Today’s Top 5 Stock Picks: Dividend Payers, REITs

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Utilities, real-estate investment trusts and consumer staple stocks are sporting nosebleed valuations, but David Abella, manager of the $240 million City National Rochdale Dividend & Income fund (ticker: RIMHX ), doesn’t think those sectors are entirely picked over.

Among the fund holdings highlighted by Abella, 50, are General Mills ( GIS GIS 0.897112419400056% General Mills Inc. U.S.: NYSE USD71.98 0.64 0.897112419400056% /Date(1469816279677-0500)/ Volume (Delayed 15m) : 1174544 P/E Ratio 26.009025270758123 Market Cap 42591475674.9719 Dividend Yield 2.6650010410160316% Rev. per Employee 424695 More quote details and news » ), $5 billion B&G Foods ( BGS BGS 13.7257043022494% B&G Foods Inc. U.S.: NYSE USD52.075 6.285 13.7257043022494% /Date(1469816308975-0500)/ Volume (Delayed 15m) : 1426472 P/E Ratio 36.769366197183096 Market Cap 2868285629.40063 Dividend Yield 3.217620301651903% Rev. per Employee 550482 More quote details and news » ), real estate investment trusts Lamar Advertising ( LAMR LAMR -0.058953574060427415% Lamar Advertising Co. Cl A U.S.: Nasdaq USD67.81 -0.04 -0.058953574060427415% /Date(1469815353161-0500)/ Volume (Delayed 15m) : 83412 P/E Ratio 24.04609929078014 Market Cap 6584459888.79376 Dividend Yield 4.424126235068574% Rev. per Employee 434204 More quote details and news » ) and EPR Properties ( EPR EPR 1.0141656662665066% EPR Properties U.S.: NYSE USD84.1448 0.8448 1.0141656662665066% /Date(1469816296756-0500)/ Volume (Delayed 15m) : 175976 P/E Ratio 27.519607843137255 Market Cap 5297880066.98608 Dividend Yield 4.560028500178126% Rev. per Employee 8934590 More quote details and news » ) and electric utility giant Duke Energy ( DUK DUK 0.5444835680751173% Duke Energy Corp. U.S.: NYSE USD85.6639 0.4639 0.5444835680751173% /Date(1469816296641-0500)/ Volume (Delayed 15m) : 1040624 P/E Ratio 22.341506631576205 Market Cap 58694617990.4053 Dividend Yield 3.9888033589923024% Rev. per Employee 788543 More quote details and news » ). While they aren’t cheap, Abella says they sport reasonable valuations relative to sector peers and pay a nice dividend. The lowest yielding among them is General Mills’ 2.6%.

Abella has been on a hot streak lately. In the past 12 months, the fund returned 20%, or more than three times the market’s return and five times the average peer funds’. To be sure, utilities and consumer stocks have been investor darlings of late, and that can’t continue forever. But the fund has proved itself over the long term as well: Its 10-year record edges out the S&P 500 and 95% of large-value funds.

Out of his New York office, the fund manager invests in cash cows hiking dividends at an above-market rate. Abella looks for relative values compared with peers and where a company’s stock has traded historically. The fund’s average 12-month forward price-to-earnings ratio, however, is 21, just above the S&P 500’s.

An unusual aspect of the fund is that it can go anywhere in terms of market value, which the portfolio manager says gives him an advantage, because mid- and small-cap companies are generally lesser known and sport more reasonable valuations.

Barrons.com spoke with Abella to get his take on five top picks.

General Mills: Healthier eating trends have been hurting the Minneapolis food giant, but its multiyear plan to revamp its image seems to be working. This year General Mills removed artificial coloring from some of its traditional cereals, including Golden Grahams, Trix and Reese’s Puffs. There’s more work to be done, particularly in its yogurt business, an $8 billion category in the U.S. In the next 12 months, the company will be reformulating its yogurt portfolio, which includes Yoplait, redesigning kid-friendly multipacks, rolling out beverages and re-launching its premium organic brand. General Mills has also been cutting costs — management is targeting 20% operating margins, up from 15%, by its next fiscal year. General Mills’ stock, at a recent $71, is trading at 22 times analysts’ estimates of 2017 earnings. It’s not cheap, says Abella, but its valuation is in line with larger food peers and the stock yields 2.7%.

B&G Foods: The $5 billion food company’s strategy is to buy unloved brands on sale. In 2007 it bought the failing Cream of Wheat brand from Kraft Foods Group and turned it around. B&G has a pantry of 45 brands including Ortega, Emeril’s Cooking Products, and Pirate’s Booty; it is aiming for 80. Last year, it acquired General Mills’ Green Giant and sister brand Le Sueur for $765 million in cash, which the company said would add an estimated $550 million in sales annually or more than half of the $966 million it made in 2015. Its stock has run up to a recent $47, or 21 times 2017 earnings estimates. Abella acknowledges the shares are no longer a bargain, but he likes getting paid 3.6% to hold on as B&G grows.

Lamar Advertising: The outdoor advertising company received approval from the IRS to reorganize its operations as a real estate investment trust (REIT) two years ago. Based in Baton Rouge, La., the company generates more than 75% of its $1.4 billion in sales from local advertising, which is considered less volatile than national advertising. Lamar is gaining market share in that space, says Abella. “The digital era has made it difficult in some cases to get consumer eyeballs and on the road is a very captive audience,” he says. Compared with traditional advertisers, Lamar isn’t as recession prone, because pricing tends to be sticky. The stock, at around $68, trades at 13 times estimated 2017 funds from operations (FFO), a valuation measure for REITs, a discount to the sector’s 18 times. Its dividend is 4.4% and management has said that it will increase it. Abella expects dividend growth in the 8%-12% range.

EPR Properties: Triple-net REITs are REITs without any of the expenses, because they are passed onto tenants. They tend to be cash cows and lately, have been in hot demand. EPR, which owns movie theaters and recreational parks, has been receiving comparably less attention because entertainment venues are seen as less profitable than retail properties. That’s why its stock, at a recent $81, trades at 16 times 2017 FFO, below the triple-net average of 20 times, says Abella. “All across the U.S. people worry about the fate of movies, but the theater business is still very important,” he says. While box office results are difficult to predict, a blockbuster can bring in customers by the droves, and Abella says movie theaters are more stable than people think. The stock yields 4.7% and has the potential to grow in the mid-to-high single-digits.

Duke Energy: The electric utility is among the largest in the country and serves some seven million customers. Abella likes the company’s 4% yield, and he considers it another “base-hit” stock idea. Demand for utilities from income investors have been strong, driving utility stocks to pricey levels as Barron’s recently pointed out. Some trade above 20 times 2017 estimated earnings per share, but Duke’s stock, at a recent $85, trades for 18 times earnings. The company has been weighed down by its international business, but it is looking to divest, says Abella. Energy regulators will rule on its plan to acquire Piedmont Natural Gas for $4.9 billion this fall.

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