Stock Analysis & Ideas

‘Things will be less rosy’: Billionaire Howard Marks likes these 2 high-yield dividend stocks for protection

With inflation rates this year reaching levels not seen since the early 1980s, and the Fed taking aggressive interests rate hikes in its attempt to tame it, these issues have been hot topics in 2022. This is a conversation unlikely to go away anytime soon, however, according to legendary investor Howard Marks. “Inflation and interest rates are highly likely to remain the dominant considerations influencing the investment environment for the next several years,” the billionaire said in a recent note to investors.

Having made his name by often taking chances in markets where other were unwilling to tread – distressed debt, China – the billionaire co-founder of $163 billion investing giant Oaktree Capital Management thinks the market conditions are now different to those of the past and are going through what he calls a “sea change.” In fact, moving forward, Marks thinks things will “generally be less rosy in the years immediately ahead.”

So, a cautious mind set is required and that will lead us to dividend stocks. These are the stocks that will ensure a steady income no matter the day-to-day market swings and protect the portfolio against any incoming volatility.

Turning to Marks for more inspiration, we took a closer look at two high-yield dividend stocks in which the billionaire has invested heavily. According to TipRanks’ database, the analyst community is on the same page, with each ticker earning a “Strong Buy” consensus rating. Let’s see why Marks and the broader Wall Street community find these stocks appealing right now.

Sitio Royalties Corp (STR)

If you’re not about to take chances in 2022’s difficult investing climate then you will probably head toward the oil and gas industry, one of the only places delivering strong returns for investors this year. With this in mind, the first Marks-backed name we’ll look at is Sitio Royalties, a pure-play oil and gas mineral and royalty company with properties mainly located in the Eagle Ford Shale, the Permian Basin and the Appalachian Basin.

The company’s remit involves acquiring high-quality assets. In fact, Sitio is the result of a June merger between Falcon Minerals and Desert Peak. And the company is about to merge again – with Brigham Minerals, which will almost double the size of a company already exhibiting some robust top-line growth.

In its most recent financial statement, revenues increased by 242% year-over-year to $115.49 million with the company reaching a record high average daily production volume of 17,990 barrels of oil equivalent per day (“Boe/d”), amounting to a 45% sequentially uptick. Sitio generated adj. EBITDA of $106.3 million, a 38% increase on Q2’s haul while Discretionary Cash Flow grew sequentially by 24% to $93.4 million.

Highlighting its defensive credentials, STR declared a dividend of 72 cents per common share with its 3Q22 results, and paid it out on November 18. At the current payment, the dividend annualizes to $2.88 and gives a high yield of 9.6%.

Sitio shares are up by an impressive 70% year-to-date, but evidently Marks thinks there’s plenty more room to run. He took a new position in STR stock during Q3, buying 12,935,120 shares, now worth almost $388 million.

He’s not the only one showing confidence. RBC analyst TJ Schultz likes the way this company operates, noting: “Increasing scale through acquisitions remains the story for STR, with the previously announced merger with MNRL (Brigham Minerals) expected to close in 1Q23 in addition to Permian acquisitions that closed in 2Q22 and 3Q22… We continue to like the benefits of the increased size and scale that the merger and acquisitions provide to STR.”

These comments form the basis for Schultz’ Outperform (i.e., Buy) rating while his $36 price target suggests shares will climb ~23% higher over the coming months. (To watch Schultz’s track record, click here)

Schultz’ colleagues agree; all 3 other recent ratings are positive, making the consensus view here a Strong Buy. Going by the $35 average target, the shares will deliver returns of 17% a year from now. (See STR stock forecast on TipRanks)

Runway Growth Finance (RWAY)

For the next Marks-endorsed name will take a turn into the financial services sector. More specifically, to Runway Growth, a company that specializes in venture lending. That is, the company provides loans to growth companies, ones looking for alternatives to equity raises. Runway’s preference is to invest in companies in the technology, life sciences, healthcare and information services sectors.

This is a space that is seeing some rapid growth. Venture debt finance is being embraced by later-stage companies to assist with development. It also helps keep companies away from dilutive equity fundraising.

Runway has also been posting some healthy growth. In the recent Q3 report, revenue rose by 47% year-over-year to $27.3 million, while EPS came in at $0.36. Both figures met Street expectations.

On the dividend front, the company has only been public for over a year, but during that period, the dividend has been increasing with every payout. The 36-cent per common share payment is up 9% from the previous quarter, and annualizes to $1.44. At that rate, the dividend yields a strong 10.7%.

High returns are always an attraction for Marks, and he currently owns over 21 million RWAY shares, at the current price worth over $245 million.

In her investment thesis for RWAY, J.P. Morgan anlyst Melissa Wedel highlights the fact Marks’ Oaktree is on aboard as a real plus.

“The executive team at Runway has an average of 26+ years of experience, which is why we believe Runway was able to attract Oaktree Capital Management as long-term anchor platform investor and has added new, experienced originators to the platform. We believe this team will drive strategy execution: deploying capital, and boosting portfolio leverage, ROE, and dividends through our forecast period,” Wedel noted.

Accordingly, Wedel has an Overweight (i.e. Buy) rating for RWAY shares backed by a $14.5 price target. The implication for investors? Upside of 26% from the current share price. (To watch Wedel’s track record, click here)

And what about the rest of the Street? Confidence abounds. With a full house of Buys – 6, in total – the stock naturally claims a Strong Buy consensus rating. The average target is practically the same as Wedel’s objective. (See RWAY stock forecast on TipRanks)

To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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