Stock Analysis & Ideas

Goldman Sachs Taps 2 High-Yield Dividend Stocks for an Unsettled Market

So far this year, we’ve seen a serious bear-market decline – and a strong rally that has carried markets back up out of the bear. The next several weeks are very important for what happens over the rest of 2022. We’ll find out if the July slow-down in inflation was a true piece of good news, or just a blip, and we’ll find out just how aggressive the Federal Reserve will be at hiking interest rates.

For now, Goldman Sachs chief US equity strategist David Kostin is counseling caution. “If inflation surprises to the upside and requires the Fed to tighten more aggressively than our economists expect, we would expect equity valuations to compress as a result,” Kostin noted.

Against this backdrop, Goldman Sachs commodity analysts have been pointing out two high-yield dividend stocks that investors can use to shore up the defensive layers of their portfolios now, in case markets turn south. Let’s take a closer look.

Coterra Energy (CTRA)

We’ll start with an oil and gas player, Coterra Energy. This company has operations in Texas, Oklahoma, and Pennsylvania, specifically, in the Permian Basin, Anadarko Basin, and Marcellus Shale formations of those states. These regions, where Coterra holds some 600,000 net acres, are some of the richest oil and gas producing regions in North America. Coterra’s proven reserves on its holdings total some 2,891 million barrels of oil equivalent – of which total, some 85% is natural gas.

Earlier this month, Coterra announced several changes in upper management, with retirement of three Senior VPs and the promotion from within of new execs to take their roles. The changes are not expected to impact the company’s performance, and are seen as part of the routine ‘churn’ of a big business.

Company performance remains solid. Both revenues and earnings are up in recent quarters. For the most recent period, 2Q22, the company reported a total top line of $2.57 billion, supporting a net income of $1.23 billion. This came out to adjusted earnings of $1.35 per share, or more than 5x higher than the 26-cent adjusted EPS reported in the year-ago quarter.

Of particular note to investors, Coterra reported over $1 billion in free cash flow, an important metric as the FCF frequently supports the common share dividend payment. In this case, Coterra’s most recently declared dividend, paid out earlier this month, was 65 cents per common share. At an annualized rate of $2.60, the common stock dividend yields a strong 8.5%. At this rate, the dividend yield is strong enough to provide a high degree of protection from inflation.

Goldman Sachs 5-star analyst Neil Mehta sees plenty of reasons for optimism on this stock. Laying out those reasons, Mehta writes: “Our Buy-rating on CTRA is underpinned by potential for (1) improving capital efficiency through longer-lateral development and more wells per pad; (2) upside to productivity in Upper Marcellus from wider spacing; and (3) attractive FCF generation which we expect to be deployed back to shareholders through capital returns given its strong balance sheet.”

The Buy rating is buttressed by a $35 price target suggesting an upside of ~13% over the next 12 months. (To watch Mehta’s track record, click here)

Overall, this stock has strong financials and a sound and rising dividend, and has received a Moderate Buy consensus from the Street. Of the 14 recent analyst reviews, 6 are Buys and 8 are Holds; the share price of $30.92 and the average price target of $36.14 imply a 17% one-year upside. (See Coterra stock forecast on TipRanks)

Chesapeake Energy (CHK)

The Goldman pick we’ll look at is Chesapeake Energy, a mid-cap company based in Oklahoma and operating in exploration and development of hydrocarbon assets in some of the richest, most productive formations of Texas, Louisiana, and Pennsylvania. Chesapeake is a major producer of natural gas, and has leases on more than 1.6 million acres with proven reserves.

The quality of those lease holdings can be seen in the production numbers. Chesapeake’s activities generated over 4,125 million cubic feet of natural gas equivalent during 2Q22, with the breakdown going to 91% gas and 9% liquids. This was brought to light by 16 rigs on 63 wells, with 57 wells getting placed into active service.

The high production in turn generated $1.237 billion in net income, with an adjusted EPS of $4.87. This was significantly higher than the year-ago quarter, when net income came in negative.

Chesapeake also generated over $909 million in net cash from operating activities. With that high cash flow, and with $17 million in cash on hand, the company saw fit to bump up its regular stock base dividend by 10%, making the quarterly payment $0.55 per common share. This is supplemented by a variable dividend, and the next payment scheduled for September 1, has been declared at $2.32 per share. The base dividend annualizes to $2.20 per share, and yields 2.2%. When the variable payments are added in, Chesapeake’s dividend is currently yielding 5.75%.

Goldman’s 5-star analyst Umang Choudhary points out Chesapeake’s solid production and its sound prospects for increasing those numbers, and goes on to say of the company, “We see CHK favorably positioned to generate attractive FCF yield… supported by a strong balance sheet which will enable significant capital returns to shareholders through (1) a strong base dividend; (2) variable dividends at 50% of FCF — we expect a 10% dividend yield over the next 12 months; and (3) share repurchases…”

Following this line, and acknowledging that investors will be deeply interested in a company that offers a high yield dividend, Choudhary rates CHK as a Buy and sets a $117 price target, indicating room for ~14% one-year share appreciation. (To watch Choudhary’s track record, click here)

Overall, it’s clear that Wall Street likes this stock. The 9 recent analyst reviews include 8 to Buy and 1 to Hold, for a Strong Buy consensus rating, while the $125.44 average price target implies ~22% one-year upside potential from the current trading price of $102.46. (See Chesapeake stock forecast on TipRanks)

To find good ideas for dividend 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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