Sequestration Resistant Investments

Are you concerned about how sequestration will affect your portfolio?  Are you looking for companies in which to invest that aren’t likely to be affected?  Look no further than the utility industry.  Why?  Utility companies tend to have highly stable revenues and above average dividend payouts which makes them very attractive to investors during an uncertain economy.

With that in mind, Paul Zimbardo has compiled this list of six utility companies set to declare dividends this week.  Please view his original article to see how he came up with these companies, and remember to always perform your own research before purchasing any stock.

Pepco Holdings, Inc. (POM): 5.26% Yield; Ex-Dividend 3/7
Geography: Northeast United States (Maryland and Washington DC)
Customers: 800,000

Financial Performance and Metrics: Source - (Finviz.com)

• Forward P/E: 16.69
• Book Value: $19.40
• Price/Book: 1.05
• Debt/Equity: 1.22
• Revenue Growth/(Contraction) (QoQ): (10.44%)
• EPS Growth/(Contraction) (YoY): 85.39%
• Payout Ratio: 92.8%
• Dividend History: $0.27 per share

PPL Corporation (PPL): 4.77% Yield; Ex-Dividend 3/6
Geography: United Kingdom and Eastern United States (Pennsylvania, Kentucky, Virginia, and Tennessee)
Customers: 10 million (7.8M in the United Kingdom)

Financial Performance and Metrics:

• Forward P/E: 14.20
• Book Value: $18.01
• Price/Book: 1.71
• Debt/Equity: 1.92
• Revenue Growth/(Contraction) (QoQ): (23.61%)
• EPS Growth/(Contraction) (YoY): (2.41%)
• Payout Ratio: 54.82%
• Dividend History: $.3675 per share

UIL Holdings Corp (UIL): 4.39% Yield; Ex-Dividend 3/7
Geography: Northeast United States (Connecticut and Massachusetts)
Customers: 700,000

Financial Performance and Metrics:

• Forward P/E: 16.26
• Book Value: $21.90
• Price/Book: 1.80
• Debt/Equity: 1.63
• Revenue Growth/(Contraction) (QoQ): 0.74%
• EPS Growth (YoY): 28.80%
• Payout Ratio: 91.27%
• Dividend History: $.42 per share

Public Service Enterprise Group Inc. (PEG): 4.38% Yield; Ex-Dividend 3/6
Geography: Northeast United States (New Jersey)
Customers: 4 million

Financial Performance and Metrics:

• Forward P/E: 14.10
• Book Value: $21.36
• Price/Book: 1.54
• Debt/Equity: N/A
• Revenue Growth/(Contraction) (QoQ): (8.73%)
• EPS Growth/(Contraction) (YoY): (9.4%)
• Payout Ratio: N/A
• Dividend History: $.36 per share

Westar Energy Inc (WR): 4.31% Yield; Ex-Dividend 3/7
Geography: Central United States (Kansas)
Customers: 700,000

Financial Performance and Metrics:

• Forward P/E: 15.46
• Book Value: $22.84
• Price/Book: 1.38
• Debt/Equity: 1.14
• Revenue Growth/(Contraction) (QoQ): 2.6%
• EPS Growth/(Contraction) (YoY): 7.29%
• Payout Ratio: 67.59%
• Dividend History: $.34 per share

SCANA Corporation (SCG): 4.14% Yield; Ex-Dividend 3/7
Geography: Southern United States (The Carolinas and Georgia)
Customers: 1 million

Financial Performance and Metrics:

• Forward P/E: 14.26
• Book Value: $31.14
• Price/Book: 1.58
• Debt/Equity: N/A
• Revenue Growth/(Contraction) (QoQ): 8.4%
• EPS Growth/(Contraction) (YoY): 6%
• Payout Ratio: N/A
• Dividend History: $.5075 per share

What Defense Investors Should Know About Sequestration

It’s on the tip of practically every tongue in America right now.  Sequestration, the across-the-board government spending cuts outlined in The Budget Control Act of 2011 in order to offset U.S. debt ceiling increases.  Under the terms of the act the 2013 defense budget is to be reduced by $54.7 billion.  While that’s certainly a considerable sum, it’s not as bad as it sounds when you look at the larger picture.   

The initial defense budget for 2013 is $728 billion.  Therefore, sequestration should reduce the defense budget to $673.3 billion, or approximately the same amount as in 2007.  That’s still a sizable amount of money that defense contractors will be receiving.  The five largest defense contractors, Lockheed Martin (LMT), Boeing (BA), Northrop Grumman (NOC), General Dynamics (GD), and Raytheon (RTN), have had a combined sales of approximately $160 billion each year for the past four years.  They will certainly be affected and there are sure to be some bumps in their balance sheets but they aren’t likely to be very serious.

On top of that, these companies aren’t exactly small.  These defense contractors are powerhouse companies, capable of weathering the proverbial storm in revenue fluctuations.  Defense companies aren’t generally considered big movers on Wall-Street.  They are typically slow and steady, which is part of why they are attractive to investors.  

Another reason investors are drawn to defense contractors is because of the dividend payouts.  Dividends are paid from company profits, the money that is left over after paying expenses and taxes.  So, in theory if a contractor experiences a drop in profits as a result of the spending cuts their dividend payout might be affected, but it’s likely to be minimal, if at all.  Most defense companies pay dividends at a low ratio, no more than 50%.  That means their current dividend payments are likely to be sustainable, even if they take a hit to their profitability.

