Income Security Recommendations

BondsOnline Advisor – February 2007
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 [sign up to receive the newsletter which will have the recommendations] these are only on the email version of the Advisor.

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Citigroup/Municipal Bonds

The investment bank is still bullish on munis, noting that the slope of the municipal yield curve has remained moderately positive, even as the Treasury curve remains fairly sharply negative.

Meanwhile, state and local governments are flush with cash from rising tax revenues, Citi points out. It expects that extra cash to be used to borrow for much-needed projects in infrastructure, health care and education, to name a few examples. Sounds counter-intuitive? Citi has previously found that strong revenues are often seen as increasing bonding capacity, rather than as a reason to cut back on borrowing.

The investment bank also notes that there were 34 gubernatorial elections last November, resulting in a large number of newly seated governors have taken office. “These new leaders will put there own agendas in place—once again supported by a strong tax/revenue base,” it adds.

Finally, there are a significant number of large “special project” financings expected to be launched in the near term, Citi points out.

It also points out there that refunding is strong, partly driven by some high-yield issuers such as tobacco settlement bond issuers who are taking advantage of lower long-term rates and tighter credit spreads.

Citi’s strategy is to take what it calls a basic “laddered” structure, focusing on bonds in the 5-14 year range. “The municipal market continues to have a modest positive slope, unlike the taxable sector,” it stresses.

“The bottom line is that potential interest rate volatility in the fixed income markets should continue to be lower that it had been historically, and investors should adjust accordingly,” it adds.

Merrill Lynch/Utilities

The investment bank points out that January was only the seventh time in 37 months that utilities stocks scored a negative return. “While one month does not make a trend, the sector’s valuation remains at historic highs according to our models and longer-term earnings have been quite volatile – thereby increasing the likelihood of additional weakness over the next several months,” it asserts.

The upshot: It is remaining underweight the sector.

Even though, it singles out PG&E Corp. (PCG), the San Francisco-based holding company, fpr its “consistent long-term dividend growth. It currently trades at $48.23 and yields 2.70 percent.

Lehman/Energy Limited Partnerships

Lehman currently has an “overweight” rating on nine limited partnerships that specialize in the energy business. They all throw off current yields that exceed most bond yields.

Many of the companies are benefiting from acquisitions. However, a number of them are growing internally as well.

For example, Crosstex Energy LP (XTEX), an independent midstream energy company, recently raised its fourth-quarter distribution payment by 1.8 percent.” We believe the partnership is well-positioned to grow the distribution payment above the industry-wide average level with the support of accretion generated from recent acquisitions (notably the purchase of Chief's assets in the Barnett Shale) and contributions from organic growth projects,” Lehman recently wrote in a brief report. “The ability to grow the distribution, without depending on additional acquisitions, should drive a stronger and more consistent long-term distribution growth rate.”

Citigroup/Recommended List

There are 25 companies on the investment bank’s recommended list. Of these, seven have above-average yields. In fact, two of them are in partly singled out for their attractive dividends: Avon Products (AVP) and Conagra (CAG).

Merrill Lynch/Trust Banks

Merrill continues to be bullish on large-cap trust banks. It recently upgraded two issues-- Northern Trust (NTRS) and State Street (STT) to buy from neutral and continues to have buy ratings on Mellon Financial (MEL) and Bank of New York (BK). “We view fourth quarter earnings as a start of a strong operating performance cycle for the group broadly,” it asserts.

It points out that four of five trust banks beat consensus earnings estimates in the fourth quarter versus just one in the prior quarter, for example.

Now it is looking for earnings growth to accelerate in the first half of 2007 based on typical seasonal strength in trade volumes, foreign exchange trading, securities lending, strong equity market returns in the fourth quarter and continued capital markets expansion in Europe.

Merrill emphasizes it expects Northern Trust and State Street to exhibit much better earnings growth momentum than Mellon or BONY.