As the taper is set to start in September, there is bound to be some volatility in the markets, so in this two part series I have put together a taper-proof portfolio.
The aim of this portfolio is not to try and avoid the volatility stemming from the taper but to fully acknowledge it, looking to invest in companies that are good investments for the long term and will not be significantly affected by short term volatility or an economic slowdown.
These are the contenders:
In Part 1 I covered the investment thesis for picks Merck, Philips 66 and Crocs; in this part I am looking at AT&T Inc. (NYSE:T), Ocean Rig and Bunge Ltd (NYSE:BG).
AT&T Inc. (NYSE:T) is bound to come under pressure when the taper finally occurs. Due to the company’s high dividend yield, investors have sought out the stock over the past few years as treasury rates have collapsed. Now that treasury rates are back on the rise, investors are selling down high yield stocks like AT&T Inc. (NYSE:T) in favor of the risk free T-bills, bonds and notes.
However, as one of the country’s main telecoms providers, AT&T Inc. (NYSE:T) has a strong future outlook with earnings expected to grow at least in line with inflation for many years to come and this should support the dividend.
Moreover, AT&T Inc. (NYSE:T) is looking to take its experience overseas, to the beaten-down European telecoms sector, a highly lucrative area of investment, where 4G penetration is rising rapidly. While an investment has not yet been announced, AT&T is doing a lot of probing in the region and an acquisition will be a huge boon for AT&T for the long term. Europe offers the company a new area of growth outside its home market, where smartphone penetration is growing at one of the fastest rates in the world, giving AT&T an edge over its peers here in the US.
That said, one of AT&T’s biggest issues is debt – there is a lot of it. Fortunately, AT&T is not in a precarious position. For a start, the company has been busy over the last few years, locking in low rates and 15% of the company’s debt is now maturing between 2038-2042 at a yield of <6%. In addition, the company is holding a lot of debt from acquisitions, which is high yield junk debt such as Southerwestern Bell Tel 7% maturing 2015.
Realistically, AT&T’s debt should not be an issue as most of the acquired junk debt can be re-financed at a lower rate and the higher coupon debt expiring soon should be able to be rolled over at rates which should be lower than the ones currently being paid. Furthermore, with 15% of debt locked into longer maturities and the junk debt to be rolled over at better rates, even a rise in the base rate will not hit AT&T as hard as many think.