LGGNY - 15 A-Rated 6% Yielding SWANs Perfect For What's Coming Next

2023-11-15 07:15:00 ET

Summary

• Americans are increasingly worried about job losses, and long-term inflation expectations are at a 12-year high.
• Leading economic indicators suggest a potential recession within three months, while unemployment is predicted to rise, and stagflation is a concern.
• A-rated ultra-yielding SWANs are a great way to invest money wisely during a high uncertainty period. Rock-solid balance sheets, great risk management, and safe ultra-yield is always in fashion.
• Here are 15 A-rated 6% yielding Sleep Well At Night blue chips that offer almost 400% upside over the next decade and Buffett-like 20+% annual returns in the coming two years.
• These 15 A-rated 6% yielding blue-chips are 30% undervalued, 5X the market's return potential through 2025, and have all the quality you need to survive and thrive through whatever is coming next for the economy, interest rates, or the stock market.

Americans are now starting to get nervous.

Worries about losing their jobs are at the highest level in 3 years.

Meanwhile, long-term inflation expectations just hit a 12-year high.

The Fed says inflation will be 2% long term. Americans don't buy it.

The bond market mostly believes the Fed. Over the next 5 to 30 years, the bond market thinks inflation will average 2.4%.

Who is right? Americans or the bond market? The smart money on Wall Street?

Based on 10 million real-time price data points that update daily, consumers are pretty close to the mark.

• Cleveland Fed estimates that by 3.6%, inflation will persist through the end of the year.

OK, so the Fed is behind the curve, losing control of inflation expectations, and it's time to start hiking again, right?

Here Comes The Recession...And Stagflation

Based on 18 leading economic indicators, the ones that are most predictive of recessions in the last 30 years are now indicating a potential recession could begin within three months.

On average, in the last 30 years, when the average of all 18 indicators is 2% above the historical baseline, the recession was one month away.

We're currently 0.3% above baseline, with the seven most predictive metrics at 1.6% below baseline.

But what about the best job market in 54 years?

The world's largest Nordic bank predicts that unemployment will rise 1.3% within seven months as 2 million Americans lose their jobs.

So, the Fed is going to start slashing rates?

Have you heard of stagflation? A recession in which inflation remains elevated?

That's what happened in the 1970s, and it was a lost decade for stocks.

It was such a miserable time for Americans we even invented a new metric to track our unhappiness, the misery index.

• unemployment rate + inflation.

While the misery index has been moving in the right direction, that could change quickly. In fact, according to Nordea Bank, this index has bottomed and is about to head to around 10% in the coming seven months.

(Source: Misery Index.US.)

Ironically, 8.5 is the historical average misery index, so we're doing better than normal, historically speaking.

What Will The Fed Do?

According to Governor Waller's speech last week, the Fed might have to continue QT for an extra year. That means -$90 billion in monthly bond buying (reverse money printing) for 2.5 more years.

• $3.5 trillion in total reverse money printing.

What would the bond market do if consumers were proven right? If long-term inflation is 3.2% and not 2.4%?

• long-term yields would have to adjust by 0.8%
• 5.4% on the 10-year yield
• 8.5% mortgage rates.

If the Fed is serious about returning to 2% inflation, they would also have to raise higher rates. How much?

The Fed is at 5.25% right now (lower bound), and by the Fed's own model, it should be at 6.5% to 7% right now.

Jamie Dimon warns that if inflation gets stuck at current levels, the Fed might have to go to 7%. James Bullard, former head of the St. Louis Fed (just retired), says 6.5%, and Governor Waller says 6% to 7% is possible along with that $2.5 trillion in total remaining QT.

What about the recession? Is the Fed's own Sahm rule about to be triggered?

• Claudia Sahm: always when unemployment goes 0.5% above the rolling 3-month minimum level you're in recession.
• 4.0% unemployment would signal a potential recession has started.

So by the end of the year, we're potentially going to get a confirmation of recession, what JPMorgan's economists have been predicting for almost 6 months.

And inflation might remain stubbornly high, forcing the Fed to not only not cut rates but even hike to 7% and keep QT running full blast for another 2.5 years.

How The Heck Could This Actually Happen?

The government printed $9 trillion during the Pandemic. But due to how leveraged the economy is, $9 trillion turned into $38 trillion in new wealth.

So Americans are $38 trillion richer than pre-pandemic levels. How much of that are they willing to spend? Economists have an answer courtesy of their estimated "propensity to consumer."

Economists estimate that consumers will spend about $1.5 trillion of that $38 trillion and have already spent $800 billion of that.

So take all the income we're getting and throw $700 billion on top.

Can you see why inflation is being stubborn?

Oh, and by the way, 85% of the money supply is from the banks.

When banks issue new credit like they keep doing, they are printing new money and injecting it into the economy.

