What’s going on in the markets lately? Since the start of this year, we’ve seen a prolonged bearish trend, and now a cycle of high volatility. Investors can be forgiven for feeling some confusion, or even some whiplash, in trying to follow the rapid ups and downs of recent weeks.
One important fact does stand out, however. Over the past three months, since mid-June, we’ve see rallies and dips – but the markets have not seriously challenged that mid-June low point. Examining the situation from research firm Fundstrat, Tom Lee makes some extrapolations from that observation.
First, Lee points out that some 73% of the S&P-listed stocks are in a true bear market, having fallen more than 20% since their peak. Historically, he notes that a percentage that high is a sign that the market has bottomed – and goes on to note that S&P bottoms typically come shortly after a peak in the rate of inflation.
Which brings us to Lee’s second point: Annualized inflation in June registered 9.1%, and in the two published readings since then, it has fallen off by 0.8 points, to 8.3%.
Getting to the bottom line, Lee advises investors to ‘buy the dip,’ saying, “Even for those in the ‘inflationista’ camp or even the ‘we are in a long-term bear’ camp, the fact is, if headline CPI has peaked, the June 2022 equity lows should be durable.”
Some of Wall Street’s analysts would seem to agree, at least in part. They are recommending certain stocks as ‘Buys’ right now – but they are recommending stocks with high dividend yields, on the order of 8% or better. A yield that high will offer real protection against inflation, providing a cushion for cautious investors – those in the ‘inflationista’ group. We’ve used the TipRanks database to pull up some details on these recent picks; here they are, along with the analyst commentary.
Rithm Capital Corp. (RITM)
We’re talking dividends here, so we’ll start with a real estate investment trust (REIT). These companies have long been known for their high and reliable dividends, and are frequently used in defensive portfolio arrangements. Rithm Capital is the new name and branding of an older, established company, New Residential, which converted to an internally managed REIT effective this past August 2.
Rithm generates returns for its investors through smart investments in the real estate sector. The company provides both capital and services – that is, lending and mortgage services – for both investors and consumers. The company’s portfolio includes loan origination, real estate securities, property and residential mortgage loans, and MSR-related investments, with the bulk of the portfolio, some 42%, in mortgage servicing.
Overall, Rithm has $35 billion in assets, and $7 billion in equity investments. The company has paid out over $4.1 billion in total dividends since it was first founded in 2013, and, as of 2Q22, boasted a book value per common share of $12.28.
In that same Q2, the last operating as New Resi, the company showed two key metrics of interest to investors. First, the earnings available for distribution came to $145.8 million; and second, of that total, the company distributed $116.7 million through its common share dividend, for a payment of 25 cents per share. This was the fourth quarter in a row with the dividend paid at that level. The annualized payment, of $1, gives a yield of 11%. That’s more than enough, in current conditions, to ensure a real rate of return for common shareholders.
RBC Capital’s Kenneth Lee, a 5-star analyst, lays out several reasons why he gets behind this name: “We view RITM’s available cash and liquidity position favorably given potential deployment in attractive opportunities. We favor RITM’s ongoing diversification of its business model and ability to allocate capital across strategies, and differentiated ability to originate assets… We have an Outperform rating on RITM shares given potential benefit to BVPS from rising rates.”
That Outperform (i.e., Buy) rating is backed by a price target of $12, suggesting a one-year gain of 33%. Based on the current dividend yield and the expected price appreciation, the stock has ~44% potential total return profile. (To watch Lee’s track record, click here)
While only three analysts have been following this stock, they all agree that it is one to buy, making the Strong Buy consensus rating unanimous. The shares are selling for $9 and their $12.50 average price target suggests an upside of ~39% for the coming year. (See RITM stock forecast on TipRanks)
Omega Healthcare Investors (OHI)
The second company we’ll look at, Omega, combines features of both healthcare providers and REITs, an interesting niche that Omega has filled competently. The company holds a portfolio of skilled nursing facilities (SNFs) and senior housing facilities (SHFs), with investments totaling some $9.8 billion. The portfolio leans toward SNFs (76%), with the remainder in SHFs.
