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- Citi’s global strategy team reveals stock selections for investors who favor companies that allocate a large portion of their capital to payout, rather than capital expenditures.
- Listed below are 10 of Citi’s "cash cow" stocks, which have an accumulative performance 10 percentage points higher than global indices.
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With so many available approaches to choose from, the investment landscape has never been more nebulous.
Couple this notion with the current forces affecting investor psyche — such as trade wars, geopolitical tensions, currency devaluations, and central bank activity — and it’s difficult to stick to a plan.
But one Wall Street behemoth thinks they’ve identified a group of stocks possessing a surefire combination of attributes that will lead to outsize gains going forward.
Citi’s "Cash Cows" — or stocks they’ve identified as "highly profitable, capex-lite business that are returning high levels of cash to shareholders" — have been trouncing the overall global market by 10 percentage points so far in 2019. And the firm thinks there’s still room for them to run in second half of the year.
"Investors are expressing a clear preference for payout over capex, paying higher multiples," Citi strategists wrote in a recent client note. "Although they do not look especially cheap, we think they should continue to generate strong returns."
Including 2018’s performance for context, the graphs below depict the cows’ outperformance since the beginning of the year.
The leftmost chart shows Citi’s cash cows have enjoyed 27% gains year-to-date — a full 10 percentage points more than MSCI All-World Index. In addition, on the right, the dark blue line shows their performance against a plethora of different investment approaches — and the cows are crushing.
Citi’s unique strategy favors an overweight in both consumer staples and information technology sector — areas of the market which have had an exceptional year thus far.
To further their point, Citi’s strategists highlight the decreasing trend in the ratio of global investment-to-payout dating back to 1995, which is important for big-picture context.
This metric takes the sum of capital expenditures and research and development, and then divides by the sum of dividends and buybacks. A falling ratio indicates more payouts, and less investment — something investors have clearly been clamoring for. It’s also a trend in which Citi believes will continue further.
On top of this, the cash cow’s median payout yield — which equates to dividends plus buybacks/share price — is trending almost one full percentage point higher than global stocks. A notion that helps sweeten the pot for investors interested in the strategy.
The graph below highlights the payout-yield outperformance for "cash cows" versus global stocks.
When all of these metrics are combined, the attractiveness of Citi’s strategy becomes clear — and provides investors with a hard-data visualization that’s hard to ignore.
Without further ado, here are 10 "cash cow" stocks Citi says could generate gains in the second half of 2019. They’re listed in increasing order of payout yield.
Dividend Yield: 0.5%
Buyback Yield: 1.8%
Payout Yield: 2.3%
Dividend Yield: 0.6%
Buyback Yield: 2.3%
Payout Yield: 2.8%
Dividend Yield: 3.0%
Buyback Yield: 0.8%
Payout Yield: 3.9%
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