Investing.com — Morgan Stanley has conducted a strategic update to its dividend stock portfolio, making key adjustments that reflect changing market dynamics and a careful re-evaluation of risk and opportunity.
One of the biggest changes is the decision to leave Microsoft Corporation (NASDAQ:), one of the biggest names in the technology sector. This move is part of Morgan Stanley’s broader strategy to reorient the portfolio toward sectors and companies that offer solid dividend yields, defensive characteristics and promising growth prospects amid rising geopolitical tensions and changing economic conditions.
In this portfolio renewal, Morgan Stanley has introduced two new additions: General Dynamics Corp (NYSE:) and Constellation Energy Corp.
These companies have been identified as strong options for the portfolio due to their potential to capitalize on rising global defense spending and increasing demand for reliable electricity, particularly from data centers.
General Dynamics, a leading defense contractor, is poised to benefit from rising global defense spending, driven by rising geopolitical tensions.
The company's diverse portfolio, spanning combat systems, marine systems and aerospace, positions it well to capitalize on expanded defense budgets in the U.S. and other NATO countries.
Additionally, increased production of Gulfstream commercial aircraft promises margin expansion, adding to General Dynamics' diversified growth prospects.
Morgan Stanley's Aerospace and Defense analyst has upgraded the stock to Overweight with a $345 price target, highlighting its potential for a 21% total return, including a 2% dividend yield.
Constellation Energy, the largest nuclear power utility in the United States, has joined the portfolio to increase exposure to the utility sector. As energy demands increase, particularly on an already constrained grid, Constellation Energy’s nuclear power capabilities are expected to play a crucial role.
The company's strong core business, supported by production tax credits, and potential growth from increased electricity demand, especially from data centers, make it an attractive addition.
Morgan Stanley's energy and utilities analyst sees Constellation Energy as a potential beneficiary of the growing need for low-emission, high-reliability power, driven by the expansion of data centers and the broader energy market. With a $233 price target, 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 revamp. Despite the tech giant’s impressive 69% gain since its inclusion in October 2022, Morgan Stanley expressed concerns about the company’s rising capital expenditures, particularly related to its investments in generative artificial intelligence (Gen ai) and cloud infrastructure.
While Microsoft remains a leader in enterprise software, cloud services and artificial intelligence applications, the market is beginning to look more critically at the company's growing capital spending.
This increase in capital intensity could impact Microsoft's margins as depreciation expenses rise, potentially affecting its ability to sustain dividend growth, a key driver for its inclusion in the Dividend Stock Portfolio.
By removing Microsoft, Morgan Stanley not only locks in gains, but also reallocates those funds to stocks with higher dividend yields and more defensive characteristics, more closely aligning with the portfolio's objectives.
In addition to these important changes, Morgan Stanley also made several adjustments to the weightings of other stocks in the portfolio as part of its ongoing risk management process. This rebalancing is designed to maintain an attractive risk profile while ensuring the portfolio remains aligned with its benchmark.
The brokerage increased its positions in Merck & Co. Inc, M&T Bank Corp (NYSE:) and Johnson & Johnson (NYSE:), all of which are seen as strong dividend stocks with solid growth prospects.
In contrast, the portfolio's exposure to T-Mobile US (NASDAQ:) Inc and Starbucks Corporation (NASDAQ:) declined, reflecting concerns about competitive pressures and potential challenges in maintaining growth.
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