Income Security Recommendations

BondsOnline Advisor – January 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

Company	Ticker	Type	Current price	Current yield	Firm
SL Green Realty	SLG	REIT	$131.81	2.10%	Merrill
Brookfield Properties	BPO	REIT	$38.89	2.00%	Merrill
Simon Property Group	SPG	REIT	$99.74	3.10%	Merrill
Taubman Centers	TCO	REIT	$53.41	2.90%	Merrill
Federal Realty Investment Trust	FRT	REIT	$85.65	2.70%	Merrill
Weingarten Realty Investors	WRI	REIT	47.85	4.00	Merrill
Archstone- Smith	ASN	REIT	59.87	3.00	Merrill
Bristol-Myers Squibb	BMY	E	26.25	4.2	Lehman
Merck	MRK	E	44.79	3.4	Lehman
Wyeth	WYE	E	50.61	2.0	Lehman
Energy Transfer Partners LP	ETP	MLP	50.98	6.1	Lehman
CenterPoint Energy	CNP	E	16.84	3.6	BancAmerica
Avon Products	AVP	E	34.41	2.1	Citi
Conagra	CAG	E	27.05	2.7	Citi
Occidental Petroleum	OXY	E	44.40	1.8	Citi
Fifth Third Bancorp	FITB	E	40.03	3.9	Citi
General Electric	GE	E	37.89	2.9	Citi
Intel	INTC	E	22.13	1.9	Citi
AT&T	T	E	34.73	4.1	Citi

NA: not applicable (there is no dividend) * E – equity; REIT – real estate investment trust; CB – corporate bond; Pr – preferred; MLP – master limited partnership; ETF – Exchange Traded Fund.

Citigroup/2007 Fixed Income Strategy

Citigroup warns that in 2007, relative value is likely to remain scarce in the bond market, citing the flat and inverted yield curves, tight spreads and key uncertainties related to the global economic outlook. “Valuations are, for the most part, less than compelling,” it asserts.

For example, it believes that we are currently at the lower end of the expected trading range on long-term bond yields. So, it does not believe this is the best time to extend portfolio duration.

Rather, it recommends that investors seeking to minimize credit-quality risks favor agency bonds over Treasury debt, or long-term high-grade corporates.

It is also positive on mortgage-backed prospects despite concerns around the housing downturn.

As for high yield bonds, it says it is currently waiting for a better entry point. “Current spreads are not particularly attractive for junk bonds or emerging market debt,” it explains.

Looking at tax exempts, Citi says it continues to recommend the “ease into the market” approach. It also suggests that municipal investors consider high-quality taxable instruments to meet short maturity needs where after-tax yields exceed that on similar maturity municipals.

Citigroup/High Yielding Stocks

The brokerage currently has 23 companies on its recommended list. Of this group, seven have above-average dividend yields—defined as at least 1.8 percent.

They include Avon Products (2.1%) and Conagra (2.7%) in the consumer staples group, Occidental Petroleum (1.8%) in the energy group, Fifth Third Bancorp (3.9%) in the financials group, General Electric (2.9%) in the industrials segment, Intel (1.9%) in the information technology group and AT&T (4.1%) in telecom services.

Interestingly, five of the 23 recommended stocks don’t currently pay a dividend, while the payout by another six companies is 1% or below.

Banc of America/Utilities

The brokerage recently added Houston-based utility CenterPoint Energy (CNP) to its Utility Fresh Money List, replacing PPL (PPL). It cites the company’s robust growth prospect from CenterPoint’s Pipelines and Field Services segment. However, among the reasons for the recommendation is because higher dividend potential exists. BofA says its model assumes a dividend growth rate of 10% for 2007 and 5% for 2008, with the possibility of his coming in at 10% in ’08).

Lehman//Energy

The brokerage deems Energy Transfer Partners LP (ETP) to be undervalued, pointing to fiscal (2007) first quarter cash flow that recently came in below estimates. Through its subsidiaries, the company operates natural gas midstream, and transportation and storage businesses. Lehman says the shortfall stemmed from lower than expected results in each business segment. Even so, it asserts that fundamentals remain intact and management reiterated its fiscal 2007 target. “We view the weakness in ETP's stock price…as a buying opportunity for investors to purchase a top-tier grower at a discount compared to peers,” Lehman recently asserted. Its price target is $59 and it has a 6% target yield.

