Asset Management, said, "I'm looking for a resilient stream of cash flows that support the dividends that’s almost tangible--that you can really see and feel and sink your teeth into," according a lengthy interview in Barron's. Among her top picks are theme park operator Six Flags Entertainment Corp. (SIX); retailer L Brands Inc. (LB), the parent of Victoria's Secret and Bath & Body Works; semiconductor maker Qualcomm Inc. (QCOM); and department store chain Target Corp. (TGT).
|Company||Forward P/E||1-Year Gain||Dividend Yield|
|Six Flags Entertainment Corp.||25x||7%||4.4%|
|L Brands Inc.||13x||-31%||6.5%|
Source: Barron's; forward P/Es based on average 2018 earnings estimates
Harrington's firm manages about $355 million of assets, of which over 40% is in equity income stocks, per Barron's. From its launch in Oct. 2006 through April 2018, her portfolio has delivered a net annualized return of 6.35%, which is 2 percentage points below the S&P 500 Index (SPX) for that period. However, her strategy seeks to limit the downside, and her portfolio has posted losses in only two calendar years since 2007, one of them being 2008 when her loss of 30% compared favorably to a 37% decline for the S&P 500. She indicates that her portfolio has an overall yield of 5.7% right now.
Six Flags is the priciest of the four picks, with a forward P/E of around 25 times projected earnings for fiscal 2018. Harrington calls it "super interesting in that it has an incredibly high barrier to entry." That is, she says, "You can't just start a new theme park." Moreover, she likes that fact that it is recession proof. That is, during economic down times, people looking for cheap vacations close to home will flock to their local Six Flags park, she told Barron's. The company has been able to raise the price of season passes consistently, while also reducing operating costs. It also was a big beneficiary of tax reform, she notes.
As far as the dividend, Harrington says that Six Flags is "completely committed" to increases, having hiked it by 73% since 2013. With plans underway for expansion abroad, she notes that the company is projecting 10% annualized growth in adjusted EBITDA through 2020.
Regarding lingerie seller Victoria's Secret, Harrington calls it the "market leader" whose "appeal cuts across socioeconomic segments," and across regions. Its "combination of cash-flow resilience and dividend coverage was the most compelling of the retailers we've looked at," she says. She also cites "an excellent management team that knows how to weather economic cycles." Last, she sees a "disconnect" behind the beaten-down price of L Brands stock and the company's actual solid performance, the problem being that "the market threw out the whole [retail] sector" indiscriminately.
Qualcomm is the leading producer of chips for use in mobile phones. However, the stock has been weighed down by "a lot of noise," she told Barron's. That includes legal disputes with Apple Inc. (AAPL) over licensing agreements, the failed takeover attempt by Broadcom Inc. (AVGO), and its own bid for NXP Semiconductors NV (NXPI) that's clouded by U.S.-China trade disputes. Harrington expects to noise to settle down, and sees a $10 billion share repurchase plan announced by the company as giving a boost to the stock. Moreover, at the current valuation multiple, she estimates that the stock has 50% upside if management's projections for 2019 earnings are met.
'Once-in-a-Lifetime Kinds of Bargains'
In 2017, Harrington scooped up several stocks that were trading at forward P/E ratios of 12 or less, and which offered dividend yields of 4.5% or more. Calling these "once-in-a-lifetime kinds of bargains," they included Target; data storage device maker Seagate Technology PLC (STX); telecom provider CenturyLink Inc. (CTL); loan servicer Navient Corp. (NAVI); mall operator Tanger Factory Outlet Centers Inc. (SKT); postage meter maker Pitney Bowes Inc. (PBI); and healthcare products distributor Owens & Minor Inc. (OMI).