Investing.com — Morgan Stanley has undertaken a strategic refresh of its Dividend Equity Portfolio, making key adjustments that reflect changing market dynamics and a careful reassessment of risks and opportunities.
One of the biggest changes is the decision to quit Microsoft Corp (NASDAQ:)., one of the biggest names in the technology sector. This move is part of Morgan Stanley’s broader strategy to refocus the portfolio toward sectors and companies that offer robust dividend yields, defensive characteristics and promising growth prospects amid rising geopolitical tensions and changing economic conditions.
In this portfolio overhaul, Morgan Stanley introduced two additions: General Dynamics Corp (NYSE:) and Constellation Energy Corp.
These companies have been identified as strong portfolio companies due to their potential to benefit from increased global defense spending and growing demand for reliable electricity, especially from data centers.
General Dynamics, a leading defense contractor, is poised to benefit from the global increase in defense spending, driven by heightened geopolitical tensions.
The company’s diverse portfolio, which includes combat systems, maritime systems and aerospace, positions the company well to take advantage of the expanded defense budgets in the US and other NATO countries.
Additionally, ramping up business jet production at Gulfstream promises margin expansion, adding to General Dynamics’ diversified growth prospects.
Morgan Stanley’s Aerospace and Defense analyst upgraded the stock to Overweight with a $345 price target, highlighting the potential for a 21% total return, including a 2% dividend yield.
Constellation Energy, the largest nuclear utility in the US, has been added to the portfolio to increase exposure to the utilities sector. As energy demand increases, especially in an already constrained grid, Constellation Energy’s nuclear power capabilities are expected to play a critical role.
The company’s strong core business, supported by manufacturing tax credits, and the potential benefit of increased electricity demand, especially from data centers, make it an attractive addition.
Morgan Stanley’s Power & Utilities analyst sees Constellation Energy as a potential beneficiary of the growing need for low-emission, high-reliability energy, driven by data center expansion and the broader energy market. With a price target of $233, the stock offers a promising combination of defensive stability and growth potential.
However, the decision to remove Microsoft from the portfolio is perhaps the most surprising aspect of this strategic renewal. Despite the tech giant’s impressive 69% gain since its inception in October 2022, Morgan Stanley raised concerns about the company’s increasing capital expenditures, particularly related to its investments in generative AI (Gen AI) and cloud infrastructure.
While Microsoft remains a leader in enterprise software, cloud services and AI applications, the market is beginning to scrutinize the company’s escalating investments.
This increase in capital intensity could weigh on Microsoft’s margins as depreciation costs rise, potentially impacting Microsoft’s ability to maintain dividend growth – a key factor for inclusion in the Dividend Equity Portfolio.
By removing Microsoft, Morgan Stanley is not only locking in profits, but also reallocating these funds to stocks with higher dividend yields and more defensive characteristics, which better suits the portfolio’s objectives.
In addition to these key changes, Morgan Stanley has also made several adjustments to the weightings of other stocks in the portfolio as part of its ongoing risk management process. This rebalancing is intended to maintain an attractive risk profile while ensuring that the portfolio remains in line with its benchmark.
The brokerage has its positions in Merck & Co. Inc, M&T Bank Corp (NYSE:) and Johnson & Johnson (NYSE:), all of which are seen as strong dividend-paying stocks with solid growth prospects.
Conversely, the portfolio’s exposure is to T-Mobile US (NASDAQ:) Inc and Starbucks Corp (NASDAQ:) was downgraded, due to concerns about competitive pressure and potential challenges in maintaining growth.
