Income Security Recomendations

BondsOnline Advisor – February 2006
By Stephen Taub

The BondsOnline Advisor strives to present you with income investment insights from analysts throughout the United States.  Bonds, preferred stocks, real estate investment trusts, or master limited partnerships can be a part of a successful income portfolio – and BondsOnline and PreferredsOnline provide the “Income Investor Tools” to keep you informed.

Income Security Recommendations

Smith Barney

The brokerage says investors can see a dramatic increase in yield if they move out of cash and into intermediate-maturity taxable or tax-exempt instruments. It talks about “the extremely low market risk” on intermediate- maturity fixed-income instruments under a wide range of likely economic/interest rate scenarios, and “the high opportunity cost” resulting from staying in cash in an environment where intermediate-maturity instruments offer higher yields.

Smith Barney’s equity analysts are also looking at high-dividend-paying shipping stocks. The brokerage points out that the industry is currently going through a downcycle. But, recommends companies that have maintained conservative dividend policies, asserting they “will come out relatively unscathed.”

It recommends Double Hull Tankers (DHT), which through a long-term chartering strategy, “should continue to provide above-average returns in the form of dividends,” according to the report. “It has the ability to increase its dividends through more vessel acquisitions.” It is based in Jersey, Channel Islands.

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UBS

The brokerage’s bond analysts have removed MBNA from its “Core” list after dropping coverage on the heels of its merger with Bank of America. It also downgraded Devon Energy to a "Market Perform." The Core Corporate Bond List is a monthly publication that represents its preferred universe for portfolio construction. It currently has 42 issuers covering 143. The core list’s current yield is 5.39 percent and its duration is 6.30.

There are currently nine issuers on the Core List. They are Anadarko Petroleum, Citicorp, Comcast, Daimlerchrysler, Goldman Sachs, HRPT Properties, National Rural Utilities, Northrop Grumman and Sprint.

Merrill Lynch

U.S. office markets continue to improve, Merrill recently told clients. So, it is recommending office REITs. It points out that office employment growth in 2005 jumped to 2.1% (vs. 1.5% in ‘04), helping to drive the vacancy rate down by 160 basis points, to 13.6% at the end of last year. However, it warns that accelerating supply could slow recovery in 2007.

Merrill’s favorites are SL Green Realty Corp. (SLG), which yields 2.9%; Kilroy Realty (KRC), which yields 3%, and Vornado Realty Trust (VNO), which yields 3.7%. It ranks Kilroy number one “due to its concentration in Southern California,” although increasing development activity in San Diego could impact the company by '07, it warns.

Merrill says Vornado has traded at a premium relative to the REIT sector due to the company’s entrepreneurial ability to create value for shareholders.

The brokerage also recently initiated coverage on Mack-Cali (CLI), which is currently yielding 5.7%. It said the buy rating on the NJ-based office REIT was based on the company's discount to the peer group, “which widened considerably over the past 12 months.”

It also recently raised its rating on Simon Property Group Inc. (SPG), the nation's largest mall owners, to Buy from Neutral “to reflect the portfolio's strong operating metrics and attractive valuation.” It is currently yielding 3.8%.

Merrill also recently upgraded Bank of America (BAC), the money center bank, to Buy from Neutral. The brokerage notes the bank trades at only 9.9 times its Consensus ’06 EPS, which represents 6%-19% PE discounts to major competitors. Its yield is currently 4.6%. “We expect a 6%-10% dividend increase in June, increasing BAC’s yield to about 5%,” Merrill adds.

Bear Stearns

The brokerage’s debt analysts recommend AT&T, asserting it offers the most attractive way to play the RBOC sector of the telecommunications market. “We believe that AT&T has the overall best collection of assets, including a significant opportunity in the enterprise business market with the best long distance asset in the industry, a wireline business which has increased revenue for seven consecutive quarters, a strong balance with minimum refinancing risk, strong and consistent free cash flow and a wireless asset that’s on track to expand margins approaching (possibly exceeding) Verizon Wireless,” it writes. The telecom debt analysts recommend the 5.10s of 2014, with a yield to worst of 5.55%, and the 6.45s of 34, with a yield to worst of 6.34%.

Its high-yield telecom analysts note in their quarterly report that they continue to believe that the high yield telecom sector overall is in a multi-year outperformance phase relative to the high yield market. They recommend an overweight position in high yield wireless telecom and a marketweight position in high yield wireline telecom.

It continues to like Dobson Cellular 9.875% second lien notes (recently 109.50); SunCom Wireless 8.5% senior notes (recently 94.50); Qwest Communications International Inc. (QCII) 7.5% of 2014 (recently 101.50); and the Time Warner Telecom 9.25% senior notes (recently 106.50). It also made a slight change, substituting the Rural Cellular 11.375% senior preferreds (recently 118.00) for the Rural Cellular L+575 senior subordinated notes. “The senior preferreds provide an additional 240 bps of yield over the fixed swapped equivalent yield to the first call of 10.03% for the L+575 floating rate notes, while leverage through the senior preferreds is only 0.7x higher than through the senior subordinated notes,” it adds.

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