Omega’s portfolio generated $92 million in net income for 2Q22, which was up 5.7% from the $87 million in the year ago quarter. On a per-share basis, this came to 38 cents EPS in 2Q22, against 36 cents a year prior. The company had adjusted funds from operations (adjusted FFO) of $185 million in the quarter, down by 10% year-over-year from $207 million. Of importance to investors, the FFO included fund available for distribution (FAD) of $172 million. Again, this was down from 2Q21 ($197 million), but it was enough to cover the current dividend payments.
That dividend was declared for common stock at 67 cents per share. This dividend annualizes to $2.68 and gives a strong yield of 8.4%. The last dividend was paid out in August. In addition to the dividend payments, Omega supports its stock price through a share repurchase program, and in Q2 the company spent $115 million to buy back 4.2 million shares.
Assessing Omega’s Q2 results, Stifel analyst Stephen Manaker believes the quarter was ‘better than expected.’ The 5-star analyst writes, “Headwinds remain, including COVID’s effects on occupancy and high costs (especially labor). But occupancy is increasing and should improve further (assuming no COVID relapse) and labor costs appear to be increasing at a slower rate.”
“We continue to believe the stock is attractively priced; it trades at 10.2x our 2023 AFFO, we expect 3.7% growth in 2023, and the balance sheet remains a source of strength. We also believe OHI will maintain its dividend as long as the recovery continues at an acceptable pace,” the analyst summed up.
Manaker follows up his comments with a Buy rating and a $36 price target that shows his confidence in a 14% upside on the one-year horizon. (To watch Manaker’s track record, click here)
Overall, the Street is split down the middle on this one; based on 5 Buys and Holds, each, the stock ekes out a Moderate Buy consensus rating. (See OHI stock forecast on TipRanks)
SFL Corporation (SFL)
For the last stock, we’ll turn away from REITs and over to ocean transport. SFL Corporation is one of the world’s major ocean transport operators, with a fleet of some 75 vessels – the exact number can vary slightly, as new vessels are acquired or old vessels are retired or sold – ranging in size from giant 160,000 ton Suezmax freighters and tankers to 57,000 ton dry bulk carriers. The company’s ships can carry nearly every imaginable good, from bulk cargoes to crude oil to completed automobiles. SFL’s owned ships are operated through charters, and the company has an average charter backlog into 2029.
Long-term fixed charters from ocean carriers are big business, and in 2Q22 brought in $165 million. In net income, SFL reported $57.4 million, or 45 cents per share. Of that net income, $13 million came from the sale of older vessels.
Investors should take note that SFL’s vessels have an extensive charter backlog, which will keep them in operation for at least the next 7 years. The charter backlog totals over $3.7 billion.
We’ve mentioned fleet turnover, another important factor for investors to consider, as it ensures that SFL operates a viable fleet of modern vessels. During Q2, the company sold two older VLCCs (very large crude carriers) and one container ship, while acquiring 4 new Suezmax tankers. The first of the new vessels is scheduled for delivery in Q3.
In Q2, SFL paid out its 74th consecutive quarterly dividend, a record of reliability that few companies can match. The payment was set at 23 cents per common share, or 92 cents annualized, and had a robust yield of 8.9%. Investors should note that this was the fourth quarter in a row in which the dividend was increased.
DNB’s 5-star analyst Jorgen Lian is bullish on this shipping company, seeing no particular downside. He writes, “We believe there is considerable long-term support for the dividend without considering any potential benefit from the strengthening Offshore markets. If we include our estimated earnings from West Hercules and West Linus, the potential for distributable cash flows could approach USD0.5/share, in our view. We see ample upside potential, while the contract backlog supports the current valuation.”
Lian puts his view into numbers with a $13.50 price target and a Buy rating. His price target implies a one-year gain of 30%. (To watch Lian’s track record, click here)
Some stocks slip under the radar, picking up few analyst reviews despite sound performance, and this is one. Lian’s is the only current review on record for this stock, which is currently priced at $10.38. (See SFL stock forecast on TipRanks)
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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.
