There’s no doubt that 2023 has gotten off to a good start for stock investors. Since January 5, we’ve seen a sharp rally in the markets – the S&P 500 is up 5% in that time, and the NASDAQ index has gained a stronger 8%. While this doesn’t end the longer-term bearish market since early last year, it does bring some hope that this year may be better.
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Or perhaps not. Economist Mohamed El-Erian has taken a downbeat look at the near-term prospects, noting that headwinds are in play which may bring additional pressure to the markets.
El-Erian doesn’t deny the recent positive turns that have bolstered sentiment, particularly the cooling down in the rate of inflation and the slowing down in the Federal Reserve’s aggressive interest rate hikes. But he also points out four strong headwinds: the potential for a new COVID outbreak in China; depleted household savings in the US; the likelihood that US inflation will remain ‘sticky’ at 4% or higher; and a Federal Reserve that may be reluctant to cut back on interest rates. Any one could present a stumbling block, and El-Erian sees the combination putting an end to the current rally.
A market environment like this practically screams out for investors to take defensive action – and that will naturally get them looking at dividend stocks. Reliable, high-yield div payers will provide a steady income stream, guaranteeing a return even when stock markets turn down.
With this in mind, we’ve used the TipRanks platform to pull up the details on two ‘dividend champs,’ that feature Strong Buy ratings from the analyst consensus, and yields of 8% or better to ensure the cash return. Let’s take a closer look.
Plains All American Pipeline (PAA)
First up is Plains All American Pipeline, a hydrocarbon midstream company. PAA operates in the area between drilling wellheads and customers, moving crude oil, petroleum products, natural gas, and natural gas liquids through a network of pipelines, storage tank farms, transport hubs and transfers, refineries, and terminals. The company’s assets also include more than 2,000 trucks and trailers and some 6,000 crude oil and natural gas liquid railcars. The company, which is based in Houston, Texas, can handle the movement of more than 6 million barrels per day of petroleum and natural gas liquids.
The business is just as big as it sounds, and in dollar terms, PAA saw top line revenues of $14.33 billion in its last reported quarter, 3Q22. This total was up 33% year-over-year, and reflected a combination of higher transport volumes and higher commodity prices. Getting down to the bottom line, the company had a net income of $384 million, a solid turnaround from the $60 million loss reported in the prior-year quarter.
On cash, Plains All American delivered a strong performance in 3Q22, with net cash from operations of $941 million, almost 3x the $336 million cash from ops delivered in 3Q21. Free cash flow declined y/y, from $1.09 billion to $726 million, but was still enough to fully fund an increased dividend payment. After distributions, PAA had an FCF of $537 million.
Turning to the dividend, the company most recent declaration was made on January 9, for a Q4 payment of $0.2675 per common share. This is up 5 cents from the last payment, and the annualized common share div of $1.07 yields a solid 8.8%. Not only is that dividend more than 4x the average found in the broader markets, it beats the December annualized inflation by 2.3 points, guaranteeing a real rate of return for investors.
This stock caught the eye of Truist’s 5-star analyst Neal Dingmann, who sees reason for optimism and says of PAA: “Plains continues to benefit from solid Permian organic and external growth as the basin remains one of the few domestic growth engines. We remain confident the company will be able to continue to boost its dividend along with continue to opportunistically repurchase equity with $200mm remaining on its authorization. In addition to the shareholder return, we forecast Plains to continue lowering leverage while potentially beginning to call some preferred shares next year assuming the shares are repriced.”
With returns on this scale, Dingmann sees fit to rate the stock as a Buy, and his $15 price target implies a gain of ~23% on the one-year horizon. Based on the current dividend yield and the expected price appreciation, the stock has ~31% potential total return profile. (To watch Dingmann’s track record, click here)
Overall, PAA shares have a Strong Buy rating from the analyst consensus, based on 6 recent reviews that include 5 Buys and 1 Hold. The shares are selling for $12.16 and their $15.67 average price target implies room or a 12-month upside of ~29%. (See PAA stock forecast)
OneMain Holdings, Inc. (OMF)
Next up is OneMain, a consumer finance company offering financial services to a sub-prime customer base that ordinarily has difficulty accessing credit and capital through establishment banks. OneMain has become a leader in this niche, and its range of services includes affordable loans, consumer finance and credit, and insurance products. The company screens its customers carefully and uses purpose-designed financial products to keep the default rate to a low level – even though it caters to a clientele that is not typically deemed credit-worthy.
The company’s top line revenue totals have been remarkably consistent, holding between $1.2 billion and $1.29 billion; the most recent quarter, 3Q22, brought in the $1.29 billion top line. Bottom line earnings, however, have been slipping over the past several quarters. In Q3, the company had a diluted EPS of $1.51. While down 36% year-over-year, this EPS did beat the $1.32 forecast by a 14% margin. At the end of Q3, OneMain had $536 million in liquid assets.
That last datum is the key for return-minded investors, as cash assets back up the dividend. The company’s most recent declaration was made in November, for a 95 cent payment that went out on November 4. The $3.80 annualized common share dividend gives a yield of 9.6%, almost 5x the average found in S&P-listed firms – and more than 3 points higher than Decembers 6.5% annualized inflation. With sound cash backing, and a significant real rate of return, this is a dividend stock that deserves a second look.
It gets that second look from JMP analyst David Scharf, who writes: “One Main Financial, at about 5x our 2023 outlook, represents one of the more compelling values, in our view, based on a more proactive approach to managing credit risk versus peers in the second half, an outsized capital generation outlook, and share gains driven by the pullback by multiple competitors in the personal lending sector that are currently under distress due to lack of funding.”
Directing his attention to OneMain’s ability to generate returns, Scharf is impressed by the company’s efforts at share repurchases, a policy complementary to the dividend payments, and adds, “Even after a 3Q22 that saw over $1 billion of capital returned to shareholders, the company has another $1.4B of buybacks remaining on its current authorization through next June.”
Looking forward, Scharf gives OMF shares an Outperform (i.e. Buy) rating, with a $49 price target to indicate confidence in ~24% gain in the coming year. (To watch Scharf’s track record, click here)
Overall, the 9 recent analyst reviews on OneMain support the Strong Buy consensus rating with 7 Buys and 2 Holds. The average price target is $44.78 and suggests a 13% upside from the current trading price of $39.61. (See OMF 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.
