Investing.com -- Morgan Stanley has undertaken a strategic refresh of its Dividend Equity Portfolio, making key adjustments that reflect shifting market dynamics and a careful reassessment of risk and opportunity.
One of the biggest changes is the decision to drop Microsoft Corp (NASDAQ:MSFT)., one of the biggest names in tech. This move is part of Morgan Stanley’s broader strategy to reorient the portfolio towards sectors and companies offering robust dividend yields, defensive characteristics, and promising growth prospects amid rising geopolitical tensions and evolving economic conditions.
In this portfolio overhaul, Morgan Stanley has introduced two additions: General Dynamics Corp (NYSE:GD) and Constellation Energy Corp.
These companies have been identified as strong fits for the portfolio due to their potential to capitalize on increased global defense spending and the growing demand for reliable electricity, particularly from data centers.
General Dynamics, a leading defense contractor, is poised to benefit from the global rise in defense spending, driven by heightened geopolitical tensions.
The company’s diverse portfolio, which spans combat systems, marine systems, and aerospace, positions it well to capitalize on expanded defense budgets in the U.S. and other NATO countries.
Additionally, the ramp-up in Gulfstream business jet production promises margin expansion, adding to General Dynamics’ diversified growth outlook.
Morgan Stanley’s Aerospace and Defense analyst has upgraded the stock to Overweight with a price target of $345, highlighting its potential for a 21% total return, including a 2% dividend yield.
Constellation Energy, the largest nuclear utility in the U.S., has been added to the portfolio to increase exposure to the Utilities sector. As energy demands rise, particularly in 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 the potential upside from 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 power, driven by the expansion of data centers and the broader energy market. With a price target of $233, the stock offers a promising combination of defensive stability and growth potential.
The decision to remove Microsoft from the portfolio, however, is perhaps the most surprising aspect of this strategic refresh. Despite the tech giant’s impressive 69% gain since its inclusion 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 capex more critically.
This increase in capital intensity could weigh on Microsoft’s margins as depreciation expenses rise, potentially impacting its ability to sustain its dividend growth—a key factor for its inclusion in the Dividend Equity Portfolio.
By removing Microsoft, Morgan Stanley is not only locking in gains but also reallocating those funds to stocks with higher dividend yields and more defensive characteristics, aligning more closely with the portfolio’s objectives.
Beyond these headline changes, Morgan Stanley also made several adjustments to the weights 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 that the portfolio remains aligned with its benchmark.
The brokerage increased its positions in Merck & Co. Inc, M&T Bank Corp (NYSE:MTB), and Johnson & Johnson (NYSE:JNJ), all of which are seen as strong dividend-paying stocks with solid growth prospects.
Conversely, the portfolio's exposure to T-Mobile US (NASDAQ:TMUS) Inc and Starbucks Corp (NASDAQ:SBUX) was reduced, reflecting concerns over competitive pressures and potential challenges in maintaining growth.