Stock Analysis & Ideas

2 Analyst-Favored Dividend Stocks to Bank on This Year

Story Highlights

Bank of America and Goldman Sachs shares are under a considerable amount of pressure going into a recession year. Still, analysts expect gains from the two financial heavyweights in the next 12 months.

Despite recession expectations, many big banks expect 2023 to be better than 2022. Therefore, I’ll go over two analyst-favored dividend stocks — BAC and GS, two of America’s biggest banks — for you to consider this year.

Indeed, nearer-term expectations are as gloomy as they are hazy. However, it’s hard to find anyone on Wall Street who doesn’t think the second half of 2023 can be constructive.

Like it or not, this bear market is aging fast and can turn a corner when we least expect it. It’s been a while since markets suffered two years in the red. Though possible, longer-term thinkers may be best served by focusing on better positioning themselves for the next inevitable upswing rather than seeking to avoid all losses in this market sell-off.

Playing defense is a good idea, especially when all is well and stock markets only seem to go up week after week. Nowadays, the demand for defensives is up, as are valuations on certain names that promise greater stability and predictability in the face of a mild recession.

Undoubtedly, the banks are not among the defensives that have been scooped up by repositioning investors. The big banks feel the force of recessions, and they can be a source of steep losses for those who go “bargain hunting” too soon in the cycle.

As credit tightens and loan losses begin to mount, the ride for the banks can be particularly bumpy, perhaps bumpier than that of broader markets. Still, lower valuations and higher dividend yields may be worthy of consideration.

Despite headwinds, the big banks probably aren’t in for a repeat of the events that unfolded in 2008. Not only are the macro headwinds less horrific, but the big banks also seem better prepared to deal with challenges. They’ve had a lot of time to prepare. Let’s look into BAC and GS.

Bank of America (NYSE:BAC)

Bank of America stock is down just over 30% from its peak. The $276.5 billion behemoth has felt a lot of the 2023 recession impact well before the fact. As the big banks batten down the hatches, I think there may be less to fear with America’s financial heavyweights as the macro event we all fear comes and goes. In simple terms, the winter may not be as cold as current valuations suggest.

At writing, BAC stock trades at 10.9 times trailing earnings, with a 2.56% dividend yield. As earnings fall under pressure, Bank of America’s price-to-book (P/B) multiple may be a better gauge of value to be had. Today, shares trade at 1.1 times P/B, well below the diversified financial services industry average of around 1.4 times.

Looking ahead, management seems cautious but optimistic about its ability to weather a storm. With a “responsible growth” mindset and a subtle rate-induced tailwind facing net interest margins, the current environment isn’t exactly putting the bank between a rock and a hard place.

Simply put, Bank of America is a banking heavyweight that’s down but not out. Higher rates are a double-edged sword, and Bank of America seems best able to minimize any potential bleeding accompanying a global downturn.

I think the stock’s too cheap, and Wall Street agrees.

What is the Price Target for BAC Stock?

Wall Street continues to favor Bank of America, giving it a Moderate Buy consensus rating based on seven Buys and five Hold ratings. The average BAC stock price target sits at $40.63. That’s a 17.9% gain from here.

Goldman Sachs (NYSE:GS)

Goldman Sachs is an investment banking heavyweight that analysts expect great things from despite the dire economic conditions that could lie directly ahead of us. Recently, Goldman announced layoffs that could affect up to 4,000 people.

Undoubtedly, Goldman is kicking off a wave of sizeable layoffs for the financial sector in 2023. It isn’t just the tech industry being pressured to reduce headcount anymore. As a tech-savvy bank that’s endured tough sledding in its push into retail banking, the recent layoff announcement should not come as too big of a shocker.

As a potential recession sets in, capital markets could continue to be sluggish, and that’s bad news for Goldman. In any case, I do think a lot of the downtempo investing banking activity is already well baked into shares of GS.

Goldman has beaten earnings over the past three quarters. Indeed, expectations continue to be a tad low for the new year. With that, GS stock may not be in for that much more pain. Sometimes, it’s better to have low expectations ahead of a chaotic year than high expectations in an upbeat year.

The stock trades at 9.7 times trailing earnings and 1.9 times book.

What is the Price Target for GS Stock?

Wall Street is cautiously optimistic about Goldman Sachs, giving it a Moderate Buy consensus rating. The average GS stock price target of $400.65 implies 8.3% upside potential from here.

The Takeaway

Bank of America and Goldman Sachs are two great banks likely to land on their feet this year. Analysts like both but expect bigger gains from BAC over the next year.


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