Wells Fargo: These 3 High-Yield Dividend Stocks Have Double Digit Upside

The stock markets have been having a string of good days, as earnings season has been a bit less grim than expected. While aggregated revenues are down nearly 10% year-over-year, many companies have been clearing the lowered expectations bar.

Writing from Wells Fargo on the current mood and prospects, equity strategist Chris Harvey describes the situation as a ‘melt up.’ He sees room for another 5% growth in the S&P 500 by year’s end.

Harvey specifically noted that two policies put in place to support the economy against the corona virus shutdowns have had a boosting effect on the stock markets as well. The severe cutback in interest rates by the Federal Reserve and a spree of corporate bond buying both increased the relative value of stocks.

The result has been a buying spree. Investors have pushed the S&P 500 to within its February pre-crash levels, and the NASDAQ has been setting new records since the end of June. Harvey’s advice for investors? “Enjoy the ride while it lasts,” but expect “less-stable markets” at the end of the year.

In the meantime, Harvey’s colleagues at Wells Fargo have pointed out several stocks that are not just poised to make gains, but are also showing dividend yields in excess of 4%. It’s an unbeatable combination for income-minded investors: share appreciation and high-yielding dividend returns.

We’ve pulled three of Wells Fargo’s stock recommendations from the TipRanks database, to find out what else makes them compelling buys.

First Horizon (FHN)

The first stock on our list today is a bank holding company. First Horizon is the owner of First Tennessee Bank, which has 180 consumer banking locations in Tennessee and the Southeast. Through its subsidiary, First Horizon provides retail and consumer banking, loans, and financial planning services. The company saw $1.9 billion in revenues last year.

Like most of the banking sector, First Horizon saw revenues and earnings plummet in the first quarter of 2020. The shutdowns kept customers at home, and branch traffic dropped to near zero. EPS for the quarter came to just 5 cents, well below the 22-cent forecast and the 47-cent result from Q4. The partial reopenings led to a bounce in Q2, and EPS rose to 20 cents.

Despite the tough conditions in 1H20, First Horizon has been able to acquire 30 branches of SunTrust’s Truist bank, adding $2.3 billion to its assets on deposit and $440 million to loans under management. FHN has also kept its dividend payment stable, paying out 15 cents per common share in both Q1 and Q2, and recently declaring the Q3 payment at the same rate. The dividend yields is 6.4%, and the company has a 9-year history of keeping it reliable.

Wells Fargo analyst Jared Shaw was particularly impressed by the merger, writing, “We view the successful completion of the merger as of 7/1 and reiteration of synergy targets related to it as a positive catalyst and that FHN should begin to reap the benefits almost immediately.” Shaw added, “We continue to like the story at FHN and 6.5% dividend yield.”

In line with his comments, Shaw rates FHN a Buy, and his $11 price target implies a one-year upside of 18% for the stock. (To watch Shaw’s track record, click here)

Similarly, the rest of the Street is getting onboard. The shares have a Strong Buy analyst consensus rating, based on 6 Buys and 1 Hold, while the $11.50 average price target suggests that FHN has room for 23% upside growth this year. (See First Horizon stock analysis on TipRanks)

FirstEnergy (FE)

FirstEnergy, the second stock on today’s list, is another holding company – this time, in the utility industry in the state of Ohio. The company owns generation and distribution subsidiaries in the Ohio electric grid, as well as having an interest in the exploration, drilling, and transport of natural gas.

FirstEnergy showed strong Q1 results, despite the coronavirus, and beat expectation on both EPS and revenues. Q2’s results were lower sequentially, but still higher than expected. That was enough to support the $0.39 quarterly dividend payment. At $4.68 annually, this dividend gives a solid yield of 5.26%.

Trouble has come for the company in the current quarter. Last month, several Ohio legislators were arrested by the FBI in a bribery scandal involving the bailout of a former FirstEnergy subsidiary. While FE was not directly involved in the scandal, it was close to all the players – and share fell sharply when news of the arrests broke. FE is down 32% from pre-scandal levels.

Fortunately, the scandal is likely to fade without implicating FirstEnergy. The company spun off the affected subsidiary earlier this year, and has already announced that it will cooperate with the law enforcement investigation. FirstEnergy has over $3.5 billion in liquid assets on its balance sheet, a comfort for investors considering the possibilities of fines or legal costs.

Covering FE for Wells Fargo, 4-star analyst Neil Kalton writes, “[We] continue to believe that the current share price reflects a far worse potential financial outcome to the investigation… At this point, we view the potential risks to FE to be a federal fine and reputational issues… The FBI investigation has, to date, not resulted in the arrest of any FE employees..”

Kalton sees the drop in FE’s share price as an opportunity, reducing the cost of entry to an otherwise sound stock. He rates FE a Buy, and his $40 price target indicates confidence in a 40% one-year upside. (To watch Kalton’s track record, click here)

Overall, the Wall Street analyst consensus on FirstEnergy is a Moderate Buy based on 6 Buys and 8 Holds issued in recent weeks. FE shares are trading for $29, and have an average price target of $38.32; this suggests a 12-month upside potential of 32%. (See FirstEnergy stock analysis on TipRanks)

Baker Hughes Company (BKR)

The last stock on our list is a support services company in the oil industry. Baker Hughes provides the specialized tech and engineering services – knowledge, tools, and roughnecks on the ground – that allow exploration companies to site and complete wells and maintain drilling operations. Baker Hughes offers services to upstream, midstream, and downstream companies in the oil industry.

A combination of factors has pummeled BKR stock in 1H20. Demand for oil fell dramatically in the first quarter, as the lockdowns and economic halt reduced fuel consumption of all sorts. While economies are starting up, and oil demand is increasing, stockpiles are bloated and so prices are low. The result, for BKR, was deep sequential drops in Q1 and Q2 earnings. Q3 earnings are expected to turn positive, but at only 20% of pre-crisis levels.

Still, investors can take heart on some fronts. Baker Hughes has maintained its dividend, holding the payment steady at 18 cents per share for common stock. The company has been paying out the dividend at this level for the last three years, and with the fall in share prices, the yield is now 4.3%.

Christopher Voie, in his note on BKR for Wells Fargo, sees a clear path for the company next year. He writes, “We believe that BKR offers one of the more compelling product portfolios in OFS as well as unique growth opportunities from a diverse, technology driven oil service and industrial equipment platform.” In particular, Voie likes the prospects for improved cash flow: “We expect significantly higher FCF in ’21 (+$920 MM) due to higher margins across product lines and the absence of more than $700 MM of separation & restructuring cash costs.”

With such an upbeat outlook, it’s no wonder that Voie rates BKR shares a Buy. His $22 price target implies an upside of 31% for BKR shares in the year ahead. (To watch Voie’s track record, click here)

All in all, Wall Street is bullish on Baker Hughes. The stock has a Strong Buy consensus rating, based on 11 Buys against just 2 Holds. Shares are priced at $16.76, and the average price target, at $20.42, suggests it has a 21% upside potential. (See Baker Hughes stock analysis 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.