Stock Analysis & Ideas

Goldman Sachs: 2 High-Yield Dividend Stocks Worth Investing In Now

Let’s begin with the fact that no investor can get around right now, the current volatile market. In the words of the Goldman Sachs strategist David Kostin, “The first six months of 2022 have been a brutal time to be an investor in public markets.” The losses, which stand at 19% year-to-date on the S&P 500, have been broad-based; barring outliers, neither value nor growth strategies have offered any respite.

Kostin dives into the current conditions, and comes up with some interesting views. He writes, “2022 has been a valuation-driven equity bear market rather than a decline prompted by lower earnings. Despite recession fears, S&P 500 consensus 2022 and 2023 EPS estimates have both been revised up so far this year.” But Kostin does note that there is a strong consensus pointing toward downward EPS revisions by year’s end, recession or no recession.

In this environment, Kostin is recommending that investors should go defensive, favoring stocks with a combination of high dividend yield and growth.

Against this backdrop, the stock analysts at Goldman Sachs have picked out stocks whose dividend payments are yielding above the market average. We’ve used the TipRanks’ database to pull up the data on two of these stocks. Let’s look into the details, along with the commentary from Goldman’s analysts, and find out what else these stocks have to offer.

Pioneer Natural Resources (PXD)

We’ll start with Pioneer Natural Resources, an Irving, Texas based hydrocarbon exploration firm working in the Permian Basin of West Texas. The Permian, in the past decade, has become one of the world’s major oil and gas production regions and has helped to put the Texas oil patch back on the global map. Pioneer’s holdings yielded over 637K barrels of oil equivalent per day in the first quarter of this year, and powered the company to its seventh quarter in a row of sequential revenue gains.

The Q1 top line was reported at $6.17 billion, which was up an impressive 152% from 1Q21; balanced against costs and expenses, this led to a net income of $2.01 billion, or $7.74 per diluted share. In addition to high revenues and earnings, Pioneer also generated plenty of cash, with Q1 free cash flow hitting $2.3 billion.

That last figure is of interest to dividend investors, since Pioneer boasts a high level of cash return to shareholders. The company reported returning 88% of Q1 free cash flow, through a combination of a 78 cent base dividend and a hefty variable dividend, which was set at $6.60 for the quarter. The combined dividend, assuming continued high variable payments for the rest of the year, annualizes to more than $29 per share and yields a powerful 13.7%.

The dividend and high capital return percentages caught the attention of Goldman analyst Neil Mehta, who writes: “We believe PXD is favorably positioned to generate attractive FCF given its differentiated undeveloped inventory (15+ years) in the core of the Permian. Also, given PXD’s strong balance sheet, we expect PXD to allocate the bulk of its FCF towards a capital return program including (1) 75%-80% towards fixed + variable dividend; and (2) remaining towards share repurchase. For 2022E/23E, we see PXD generating 19%/16% FCF yield and distributing a ~16% 1-yr forward dividend yield.”

Unsurprisingly, then, the 5-star analyst has a Buy rating on the stock, which he backs up with a $266 price target, indicating potential for 26% growth in the year ahead. (To watch Mehta’s track record, click here)

Overall, this stock has picked up a Moderate Buy rating from the Wall Street analyst consensus, based on 19 recent analyst reviews which include 13 Buys and 6 Holds. The shares are trading for $211.37 and the $303.68 average price target suggests a one-year upside of ~44%. (See PXD stock forecast on TipRanks)

Phillips 66 (PSX)

The second dividend stock we’ll look at is one of the oil and gas industry’s major players, Phillips 66. This oil major boasts a $38 billion market cap and more than $111 billion in annual revenues. The company has its hands in multiple aspects of the hydrocarbon business, including the refining, midstreaming, and marketing of a wide range of fuels, fuel oils, and lubricating oils, as well as the industrial chemical industry, including petrochemicals.

Rising oil prices over the past 12 months have been a boon for the industry as a whole, and Phillips 66 has been no exception to that rule. The company’s 2021 revenues were up 75% year-over-year, and the top line in 1Q22, at $36.6 billion, was up 12% from 4Q21 and 70% from 1Q21. Earnings, which are more volatile, came in at an adjusted total of $595 million for the quarter, giving an adjusted EPS of $1.32. While down from the Q4 number of $2.94, the Q1 earnings were a large turnaround from the $1.16 per share loss reported in the year-ago quarter.

On cash flow, Phillips 66 reported a total of $1.1 billion in cash from operations during Q1. This funded some $370 million in capital expenditures and investments – without skimping on the dividend, which was funded to the tune of $404 million. The company, which held $9 billion in cash reserves at the end of the quarter, announced the restart of an existing share repurchase program, with $2.5 billion authorized.

Dividend investors will be pleased to note that Phillips 66 raised its dividend payment in the most recent declaration, to 97 cents per common share, which was paid out on June 1. At the current rate it annualizes to $3.88, and yields 5%, well above the ~2% average yield found among dividend payers in the broader markets.

Checking in with Neil Mehta once again, we find he has published an upbeat view of PSX for Goldman, saying of the company, “Phillips 66 remains our top idea within our US refining coverage. With the stock having underperformed large cap peers MPC and VLO by ~40% over the last 12 months, we do not believe the market is giving credit for the positive inflection in PSX earnings, cash flow, and capital returns we expect to see in 2022/2023…. Overall, we see 38% total return to PSX vs the large cap peer average of 14% and the refining sector average of 20%.”

Mehta’s comments back up his Buy rating on the shares, while his $109 price target implies they have a 40% upside ahead for the next year.

Phillips 66 claims a Strong Buy rating from the analyst consensus, based on 10 reviews that break down 9 to 1 in favor of Buy over Hold. The stock is trading for $77 and the $111.90 average price target suggests a 45% one-year upside potential from current levels. (See PSX stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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.

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