Taking a look at high dividend yielding stocks

US Stocks

The stock markets rallied on the belief that the government will do all it can to keep the economy on track, with a USD 60-75 billion stimulus package. It's also rallying because Cisco said its earnings would be able to meet analyst expectations for the quarter ending Oct 31. And there were also some good non-manufacturing NAPM numbers.

Cisco aside, we are stepping into the 3Q reporting season, further disappointments would wreak havoc in an already fragile market. The long awaited attack on Afghanistan has started, and investors are waiting to see what will be the counterattack from the terrorists. The uncertainty will definitely put a damper on the market.

Morgan Stanley conducted a survey on the CFOs of its of 225 companies. Whereas 15% said they planned to cut or delay IT spending six months ago, the percentage has now risen to around 40%. And 30% said they would definitely be spending less than six months ago.


Taking a conservative approach, investors can look into stocks with high dividend yields, and meet the following criteria:

• Low debt outstanding (debt/equity < 50%)
• Good cash flow
• High pay-out ratio
• Total debt = or < 40% of capital structure
• Market capitalization more than $1 billion
• Interest expense coverage equal to or more than 2x
• Net dividend yields > or = 3%

American Financial Group Inc - provides multi-line property and casualty insurance (net yld: 3.3%)

Hospitality Properties Trust - acquires, owns, and leases hotel properties throughout the US. The hotels are marketed under the "Marriott" logo (net yld: 7.64%)

Public Storage Inc - invests primarily in existing mini-warehouses, self-service facilities which offer storage space for personal and commercial use (net yld: 3.06%)

RJ Reynolds Tobacco Hdlg. Inc - #2 tobacco company in the US (net yld: 3.76%)

Rockwell int'l Corp - provides industrial automation, power, control, and information solutions (net yld: 4.33%)

Worthington Industries - processes steel and fabricates metal, focusing on specialized products - flat rolled steel, metal farming products & automotive body panels (net yld: 3.61%)

It is important to understand, however, that there is a 30% withholding tax on dividend income for non-US investors. Furthermore, earnings decline might prompt management to reduce dividend payment or eliminate it.

US Technology

Nortel Networks (NT US $5.55 CSFB rating: BUY, CSFB MG V: Short-term Hold) joined the warnings parade last week, damping the positive tone of the Federal Reserve's ninth interest rate cut this year. Nortel is presently expecting a net loss of $3.6 billion for the 3Q01 as sales fell to $3.5 billion (from consensus estimates of $3.9 billion) due to the weakness in demand for telecommunications equipment in all geographic regions (excluding Asia). The company is now expecting revenues to come up $500 million short of previous expectations for $4 billion. In its continued effort to downsize and to rework its current breakeven plan to reflect expected revenues for the first quarter of 2002 (with revenue "well below $4 billion," compared with a forecast for a breakeven level at $5 billion), the company plans to shed an additional 20,000 jobs.

Compared to what Nortel was in 3Q00 (over 94,000 employed and a revenue of $7.3 billion), it will be less than half of what it was before with its headcount dropping to 45,000, and its revenue to $3.5 billion. Its share has fallen as well, from as high as $70 a year ago to near $5. Unless firm demand emerges, it is unlikely that Nortel can rebound in the near term regardless of how significant its cost cutting measures will be. Maintain Short-term Hold.

Openwave Systems Inc. (OPWV US $7.38 CSFB rating: Strong Buy, CSPB MG V: Short-term Hold) headed south after it pre announced an expected revenue ranging from $115 million to $120 million (from $151 million), with a pro forma EPS loss of 1 cent to 4 cents a share. The company blames the slowdown in sales from the September 11 tragedy, causing a total of 2 critical weeks loss of potential selling activities. However, the huge size of the shortfall indicates additional weakness beyond the tragic event of last month; the dramatic slowdown in demand for the wireless internet services.

Maintain Short-term Hold.

Europe

Sentiment improved in the early part of the week as the FED lowered interest rates by another 50bp to 2.50% and Dell and Cisco confirmed that they would meet 3Q01 forecasts. However, uncertainty has increased towards the end of the week as a weak employment report revealed the poor condition of the US economy and military operations against Afghanistan started. We expect uncertainty to reign and hence equity markets to consolidate in the days ahead.