Lehman/Pharmaceuticals

The investment bank recently reiterated its highest rating on the pharmaceuticals sector for four main reasons.

They include strong anticipated revenue growth, various cost cutting and productivity initiatives, and the belief that political risk is overdone.

The fourth reason: dividend yield support: “US major pharmaceuticals provide an attractive dividend yield when compared to the S&P 500 and EU major pharmaceuticals,” the brokerage asserts.

Lehman elaborates that if you assume US GDP growth will be 2.5 percent and S&P earnings growth of 8-9 percent with dividend yields lower than 2 percent in 2007, investors might consider US pharmaceuticals as being "relatively attractive." The average dividend yield of combined large cap US and EU stocks is 2.66 percent. The range is 4.46 percent for Pfizer to 0.94 percent for Schering-Plough. The average yield excluding US is 2.22 percent with the average yield in the US of 2.88 percent or 3.16 percent if you exclude Schering-Plough.

The brokerage currently rates three companies “overweight.” They are Bristol-Myers Squibb (BMY), Merck (MRK) and Wyeth (WYE).

Regarding Bristol, Lehman says it continues to expect sales growth of key and newly approved products to offset the net revenue decline of exclusivity losses suffered during the year from drugs such as Pravachol. It also points out that the drug maker has stated that 2006 is its transition/baseline year as it prepared for growth in 2007.

Merrill Lynch/REITs

After watching REITs racks up a 36% total return in 2006—its seventh straight year outperforming the S&P 500—Merrill is gearing up for a more modest 11% return in 2007 for the group. “The slowing economy should keep long-term interest rates stable during 2007 which, in turn, should keep multiples from contracting over the coming 12 months,” it asserts.

Still, it singles out seven stocks.

SL Green Realty (SLO) is one of ML’s two top recommendations in the office sector. The company is currently in the process of closing on its deal with Reckson Associates Realty. Merrill cites the company’s concentration in New York City, calling it the nation’s best office market. It forecasts it to generate among the highest FFO (funds from operations) growth rates in 2007, driven by very strong internal growth forecasts of 6%-plus. Last year, its stock rose 74%, plus dividends. The stock currently trades at a 10% discount to ML’s current NAV of $150 per share.

Brookfield Properties (BPO), along with SL Green, is Merrill’s favorite pick in the office sector. It has exposure to some of the nation’s healthiest office markets, such as New York City, Washington, D.C. and Southern California, and some of Canada’s premier markets such as Calgary and Toronto, it notes. Merrill also points out that the stock trades at a discount to its peers compared with both cash earnings and it forward NAV estimate. Wild card play: Merrill estimates the company’s residential land business is worth nearly $1.7 billion, or $7 per share.

Simon Property Group (SPG) is the nation’s largest REIT and dominant mall landlord, according to ML. It currently owns or has an interest in 285 properties in the United States containing 201 million square feet of gross leasable area in 38 states plus Puerto Rico. Merrill says its 4% premium to the bank’s forward NAV estimate is slightly above the company’s long-term average of a 1% discount.

Taubman Centers (TCO) owns 63% of The Taubman Realty Group LP, the operating partnership, a subsidiary that owns 21 urban and suburban shopping centers in 9 states in the United States. Merrill figures the stock will trade at parity with its forward NAV estimate, which is above its long-term average of a 14% discount to NAV. It is deemed to have an upscale portfolio.

Federal Realty Investment Trust (FRT) is said to own “the highest quality shopping center portfolio in the country” with significant concentrations on the East Coast, stretching from Washington DC to Boston and on the West Coast in both Northern and Southern California. Merrill claims the REIT has extremely strong demographics, which provide the company with the highest projected internal growth rate among its peers. Merrill expects it to generate 8% to 10% earnings growth per annum based on its existing portfolio.

Weingarten Realty Investors (WRI) operates in two segments--294 shopping centers and 59 industrial properties. Merrill says its price objective assumes the stock trades at a 10% premium to its forward NAV estimate.

Archstone-Smith (ASN) is an apartment REIT that operates mostly upscale high-rise and garden apartment communities in the Washington, D.C. metropolitan area, southern California, the San Francisco bay area, the New York City metropolitan area, Boston, Chicago, southeast Florida, and Seattle. It has a position in 257 communities, representing 86,930 units, including units under construction.