Well, the news is in, and it’s not as good as had been hoped. The inflation numbers for January showed a 0.5% month-over-month increase, and an annualized rate of 6.4%. Both numbers are higher than expectations – analysts had been looking for a 0.4% monthly rate, and a 6.2% year-over-year rate.
So, what are the implications? The Federal Reserve will most likely stick to its guns on interest rate hikes, the central bank’s primary tool to combat inflation. It’s likely that the Fed will raise rates in both March and May of this year, and markets are already predicting a peak rate of 5.25% later this year. The Fed has pledged to hold rates higher, longer, until inflation is pushed back down – even at a risk of recession.
Whatever the Fed does, investors should look for defensive moves to protect themselves – and that’s going to draw us to dividend stocks – and especially the high-yield dividend stocks. We’ve used the TipRanks database to look up two dividend payers that offer yields that beat the current inflation rate – up to 13%. And even better, they both have a ‘Strong Buy’ consensus rating from the analyst community. Let’s take a closer look.
Alliance Resource Partners (ARLP)
The first dividend stock we’re looking at is Alliance Resource Partners, a major name in the US coal production sector. Coal remains a major fuel source for the nation’s electrical power plants, even with the shifts toward natural gas and, more recently, green energy, and it also has essential applications in the steel industry. Alliance operates in both the Appalachian Mountains and in the Illinois Basin, and is the second largest coal producer in the eastern US. The company supplies coal to customers in both the utility and industrial segments.
Coal prices rose sharply last year, by more than 40%, and that increase was reflected in Alliance’s financial results. For the fourth quarter and full year 2022, the company reported strong gains at the top line, and blockbuster gains in net income.
By the numbers, the company saw a top line of $700.7 million for the quarter, and $2.4 billion for the year, year-over-year increases of 48% and 53%, respectively. At the bottom line, net income came in at $214.5 million for Q4, up 313%, and at $577.2 million for the year, up 224%. The full year results were company records.
Unsurprisingly, the company’s wallet was also full. Alliance showed full year ‘cash from operations’ of $791.8 million. Of particular interest to dividend investors, the distributable cash flow for the year hit $684 million. This is the metric that directly supports the dividend payment.
Being flush, Alliance felt able to increase the regular quarterly common share dividend by 40% over the previous quarter, raising the payment from 50 cents per share to 70 cents. At the $2.80 annualized rate, the new dividend yields an impressively high 13%, far above inflation and more than enough to guarantee a rate of return that is not only real, but also substantial.
With a background like that, it’s no wonder that ARLP has attracted rave reviews from the analysts. Among the bulls is Noble analyst Mark Reichman who writes: “Earnings visibility remains strong and we think Alliance can continue to increase its market share within the coal segment, while continuing to grow its oil and gas business and sustain revenue and margin growth through at least 2024. In our view, the recent cash distribution increase reflects the company’s confidence in its financial outlook… We think Alliance is in the early innings of diversifying its business to meet the needs of an evolving energy market. We think the opportunity for growth outside of its traditional businesses is exceptional.”
All in all, the analyst puts an Outperform (i.e. Buy) rating on ARLP shares, with a price target set at $32 to suggest a 12-month upside potential of 50%. Based on the current dividend yield and the expected price appreciation, the stock has ~63% potential total return profile. (To watch Reichman’s track record, click here)
Overall, there are 3 recent analyst reviews on file for ARLP, and they are unanimously positive – for a Strong Buy consensus rating. The stock’s average price target of $29.33 implies ~37% one-year upside from the current share price of $21.34. (See ARLP stock forecast)
Ternium S.A. (TX)
From coal, we’ll switch to steel. Ternium is a major steel producer in Latin America, and the leader in flat steel production for the region. Ternium has its hands in all aspects of steel production, from mining, with iron ore mines in Mexico, to the foundry, with 18 operating plants in Latin America. The company ships 54% of its total production to Mexico, 20% to Argentina, and 10% to Brazil. In 2021, the Ternium boasted more than $16 billion in annual net sales.
We’ll see Ternium’s latest financial release, for 4Q22 and the full year, after the markets close today, but for now we can get a feel for where the company stands by looking back at the third quarter. In that period, Ternium shipped over 2.96 million tons of steel and 831,000 tons of iron ore. Net sales came to $4.125 billion, down 10% year-over-year, and the operational income of $526 million was down 70% from the $1.88 billion reported in 2Q22.
What this reflects is the continued work-through of high supply-chain costs in the raw materials market. These costs started rising sharply after Russia’s invasion of Ukraine, but have since come down – although it will take time for today’s lower costs to effect Ternium’s production. On the positive side, Ternium expects that these issues will reverse during the course of 2023.
In the meantime, the company has remained profitable, and has seen its shares increase by 24% so far this year. And in a move that should please investors, Ternium has also kept up its twice-yearly dividend payment, of 90 cents per American depositary share. The company has a habit of adjusting the dividend at each payment, to keep it affordable; the total dividends paid in 2022 came to $2.70 per ADS, and yielded a strong 7.1%.
In his coverage of this stock for BTG Pactual, analyst Leonardo Correa points out that this stock is primed for gains this year, writing: “We believe the company’s earnings are expected to rebound into 1H23 – weak/bottom 4Q results already priced-in at this point. We forecast EBITDA margins to rebound to 13-14% in the 1Q23, coming from ~8% in the 4Q, which should help the stock gain momentum over the coming months.”
Correa also likes this stock for its dividend, noting: “We forecast a 9% dividend yield for the coming years, which still screens attractive to us.”
These points add up to a Buy rating from Correa, and his price target of $48 implies a 12-month gain of ~25% on the way for TX shares. (To watch Correa’s track record, click here)
Overall, Ternium shares have picked up 5 recent reviews from the Wall Street analyst, and these include 4 Buys against 1 to Hold (i.e. Neutral) – for a Strong Buy consensus rating. The stock has a current trading price of $38.71 and an average price target of $43.50, suggesting a gain of ~13% on the one-year horizon. (See Ternium stock forecast)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a 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.
