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Morgan Stanley Makes Inflation-Protected-Yield Stock List at B of A

'We prefer companies that have strong free cash flow or distribute cash to shareholders,' Bank of America said.
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Bank of America has put together a list of what it calls attractive inflation-protected-yield stocks.

“With cash moving from worthless to yielding 3%-plus next year … amid [Federal Reserve interest-rate] hiking, we prefer companies that have strong free cash flow or distribute cash to shareholders,” Bank of America strategists wrote in a commentary.

“But in an environment where there are no signs of inflation subsiding, yield that is protected from inflation is also crucial.”

They see dividend growth stocks situated “between bonds (pure income, no inflation protection) and commodities (all inflation-exposure, no income).” Dividend stocks also “benefit from inflation, given that earnings are nominal,” the strategists said.

Among the screens the investment firm used to select its stocks are:

· Dividend yields higher than the 10-year Treasury yield;

· Dividend growth in at least three of the past four years, with no negative years;

· Less labor intensive than the median S&P 500 company, defined by the employees-to-sales ratio.

The stocks include:

· Boston Properties  (BXP) - Get Boston Properties, Inc. Report, an office real estate investment trust;

· Chevron  (CVX) - Get Chevron Corporation Report, the oil company;

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· Cisco Systems  (CSCO) - Get Cisco Systems, Inc. Report, the network technology company;

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· Morgan Stanley  (MS) - Get Morgan Stanley Report, the bank.

Morningstar on Boston Properties

Looking at Boston Properties, the country’s largest office REIT, Morningstar analyst Suryansh Sharma puts fair value at $125, compared to a recent quote of $111.96.

In its first-quarter earnings report, “management highlighted that the aggregate office-market statistics that currently show elevated levels of vacancy and weak net absorption don’t properly reflect the market dynamics of the premium end of the market,” he wrote in a commentary. That’s where most of Boston Properties’ portfolio lies.

A study the REIT conducted with CBRE, the Dallas real-estate-services and -investment firm, compared the relative performance of prime office assets, representing about 17% of total space, versus the rest of the market in five of Boston Properties’ central business districts. 

“CBRE found the vacancy rate is more than 5 percentage points lower for prime office assets versus non-prime assets in these markets,” Sharma said.

Morningstar on Kinder Morgan

Regarding Kinder Morgan, Morningstar analyst Stephen Ellis puts fair value at $17.50, compared to a recent quote of $18.65

“Kinder Morgan’s first-quarter results were strong, as tight oil and gas markets contributed to strength across multiple areas of its business,” he wrote in a commentary.

“Excluding one-time impacts from winter storm Uri, Kinder Morgan is seeing benefits across its business: higher demand for storage, the recent Stagecoach acquisition already ahead of expectations, higher liquefied natural gas demand at its Elba terminals due to the Russia-Ukraine war, and demand for new Permian gas takeaway pipes.”

To be sure, “the potential upside should be tempered by uncertainty about inflationary headwinds (fuel and steel costs),” Ellis said.