The markets have been pounded lately by a series of economic shocks, most recently the bank crisis sparked earlier this month by the failure of Silicon Valley Bank. That spread quick fears of contagion, as the crypto-heavy Signature and Silvergate banks also failed – and then the international heavyweight Credit Suisse showed signs of cracking.
Economist Mohamed El-Erian warns that we are facing multiple problems simultaneously, and the outlook is grim.
“It’s not just a dilemma of inflation versus growth, it’s a trilemma – inflation, growth, and financial stability. And we don’t have a good way out of it. The truth is there is no first best policy response any more. Everything would have collateral damage and unintended consequences,” El-Erian opined.
In El-Erian’s view, the Federal Reserve should respond by slowing down on its interest rate policy, and easing back on the hikes. The central bank should, from El-Erian’s perspective, maintain that hold until the banking turmoil has abated.
“I’m more worried about the credit issues — and that really comes back to how badly hampered is the economy because of this mishandled interest rate cycle,” El-Erian said.
In this situation, investors will naturally gravitate toward defensive stocks – and that will quickly draw attention to the high-yield dividend payers. Dividend stocks offer a degree of safety by paying out an income stream whether markets move up or down, and that will help to insulate investors when the main indexes turn south.
With this in mind, Wall Street’s 5-star analysts have picked out two stocks with high dividend yields, including one that pays as high as 11%, as the right moves going forward. Even better, these ‘Strong Buy’ stocks have double-digit upside in store. Let’s take a closer look.
Vitesse Energy, Inc. (VTS)
We’ll start in the energy sector, with Vitesse. This company fills an interesting niche, staking a position in the hydrocarbon exploration and production sector as a non-operator. In short, Vitesse doesn’t engage in production activities directly, but instead it owns interests in third-party productive wells. In this respect, Vitesse is more akin to investment companies. The arrangement gives Vitesse the ability to focus solely on generating the maximum shareholder returns through the acquisition of a solid slate of revenue-generating assets.
Vitesse has been in operation for 10 years, during which time it has amassed an asset portfolio with more than 50,000 net acres holding 6,000 or more productive oil and gas well. In its ten years of operation, Vitesse has seen a return exceeding $124 million.
For most of its operational life Vitesse had private ownership, with the principal shareholder being the Jefferies Financial Group. Earlier this year, however, Vitesse spun off and became a publicly traded company. VTS shares debuted on Wall Street in January.
In February, Vitesse reported its first set of quarterly financial results since its spin-off to the public markets, for the fourth quarter and full year of 2022. The company’s net income last year came to $118.9 million, for a huge 682% year-over-year increase. Vitesse derived that income from its interests in hydrocarbon production, which average a daily production rate of 10,376 barrels of oil equivalent through the year. Of that total, 68% was petroleum and the remainder was a combination of natural gas and natural gas liquids and products.
Of particular interest to dividend investors, Vitesse generated $147 million in cash flow from operations in 2022; of that total, $100 million was free cash flow. This cash flow gave Vitesse the confidence to declare its first common share cash dividend, of 50 cents per share. The dividend will be paid out on March 31; at its annualized rate of $2, it yields 11%. That’s 5x the average div yields found among S&P-listed firms.
All in all, Vitesse has built a sound business model, one that has attracted attention from Jefferies’ 5-star analyst Lloyd Byrne.
“Vitesse enhances its asset base by making oil & gas acquisitions, targeting assets with PDP and undeveloped inventory with near-term development potential, and has made over 130 smaller acquisitions totaling ~$580mn. Differentiated competitive position allows Vitesse to continue to execute on this. With ample inventory, we see M&A not as a move out of need to replenish inventory, but a strategic choice. We believe Vitesse could continue to serve as a consolidator of non-operated working interest in the Bakken, and with activity increasing and E&Ps prioritizing FCF over growth, there is a pipeline of high-value opportunities,” Byrne opined.
“With its significant cash flows, Vitesse plans to pay a ~$66mn fixed dividend annually (~$2/sh DPS), giving it one of the highest base dividends among SMID Cap E&Ps,” the top analyst summed up.
Looking ahead, Byrne gives VTS shares a Buy rating and a $23 price target to suggest a 25% one-year upside potential. Based on the current dividend yield and the expected price appreciation, the stock has ~36% potential total return profile. (To watch Byrne’s track record, click here)
In its short time as a public firm, Vitesse has picked up 3 analyst reviews, all positive, to back up the Strong Buy analyst consensus. The stock has an average price target of $22.67 and a current trading price of $18.25, giving a 24% potential gain on the one-year time horizon. (See VTS stock forecast)
Archrock, Inc. (AROC)
For the second dividend stock on our list, we’ll stick with the energy sector and take a look at Archrock, a natural gas industry player occupying an important niche. Archrock is a provider of natural gas compression services, the techniques and technology needed to liquefy natural gas and natural gas products. This is an essential service, necessary for the transport and long-term storage of natural gas.
Archrock has operations and offices in most of the large gas production regions of the lower 48 states, from Montana south through the Rocky Mountains, into Texas, Louisiana, and the Gulf Coast, to the Appalachians of West Virginia, Pennsylvania, and New York, and the Great Lakes.
In February, Archrock reported its financial results for 4Q22. The company’s revenue came in at $218.9 million for the quarter, up 12% year-over-year, and the bottom line net income was reported at $10.5 million, for a 75% y/y increase. That income gave an EPS of 7 cents per share, in-line with the forecasts; the revenue number had beaten expectations by $5.6 million.
With the quarterly results, the company also declared its 15-cent common share divided. The dividend payment, which was sent out on February 14, annualizes to 60 cents and gives a yield of 6.2%.
That forms the background for the comments by 5-star analyst TJ Schultz, of RBC, who says of this company: “We increase 2023/2024 EBITDA estimates by 15-20% as AROC has ramped utilization faster than our prior expectations. This should lead to better pricing power and margins. Planned growth capital is ~80% contracted and focused on Permian associated gas, which should provide more stable growth and protection from natural gas price fluctuations vs. dry gas basins. We believe that AROC could provide additional capital returns to investors if growth expectations are met, and the ability to capture additional rate increases is a primary driver.”
In Schultz’s view, these prospects back up an Outperform (i.e. Buy) rating on the shares, and he sets his price target at $15 to indicate potential for ~56% share appreciation in the coming year. (To watch Schultz’s track record, click here)
Overall, all three of Archrock’s recent analyst reviews are positive, making a unanimous Strong Buy consensus rating. The stock is currently trading at $9.62 and its average price target of $13.67 implies a one-year increase of 42% from that level. (See Archrock stock forecast)
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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.