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Taking Stock

Tony Crowell

Increasing Income Wins Popularity Contests

With three weeks to go, the stock market is up 12% for 2012. Financial media are counting down to the “fiscal crisis” as if the New Year were to be greeted with a nuclear explosion. The fiscal issues are serious but resolvable and investors have not (yet) let daily headlines of Congressional bumbling induce panic selling. As Mark Twain said, “No man’s life, liberty or property is safe while Congress is in session.”

Congress is scheduled for a holiday recess in a week, another self-imposed time pressure that may bring some closure. Its history of changing tax rates and laws shows that the changes have usually been moderate in scope and sometimes deferred in application. With time getting short, I think it likely that it may propose a patchwork compromise of moderate tax increases together with some sort of deferred spending cuts.

That’s hardly ideal but will probably be enough to direct Wall Street’s attention back to company financial results as the primary bases for stock prices. That seems to be the consensus of investors as stocks continue their recently resumed uptrend. Anomalies persist like Apple’s sudden sell-off but that seems attributable to changed collateral requirements affecting leveraged speculators. Investors will always pull ahead of speculators as long as they do not try to become speculators.

Low interest rates, restrained inflation and a persistently growing economy continue to provide a fertile field for increasing corporate earnings. Anxieties provoked by clamoring media are keeping stock valuations low. Unsurprisingly, investors in Diageo (DEO-$119), the world’s largest provider of alcoholic beverages, are doing nicely.

The brands of London-based Diageo include Johnny Walker, Smirnoff, Tanqueray and Gordon’s, among many others. It yields 3% with earnings growth rates in the low teens. Anheuser-Busch InBev (BUD-$87), a new recommendation, is based in Belgium, where the company was founded in 1366. It offers over 200 brands besides Bud, including Stella Artois and Becks globally, together with local brands such as Brahma in Brazil, where it has extensive operations. Growth is steady, also in the low teens. Yield is only 1.5%, however, its 37-year record of dividend increases makes Bud a particularly good stock to cellar in a retirement account.

Insurance, a more sober sector, also has excellent cash flow and Aflac (AFL-$53), the supplemental health carrier, is approaching a new 52-week high, while trading at less than 10 times earnings that are growing in the 10%-12% range. It is another dividend champ, with increases for 29 straight years.

Reinsurance, a field where companies provide back up insurance for primary insurers, has always seemed to me to be a high-class bookie operation. It is also quite profitable although the field suffered through their investment operations during the financial crisis. PartnerRe (PRE-$82), a Bermuda-based reinsurer, reported strong earnings and is a new buy.

Third quarter earnings were $7.53 a share, bringing earnings for the first nine months to $15.19. Book value per share is now $99. Its exposure to recent hurricane claims appears quite moderate and the fourth quarter should see further gains. Also a dividend champ, it yields 3% now with dividend bumps for 17 straight years.

Dividends may lose their current favored tax status but they have usually enjoyed some form of protectionism. Income-seeking investors should consider my two new public partnership buys, both yielding 8%: Calumet (hydrocarbon variants) (CLMT-$30, and Rentech Nitrogen Partners (fertilizer) (RNF-$38). Even though tax rates may go up, stocks providing increasing income will always be in demand.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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