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An Alternative To Money Market Funds

November 2016

October is behind us and interest rates are again in focus. A global bond market rout sent yields around the world well above their low point reached earlier this year. The yield on the 10 Year US Treasury has climbed more than 50 basis points since hitting its all time low of 1.35% after the Brexit vote in June. The Federal Reserve is widely expected to raise rates by 25 basis points when it meets December 13-14.

The US Dollar had a strong rally during October based on the growing belief the Fed will raise rates in December. The upward move in interest rates has hit several dividend paying stocks particularly hard. By the end of October, both AT&T and Verizon had fallen over 15% from their peak trading price in 2016. They now offer compelling dividend yields as Verizon yields about 4.70% and AT&T’s yield is over 5.30%. On October 22, AT&T raised its quarterly dividend for the 33rd straight year, boosting the dividend by a penny to 49c. This dividend will be paid on February 1 to holders of record as of January 10.

Both companies are in the midst of completing deals for media content. Verizon may seek to reduce its price for Yahoo’s assets due to the recent hacking scandal. Meanwhile, AT&T has agreed to acquire Time Warner for more than $85 billion in cash and stock, valuing Time Warner @ $107.50 per share. This deal is the largest M&A transaction of 2016. The AT&T Time Warner deal is expected to receive extensive scrutiny by the various regulatory agencies around the world. Their approval must be obtained in order to complete this deal.

Time Warner shares ended October trading about $20 below the $107.50 takeover price as investors remain concerned about the deal receiving regulatory approval. One notable aspect of this transaction are the breakup fees payable to each party under the merger agreement. AT&T will pay Time Warner $500 million should this deal fail to obtain regulatory approval. However, Time Warner would have to pay AT&T $1.725 billion if it accepts a proposal from another suitor.

Due to the share price declines for AT&T and Verizon, the Energy and Utility sectors ended October as the top two performing sectors of 2016. The Energy sector’s top ranking for 2016 is remarkable considering how dismal the outlook was for both crude oil and the major oil firms in January and February. These companies continue to offer strong dividend yields with Exxon yielding about 3.50% while Chevron and Occidental both offer yields above 4%.

My weekly radio show on WWPR 1490 AM airs at 12.30pm each Friday. The show can also be heard live on the station’s website (www.1490wwpr.com). My prior radio shows and news columns are available on my firm’s website (www.amescapmgmt.com).

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