Market signals are starting to switch, after a long year of steady upward trends in the S&P 500 and NASDAQ indexes. The Federal Reserve has made it clear that it will start tapering bond purchases, likely next month, and that the low-to-zero interest rate policy may end early next year. Q2 GDP growth came in a brisk 6.7%, but forecasts going into 1H22 are predicting a slowdown to the 3% to 4% range. And to top it off, inflation is up, with the consumer price index gaining 4.3% yoy in August of this year, while the September jobs report was, with less than 200,000 new positions, disappointing at best.
It’s a market environment made for defensive stocks, according to Mike Wilson, chief investment officer at Morgan Stanley, who noted: “Large-cap quality leadership since March is signaling what we believe is about to happen — decelerating growth and tightening financial conditions.”
Morgan Stanley isn’t the only major investment firm taking this stance. Weighing in from Oppenheimer, John Stoltzfus, chief investment strategist notes that dividend stocks “are worth consideration, particularly for investors seeking current income with potential for capital gains.”
Following Stoltzfus’ lead, Oppenheimer’s stock analysts have been picking out potential dividend winners, stocks that are ‘right’ for shoring up a defensive portfolio. These are big dividend payers, with histories of long-term dividend reliability – and current yields at 7% or better. Let’s take a closer look.
Barings BDC (BBDC)
We’ll start with Barings BDC, a business development corporation and part of Barings LLC. The parent company is a major asset manager, with over $382 billion AUM across the firm; Barings BDC handles debt investments in middle market companies. Barings BDC offers these companies a combination of asset management and access to affordable capital.
The BDC saw a deep revenue hit at the height of the corona pandemic, but the top line turned positive again in 4Q20 and has remained so since. In the last reported quarter, 2Q21, revenues came in at $33.7 million, a strong rebound from the $458K revenue loss reported in the year-ago quarter. The company’s EPS declined year-over-year, from $1.14 to 45 cents.
On the dividend, however, Barings BDC has delivered consistently, no matter what the general economic conditions. The company’s most recent payment went out in September, at 21 cents per common share. This was up from 20 cents in the previous quarter, and 16 cents in the year-ago quarter. In fact, Barings BDC has been raising its dividend steadily for the past three years. At the current rate, the payment annualizes to 84 cents per common share, and yields a robust 7.58%.
In coverage of BBDC for Oppenheimer, analyst Mitchel Penn initiates his coverage with a bullish stance writing of the company’s ability to make return for shareholders: “BBDC currently pays a quarterly $0.21/share base dividend implying core net interest income of $0.84/share, equating to a full year ROE of 7.4%. We estimate that Barings will likely earn $0.93/share in 2022, which equates to an ROE of 8.2%. We believe additional income from the cross-platform investments and less costly borrowings will likely allow Barings to achieve a 9% ROE.”
In line with these comments, Penn rates the stock an Outperform (i.e. Buy), along with a $12 price target. (See BBDC stock analysis)
Golub Capital BDC (GBDC)
The second stock we’ll look at, Golub Capital, is another BDC catering to a middle market clientele. Golub invests between $10 million and $75 million into its client companies, and as of the end of 1H21, it had invested in the debt and equity of 275 companies. This portfolio totaled approximately $40 billion worth of capital under management, and consisted mainly – about 96% – of first lien loans. The two largest business segments represented in the portfolio were software, at 26%, and healthcare providers and services, at 10%.
Turning to the dividend, we find that Golub has kept the payment steady at 29 cents per common share for the past 6 quarters. The payment was adjusted downward at the beginning of 2020, under pressure from the corona crisis, but Golub management has kept it steady since then. The company’s ability to maintain positive earnings and revenue – even though below expectations – in the difficult investment environment of the pandemic year supported the steady dividend. At current levels, the dividend annualizes to $1.16 per common share and yields 7.2%.
Once again, Oppenheimer’s Mitchel Penn is initiating coverage of this dividend stock with an Outperform (i.e. Buy) rating. His price target is set at $16.
In his comments, Penn notes that GBDC is positioned for a solid return for its shareholders, one based on a company with sound cash position. He writes: “We are forecasting earnings per share of $1.89 and $1.20 for 2021 and 2022, respectively, which would equate to an ROE of 13.2% and 8.0%… GBDC’s liquidity would support our estimated portfolio growth of $500M, with enough liquidity remaining to fund its unfunded commitments, if necessary.” (See GBDC stock analysis)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
