Earnings season is a crucial period, offering valuable insights into the state of corporate Britain and providing investors with fresh data to analyse their favoured investments.
This year, the first and second-quarter earnings reports have been dominated by big tech stocks, these companies being the driving force behind the FTSE 100 and holding significant weight in global stock market indices. Entering August, the largest FTSE 100 constituents accounted for 36% of the index's total weighting. A large proportion of these top ten companies are major technology corporations, including those featured in a recent Wall Street Journal article.
The business publication has identified five key takeaways from the earnings season, providing valuable information about the UK economy and the stocks held within investors' portfolios.
Positive Developments:
Firstly, FTSE 100 earnings have increased by 10.9% compared to the same period last year, underpinned by revenue growth. The 5.2% revenue growth rate marks the highest since the fourth quarter of 2022.
Challenges:
However, not all is rosy. Inflation has impacted the middle class, leading to reduced spending. Even anti-cyclical consumer businesses, such as McDonald's and its suppliers, are facing pressure.
Higher interest rates have also created difficulties for banks. They are compelled to offer higher interest yields to attract customers, leading to increased competition. This situation has wider implications as it discourages mortgage refinancing and borrowing, leading to rising consumer debt and difficulties meeting loan repayments.
Focus on AI:
Despite the challenges, big tech companies remain committed to AI development and investment. While AI remains a hot topic, the sector faces the risk of falling short of investor expectations, potentially impacting earnings growth.
Dividend Powerhouses:
Amidst these economic headwinds, two high-yield picks have emerged, companies that have thrived during the second quarter and continue to perform well despite challenges faced by other sectors. These companies offer attractive valuations for investors seeking steady income growth.
Enbridge (ENB) â 7% Midstream Yield:
Enbridge, with a market cap of $84 billion, is North America's largest midstream company, responsible for transporting approximately 30% of the continent's crude oil production. It boasts significant export terminal capacity and delivers around 20% of the natural gas consumed by over 170 million people in the United States. Enbridge also owns over 5 gigawatts of renewable energy capacity in North America and Europe.
This business benefits from robust oil and gas production, strong demand, and increasing importance of oil and gas exports. Shareholders are further protected by the fact that 98% of its revenue comes from cost-of-service and contracted operations, with 95% of its customers holding investment-grade balance sheets.
Enbridge has a strong track record of dividend increases, boasting 29 consecutive years of dividend hikes. The company currently offers a 6.9% yield and believes it can deliver a 10-12% total annual shareholder return, driven by annual distributable cash flow growth.
NNN REIT (NNN) â 5% Net Lease Income:
NNN REIT, previously known as National Retail Properties, is one of the largest net lease REITs in the US. Its tenants are responsible for taxes, maintenance, and insurance, providing a degree of protection from temporary consumer weakness. The company boasts an impressive portfolio of 3,548 freestanding single-tenant properties, with an occupancy rate of 99.3%, surpassing its historical average of 98.0%.
NNN has a strong track record of outperforming its peers, maintaining a 96% occupancy rate even during the Great Financial Crisis. The company's tenant base is impressive, including notable names like 7-Eleven, Mister Car Wash, Camping World, Dave & Busterâs, LA Fitness, Best Buy, and other major retailers and convenience stores.
The company continues to invest prudently in new properties, with a recent $111 million investment in 16 new properties, achieving a compelling initial cash cap rate of 7.9%. NNN's balance sheet is robust, with a weighted average debt maturity of 12.6 years and significant debt maturities not due until the fourth quarter of 2025. The company maintains strong liquidity with $1.2 billion of available credit, reinforcing its BBB+ credit rating.
NNN has an impressive track record of dividend growth, with 35 consecutive years of annual increases. The current yield stands at 5.2%, coupled with a 69% payout ratio.
Conclusion:
Earnings season has presented a mixed bag of results, highlighting both strengths and challenges across different sectors. While big tech continues its AI-driven journey, consumer spending and the banking sector face pressures from high interest rates and inflation.
In this volatile market, Enbridge and NNN REIT emerge as attractive high-yield options, offering dependable sources of income and growth with a high level of safety. Enbridge, with its robust midstream operations and inflation-protected revenue, offers a reliable 7% yield, while NNN REIT's strong tenant base, impressive dividend track record, and favorable net lease model provide a secure 5% yield.
These two picks stand out as dependable investments in the current unpredictable market, offering income, growth, and a robust safety net, providing investors with peace of mind in uncertain times.
