Investing.com – Morgan Stanley has made a strategic update to its dividend stock portfolio, making key adjustments to reflect changing market dynamics and a careful reassessment of risks and opportunities.
One of the biggest changes is the decision to drop Microsoft Corporation (NASDAQ:), one of the biggest names in technology. The move is part of Morgan Stanley’s broader strategy to reposition the portfolio toward sectors and companies that offer strong dividend yields, defensive characteristics and promising growth prospects amid heightened geopolitical tensions and evolving economic conditions.
As part of this overhaul, Morgan Stanley made two additions: General Dynamics Corp (NYSE:) and Constellation Energy Corp.
These companies were identified as a good fit for the portfolio due to their potential to capitalize on increased global defense spending and growing demand for reliable electricity, particularly from data centers.
General Dynamics, a leading defense contractor, is expected to benefit from a global surge in defense spending, driven by rising geopolitical tensions.
The company’s diversified portfolio, which includes combat systems, naval systems, and aerospace, puts it well positioned to take advantage of expanding defense budgets in the United States and other NATO countries.
Moreover, Gulfstream’s expansion of business jet production would herald margin expansion, adding to General Dynamics’ diverse growth prospects.
Morgan Stanley’s aerospace and defense analyst upgraded the stock to Overweight with a $345 price target, highlighting its potential for a total return of 21%, including a 2% dividend yield.
Constellation Energy, the largest nuclear utility in the United States, has been added to the portfolio to increase exposure to the utility sector. As demand for energy rises, 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 production tax credits, and potential opportunities from increased electricity demand, particularly from data centers, make it an attractive addition.
Morgan Stanley’s energy and utilities analyst sees Constellation Energy as benefiting from the growing need for low-emission, high-reliability power, driven by data center expansion and the broader energy market. With a $233 price target, the stock offers a promising mix of defensive stability and growth potential.
But 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 listing in October 2022, Morgan Stanley has raised concerns about the company’s increased capital spending, particularly its investments in generative AI and cloud infrastructure.
While Microsoft remains a leader in enterprise software, cloud services and AI applications, the market is beginning to look more critically at the company’s rising capital spending.
This increase in capital intensity could impact Microsoft’s margins as depreciation expenses rise, which could impact its ability to maintain earnings growth – a key factor for inclusion in a dividend stock portfolio.
By removing Microsoft, Morgan Stanley is not only locking in gains, but also reallocating that money to stocks with higher dividend yields and more defensive characteristics, more closely aligned with portfolio objectives.
In addition to these major 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 aimed at maintaining an attractive risk profile while ensuring that the portfolio remains consistent with its benchmark.
The brokerage firm increased its positions in Merck & Co. Inc., M&T Bank Corp. (NYSE:M), and Johnson & Johnson (NYSE:JOHN), all of which are considered strong dividend-paying stocks with strong growth prospects.
Conversely, the portfolio’s exposure to T-Mobile US (NASDAQ:) Inc. and Starbucks Company Nasdaq:NASDAQ shares fell, reflecting concerns about competitive pressures and potential challenges in maintaining growth.