Under a longer-term perspective we remain of the opinion that the proposed US stimulus package and the low level of interest rates will eventually lead to a recovery in the global economy some time next year. Investors with such a time horizon should use any weakness based on the current uncertainties as an opportunity to build up long-term positions.

The Euro STOXX 50 has gained more than 16% since the September 21 lows and most European indices are now close to the levels before the terrorist attacks in the US. Taking into account the deteriorating economic news and earnings reports ahead we believe that the potential for disappointments has increased.

This applies in particular to technology related stocks as the first US technology companies start reporting this week. The fundamental situation in the technology industry has not changed at all. With the global economy getting weaker there is only little hope of a recovery in demand anytime soon. Even though valuations might look more attractive these stocks will continue to trade based on daily news. Trading oriented investors should take some profit at current levels.

Aventis' (AVE FP; EUR 83.80) rally stalled this week after reaching a high of EUR 85.80 or 17.20% since our recommendation three weeks ago. While we are convinced of the company's outstanding long-term qualities we feel that the share price could suffer slightly due to profit taking or switches in the short-term.

Serono (SEO VX; CHF 1400), one of Europe's largest biotechnology companies and global leader in the treatment of infertility, gained almost 15% for the week and 11.20% since our recommendation two weeks ago. We believe that the latest weakness in the stock was mainly related to the FDA filing of Rebif. By the end of the year we expect some positive news on Serono's multiple sclerosis (MS) product, Rebif, which is said to deliver superior results against Avonex, the current MS product in the US protected by the 'orphan drug status' until 2003. Rebif rapidly built market share in the non-US market (32%) and had sales of USD 254 million in 2000. The drug is expected to generate sales of USD 773 million in 2005. Even if Rebif is not introduced before 2003 Serono is attractively valued compared to Amgen or Genentech with a strong balance sheet and an interesting early stage pipeline. We would use any forthcoming weakness as a buying opportunity.

Vodafone (VOD LN; GBP 1.56) said it added 2.5 million customers worldwide in the quarter ended September. The increase brings Vodafone's worldwide subscriber base to 95.6 million. Regions of strong growth were Southern Europe and the USA while high churn in Germany dampened growth rates. High churn rates are likely to continue in the quarters ahead but this should enhance the ARPU performance going forward. Additionally a newspaper report had it that Vodafone was expected to report first half proforma EBITDA up more than 40% yoy, beating company and analyst expectations. We believe that the company's fundamental picture is clearly improving. Vodafone is trading 15% above the pre-attack level and is one of the few companies to enjoy earnings upgrades by analysts. With the share-overhang in mind, we look to upgrade the stock to buy when equity markets stabilise.

Sodhexo Alliance (SW FP; EUR 46.10) reported strong sales growth for the fiscal year 2000/2001, ending August 31, 2001. Consolidated sales rose by 13.7% to EUR 11.9bln. Fourth-quarter sales rose 26% yoy. The trends coming out of Sodexho's full year sales release continue to show that its healthcare and education sales remain robust with organic growth of approx. 7% (47% of group sales) whilst its sales to business and industry customers (49% of group sales) continue to show slightly slower growth, particularly in the US, where we suspect Sodexho to have generated next to no growth in the fourth quarter.

We continue to like the catering sector. Leaders Sodexho and Compass have a big market opportunity in front of them and penetration remains low, especially in the attractive healthcare and education segments (only 25% of $40bn US market is currently outsourced). Whilst organic growth for Sodexho is not immune to slowing economies, we expect the downside risk to revenues and profits next year to be small and for organic growth to remain positive.

Sodexho will remain volatile until the US economy stabilises. However, we believe that the current valuation does already price a lot of pessimism. Sound cash flow will help Sodexho to weather the current weakness better than most of its competitors.

Zurich Fin. Serv. (ZURN VX; CHF 350) issued a profit warning today. ZFS doubled the estimates for claims related to the US attacks to USD 700-900 million. The company blamed lower investment income resulting from declining markets for the shortfall but gave no new guidance for 2001. ZFS opened the week down 10%. We removed the stock from our recommendation list on September 20, 2001 because of the lack of strategy and weak profit outlook. The latest profit warning does underline our assumption. While inexpensive we do not see a lot of upside potential from current levels.