The global economy has been sending mixed signals recently. On one hand, the US inflation rate dropped to 5% in March, marking its lowest point since May 2021, and China has shifted its strategy away from strict zero-COVID policies. Moreover, the world’s supply chains have managed to adjust to the impact of Russia’s invasion of Ukraine. On the other hand, interest rates remain high, and there are concerns about the possibility of a recession. In addition, the US banking sector is still feeling the shock of the SVB failure.
In a recent research note from UK banking giant Barclays, Emmanuel Cau, head of European equity strategy, describes the current outlook, laying out the reasons why investors should approach stocks with caution.
“Equity flows look subdued compared to resilient data, but the feared earnings decline into H2 will likely keep LO investors on the sidelines, in our view. Although we have not seen yet the final capitulation phase that typically comes with a recession, and seasonals will soon turn negative, near-record short positioning on SPX futures suggests investors are hedged for downside, while SX5E futures positions look mildly bearish. So fundamental risk-reward for equities on a 6-12m horizon is unexciting to us, but cautious positioning may continue to provide cushion and still tilt the pain trade to the upside,” Cau opined.
A cautious approach would naturally pull investors toward dividend stocks, the classic defensive play. Dividends offer a steady, passive income stream, providing investors with a degree of protection – and usable cash – for an uncertain market environment.
The stock analysts from Barclays have taken that cue, and are going bullish on two dividend stocks in particular. These are dividend payers that offer high yields of 7% or better. In fact, Barclays analysts are not the only ones singing these stocks’ praises. According to the TipRanks platform – they are rated as Strong Buys by the rest of the Street. Let’s take a closer look.
Sunoco LP (SUN)
The first stock on our short list is one of the readily recognizable names in the fuel and energy industry. Sunoco is a major player in the US wholesale market for motor fuels, and holds a varied portfolio of fuel products, including both branded and unbranded gasoline, diesel, and jet fuels. Sunoco’s distribution network includes more than 10,000 locations spread across more than 40 states. In addition to fuels, Sunoco also owns ‘value added’ retail ops, such as convenience stores, gas stations, and food & beverage services. On the specialty side, Sunoco also deals in gas station fuel dispenser equipment, and in fueling station commercial real estate.
Sunoco has also been making moves toward green operations, and to that end, the company works in transmix fuel collections, gathering gasoline, diesel, and jet fuels and mixing them in the transmission pipelines. The transmix fuels can then be reprocessed, to reduce waste and environmental pollution.
Gasoline, and fuels generally, are huge business, and Sunoco reported revenues of $5.92 billion in its last quarterly report, for 4Q22. This was up 19.5% year-over-year, and beat the forecasts by $970 million. While the top line was solid, the company’s Q4 bottom line failed to impress. The company reported a GAAP EPS of 42 cents, a full 35 cents below expectations.
Dividend investors, however, will be more interested in Sunoco’s distributable cash flow. This metric came to $153 million in Q4, up $10 million y/y. For the full year 2022, the DCF rose from $542 million to $650 million. Based on the solid DCF, Sunoco raised its quarterly distribution by a modest 2%, to 84.2 cents per common share. The dividend annualizes to $3.368 per common share, rounded to $3.37, and yields 7.5%, or about 4x the average dividend yield found among S&P-listed companies.
Barclays analyst Theresa Chen, who holds a 5-star rating from TipRanks, covers Sunoco’s shares, and finds the stock compelling as a defensive option.
“We expect SUN’s volumes to remain relatively steady over the long run and reflect its diversified footprint and asset integration. We expect margins in 1Q to hold steady amid a volatile commodity market and also believe in long-term margin durability given SUN’s proven ability to execute in many commodity price environments… With cash contribution from recent projects and acquisitions plus a positive free cash flow outlook as well as a relatively resilient, downstream-levered business ahead of a potential recession, we think SUN remains defensive from here,” Chen wrote.
According to Chen, SUN deserves an Overweight (i.e. Buy) rating and a price target of $51, indicating a potential increase of 13% in the next 12 months. (To watch Chen’s track record, click here)
Chen is hardly the only bull, however, as Sunoco’s 5 recent analyst reviews break down 4 to 1 in favor of Buy over Hold, for a Strong Buy consensus rating. The shares are priced at $44.97, and their average price target is $51, matching Chen’s for a 13% potential gain in the coming year. (See SUN stock forecast)
Western Midstream Partners (WES)
Next up is Western Midstream, another energy company, one operating in the midstream sector. Midstream companies work in the area between the well heads and the retailers and customers, gathering, transporting, storing, and exporting crude oil, natural gas, and natural gas liquids. Western Midstream, as its name suggests, focuses its operations in the American West, particularly in Texas and the Rocky Mountain regions. The company’s network includes more than 15,000 miles of pipelines fed by 23 gathering systems and supplying 72 processing and treatment facilities.
Western reported $779.4 million in 4Q22 revenue, for an 8.3% year-over-year gain – but it missed expectations by over $21 million. However, the GAAP EPS figure of 85 cents beat the forecast by 13 cents.
Western has a long-term commitment to returning capital to shareholders, and backs it up with sound cash flows. For 4Q22, the company’s cash from operations came to $489.2 million, and the free cash flow was reported at $365.6 million. The latter backed up the capital return policy, and through December 31, 2022, covering the full year, Western repurchased a total of $487.6 million worth of common shares.
Along with the share repurchases, the company on April 20 announced a combined base and enhanced dividend of 85.6 cents per commons share. The base dividend, of 50 cents, annualizes to $2 and gives a strong yield of 7.3%; add in the enhanced payment, and the total dividend of 85.6 cents annualizes to 12.6%. The full dividend is scheduled for payment this coming May 15.
Covering this stock for Barclays is Marc Solecitto, another 5-star analyst on TipRanks. Solecitto is impressed by the company’s ability to generate free cash flow and to return cash to shareholders.
“Our Overweight rating remains predicated on WES’ ~15% FY24 FCF yield and strong balance sheet, as well as the partnership’s commitment to meaningfully return cash to shareholders both through dividends and buybacks. On that note, WES screens as the midstream company that returned the most cash to shareholders (on a percentage basis) in 2022 through the combination of its enhanced distribution framework and buybacks… We also view WES’ valuation at ~7.3x 2024e EV/EBITDA as conservative when compared to other MLP peers (trading at ~ 8.0 2024e EV/EBITDA, on average),” Solecitto stated.
Along with the Overweight (i.e. Buy) rating, Solecitto gives WES shares a $32 price target, implying an upside of ~18%. (To watch Solecitto’s track record, click here)
Overall, there are 8 recent analyst reviews of Western’s shares, and they include 7 Buys against just a single Hold for a Strong Buy consensus rating. With a $27.21 current trading price and a $32.50 average price target, WES boasts a potential one-year gain of 19%. (See WES stock forecast)
To find good ideas for 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.
