Gabelli Equity Income Fund (GABEX) is ranked four stars by Morningstar and is run by famed investor Mario Gabelli. With a focus on dividend income, the fund is an excellent source of ideas. Recently Gabelli highlighted Mondelez International Inc (NASDAQ:MDLZ), American Express Company (NYSE:AXP), and The Boeing Company (NYSE:BA) as having good prospects.
What Gabelli Looks for
When looking for investments, Gabelli tries to find stocks yielding more than the S&P 500 Index. However, that alone isn’t enough to get a stock in the fund. The manager is also looking for companies with strong free cash flow, a history of regular dividend payments, and the potential for long-term earnings growth. A performance catalyst, like a management change, new business line, or a spin-off, is also important.
The approach has worked well over the long term, leading Equity Income Fund to outperform the S&P 500 over the trailing five-, 10-, and 15-year periods.
An Outlook
Gabelli isn’t overly excited about the outlook for The United States right now. “Unfortunately, the economy is not gaining momentum,” he wrote recently. And, “The United States is in for another year of weak growth.” That’s a dour outlook and is compounded on the corporate side. “We have started to see that earnings are peaking, and the disconnect between continuing profit gains in the face of flattish revenues is over.” He suggests that investors “invest at good prices in dividend paying stocks with strong prospects for longer term earnings, dividend growth, and good cash earnings.”
Here are three stocks that make Gabelli’s list:
A Spin Off
Mondelez International Inc (NASDAQ:MDLZ) was one of the fund’s top performers in the first quarter. After separating from Kraft Foods Group Inc (NASDAQ:KRFT), Mondelez generates about 75% of it revenues from the snack business. Moreover, about 45% of the top line comes from emerging markets. Gabelli expects that number to increase to 50% over the next two years.
After the separation Mondelez International Inc (NASDAQ:MDLZ) was something of a laggard, but Gabelli believes that investors are “gradually beginning to appreciate the strong international growth prospects for the company.” Its stable of brands includes Oreo, Ritz, Trident, and Cadbury. An impressive collection that underpins Gabelli’s view of a bright future.
Investors can get an attractive 2.5% or so yield while the market continues to get a better feel for a new company with solid growth prospects from an enviable brand portfolio.
The Card for Rich People
Although the 2007 to 2009 recession led to a dip in revenues, the top line has been climbing since 2009. More notable, perhaps, is the fact that American Express Company (NYSE:AXP)’s bottom line didn’t dip into the red during the recession. Recently earnings have been in the $4 range.
Gabelli likes that “[t]he company’s strong consumer brand has allowed American Express to enter the deposit gathering market as an alternate source of funding…” He expects the company to “continue to expand into other payment related businesses like corporate purchasing, while also growing in emerging markets.” That could spell years of growth.
American Express Company (NYSE:AXP) shares are trading around all-time highs and yield only around 1.3%. They are most appropriate for growth investors. However, this company should probably be on everyone’s watch list just in case a broad market sell off creates fire sale prices again.
Airplane Duopoly
The Boeing Company (NYSE:BA) “is one of two manufacturers of large commercial aircraft. Over the next 20 years, the global passenger aircraft fleet is projected to double to approximately 40,000 airplanes, and roughly 34,000 new aircraft will be needed for industry growth and replacement.” Basically, Gabelli believes that Boeing is part of a duopoly and big industry sales are in the future.
Gabelli highlights The Boeing Company (NYSE:BA)’s commercial plane portfolio as giving airlines the flexibility to “choose the most cost effective jet for each flight.” That, in turn, should “enable Boeing to continue to capture a significant share of the future commercial aerospace market.”
Because of the types of products Boeing sells, its top and bottom lines can be a bit choppy. However, it has an enviable industry position and if Gabelli’s industry analysis is correct, the aircraft maker will have a solid book of business for years to come. The shares yield around 2% but have run up toward all time highs recently. Momentum investors might like the stock, though most would probably be better off waiting for a pull back.
Growth and Income
Gabelli Equity Income Fund pays a regular monthly dividend of three cents. That equates to a pretty small yield of around 1.3% recently. Investors willing to keep an eye on its holdings can cherry pick good names and earn a higher yield. Mondelez International Inc (NASDAQ:MDLZ) is probably the most timely option above, but the other two are definitely worth keeping an eye on.
The article Gabelli Equity Income Picks originally appeared on Fool.com and is written by Reuben Brewer.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