The last thing to be aware of is the process through which defense companies are paid.  It can literally take years for a company to be awarded a contract, have funding approved, and receive payment.  Sequestration doesn’t affect the money that has already been approved.  Therefore the full impact on defense contractors likely won’t be felt for a few years.

What does all of this mean to investors?  If you currently own stock in a defense contractor you most likely have nothing to worry about.  If you don’t currently own defense stock, now might be a good time to visit the idea since many skittish investors have sold their shares lately, driving the prices down. 

Nevada and New Jersey Gamble With Online Gambling

Online gambling has been illegal in the United States since Congress barred it in 2006.  But opinions and attitudes are changing.  Last month the state of New Jersey, home to many well known Atlantic City casinos including Bally’s, Borgata, and Caesar’s, officially legalized online gambling in the state.  On Thursday, March 21 2013, 888 Holdings Plc (EIHDF.PK) announced plans to launch online gaming in the state of Nevada after receiving the first U.S. license to ever be awarded to an internet gambling firm.

As reported by Reuters, 888 could launch their initial offering as early as May.  888 has reportedly already finalized a deal with Treasure Island in Las Vegas to launch online poker under its own brand in the state.  Deals have also been reached with Caesars’ and WMS to create an internet spin-off of Caesars’ World Series of Poker and provide an internet presence for WMS’ slot machine operations.

While initial revenue from the Nevada operations is not likely to be substantial, and reportedly not expected to impact 888’s bottom line until at least 2015, the company sees this as an important first step towards a broader U.S. gaming market.

"This is an historic moment for 888. This is the first time a company uniquely providing online gaming has been licensed by any U.S. jurisdiction," Chief Executive Brian Mattingley said.

Many internet gaming companies like 888 and Bwin, the world’s largest internet gambling company, are well positioned to take advantage of the emerging U.S. market, with the infrastructure and experience already in place from years of operating in Europe.

Online gaming has a distinct advantage over traditional casinos.  People will no longer have to travel, sometimes great distances, in order to gamble.  Instead they will be able to enjoy doing so from the comfort of their own home, or anywhere else with an internet connection.

What does this mean to holders of casino and gaming stocks?  In the short-term we don’t expect any impact, as the market is still in its infancy.  In the long-term online gaming is sure to steal some of the market share from existing traditional casinos as more legislation is passed and online gaming becomes available to more people.  But don’t fold on your gaming stocks just yet.  Traditional casinos and gaming establishments are well aware of the potential to lose market share and are already looking at ways to adapt.  While Treasure Island, Caesar’s and WMS have already established partnerships with 888, we expect many other gaming firms to follow suit and it’s highly likely that many of them will establish their own online presence as an extension of their traditional businesses.  Bottom line, for investors in gaming stocks, this can only be a positive development and you might want to look into expanding your holdings to include some online gaming companies if you don’t already.

Is it Time to Sell Amazon?

Amazon (AMZN) is to internet commerce as Wal-Mart is to traditional retailing.  Both companies are the alpha dogs in their respective niches and are generally considered sound investments.  However, according to David White, there’s quite possibly a perfect storm of circumstances converging right now that should at least cause you to stop and evaluate your position in Amazon.

White explains, “Amazon has revenues of $21.27B in Q4 2012 alone. For FY2012 that figure was $61.09B. This was up 27% from FY2011, although Q4 revenue was up only 22% year over year. However, AMZN was far from the largest retailer in terms of profits. In 2012 AMZN's GAAP net income fell to $97 million for Q4 2012 (or +$0.21 per share) versus $177 million in Q4 2011. This figure is only 0.46% of revenue for Q4 2012. AMZN's net income for FY2012 was -$39 million. In other words it lost money.”

Additionally, the European Union’s recession is getting worse.  GDP fell by 0.9% in Q4 2012.  Cyprus is on the verge of default.  Italy is seeing 1000 businesses fail each day, over 300,000 businesses for the year.  Spain and Greece are experiencing unemployment rates of 26% or more.  Spain is still experiencing real estate and banking problems and saw a loss of 10.2% in retail sales for the 2012 Christmas season.  All of these factors will have a negative impact on Amazon’s future sales in Europe.

In the U.S., the picture doesn’t look any better.  As White explains, “The Q4 2012 GDP growth was only +0.1%. Subsequently the federal government hiked the payroll taxes by 2.9% of income for the average American. The government heaped further taxes on the rich for capital gains and dividends. It also added a 3.8% ObamaCare tax on the rich on their capital gains. Then at the beginning of March 2013, Obama signed the sequester into effect. All told economic experts think the decreased spending of the sequester coupled with the increased taxes of early January will lead to approximately -2% less GDP growth in 2013. If the Q4 GDP growth of +0.1% is a valid indication, this will mean a US recession in 2013. At the very least the average taxpayer will have 2.9% less income to spend at Amazon.com. If AMZN's margins weren't going to be negative already, the above US economic factors will likely push them into the red for the first three quarters of 2013.”  And the icing on the cake is the expectation that the U.S. congress will soon pass the Amazon Law, giving states the authority to collect taxes on sales made in their state.  This is likely to further erode Amazon’s sales and revenue, and consequently profits.

The combined effect of these issues is likely to force Amazon’s stock price to drop.  If you own Amazon stock, the question you need to ask yourself now is can you weather that potential storm or is it time to bail?  Only time will tell for sure.