Now do you understand how little control the Fed really has?

The Fed can't play the economy like a violin. It can do exactly 3 things.

• change short-term rates
• change its balance sheet
• tell the market what it plans to do.

3 things, and 3 things only. The Fed has no other tools at its disposal, and all of those tools are very blunt instruments.

So What's An Income Investor To Do?

A-rated companies have not just strong balance sheets but rock-solid fortress balance sheets.

The risk of an A-rated company going bankrupt in the next 30 years is 2.5%, the same probability of nuclear war in any given year.

• outside of this current proxy war with Russia
• Goldman Sachs estimates a 10% chance of nuclear war right now.

A-rated balance sheets mean a lower cost of capital for companies that don't need to borrow at all.

A-rated companies can borrow for 5.3% to 6% rates right now. That's 4X the record-low rates during the Pandemic. But it's a lot better than junk bond-rated companies whose borrowing costs are 7.3% and on their way to 14% to 15%.

• average junk bond credit spread in recessions blowouts out to 10%
• 4.6% current 10-year yield + 10% = 14.5%
• possibly 15% to 16% if we get stagflation.

So, guess what high-yield investors can do if they are worried about stagflation?

How To Find The Best A-Rated Ultra-Yield SWANs

Here is how I have used our DK Zen Research Terminal to find the best A-rated 6% yielding blue chips.

From 505 stocks in our Master List to the best blue-chip aristocrat bargains.

All in one minute, thanks to the DK Zen Research Terminal. This is how I find all my investment ideas.

15 A-Rated 6% Yielding SWANs

Fundamental Summary

Fundamentals Summary

• yield: 6.2% (3X S&P 500 and above SCHD or VYM)
• dividend safety: 87% very safe (1.65% dividend cut risk)
• overall quality: 83% low-risk Ultra SWAN dividend aristocrat
• credit rating: BBB+ stable (4.73% 30-year bankruptcy risk)
• S&P LT Risk management global percentile: 75th = low risk (good risk management)
• long-term growth consensus: 6.7%
• long-term total return potential: 12.9% vs 10.2% S&P 500
• discount to fair value: 29% discount (potential Ultra Value "fat pitch" buy) vs 8% overvaluation on S&P
• 10-year valuation boost: 3.5% annually
• 10-year consensus total return potential: 4.6% yield + 8.6% growth + 5.4% valuation boost = 16.4% vs 9% S&P
• 10-year consensus total return potential: = 357 % vs 134% S&P 500.

6% very safe yield today, from 15 amazing companies with rock-solid balance sheets and amazing risk management and are so undervalued they are expected to turn $1 into $4.57 in the next decade.

I've ranked these A-rated ultra-yield SWANs by highest to lowest yield and linked to articles about each.

• Legal & General ( LGGNY )
• Enterprise Products Partners ( EPD )
• Bank of Nova Scotia ( BNS )
• Canadian Imperial Bank of Commerce ( CM )
• Truist Financial ( TFC )
• Simon Property Group ( SPG )
• Realty Income ( O )
• Manulife Financial ( MFC )
• Philip Morris International ( PM )
• Bank of Montreal ( BMO )
• U.S. Bancorp ( USB )
• Allianz ( ALIZY )
• Prudential ( PRU )
• Pfizer ( PFE )
• PNC Financial ( PNC ).

Consensus Total Return Potential Through 2025

• if and only if each company grows as analysts expect
• and returns to historical market-determined fair value
• this is what you will make.

Enterprise Products Partners

Scotiabank

Canadian Imperial Bank of Commerce

Truist

Simon Property Group

Realty Income

Manulife Financial

Philip Morris International

Bank of Montreal

U.S. Bancorp

Allianz

Prudential

Pfizer

PNC Financial

S&P 500

Bottom Line: 15 A-Rated 6% Yielding SWANs Perfect For What's Coming Next

Imagine you are, God forbid, diagnosed with cancer.

Spurred on by fear, you start eating a healthy diet, quitting smoking, quitting drinking, getting enough sleep, drinking enough water, doing stress management, and exercising every day.

6 months later, new scans show your cancer is completely gone.

So obviously, it's time to start smoking, drinking, eating crap by the pound, and completely go back to the way you used to live, right?

Obviously, is an extreme example, but my point is that strong balance sheets matter all the time.

Whether or not we get a recession beginning this year, next year, or not even in 2025 (like what Goldman now expects), A-rated SWANs are a wonderful source of investing ideas.

High-yield investing is also great for paying the bills, and A-rated 6% yielding SWANs is a great solution for a lot of investors no matter what happens next with inflation, interest rates, the economy, or the stock market.

For further details see:

15 A-Rated 6% Yielding SWANs Perfect For What's Coming Next