Market trends are generally heading up, and investors are feeling confident. The S&P 500 has gained 20% so far this year, and the NASDAQ has gained 15%; for now, it looks like the confidence is justified. The economy’s reopening is proceeding apace, and both investors and consumers are looking forward to a more normal 2022.
In a recent note for RBC, the firm’s head of US equity strategy, Lori Calvasina, acknowledges the optimism – and also points out the potential fly in the ointment. Stock performance lately has been closely tied to the COVID data, and that has the potential to derail the good feelings.
“...for the most part, stocks are looking past the current COVID surge. Over the past few weeks, we’ve been highlighting how the reflation trades in the US equity market have been tied to trends in domestic COVID cases... But in coming weeks and months we also worry there may end up being more unexpected damage to earnings and economic data from the Delta variant than investors appreciate,” Calvasina wrote.
For many investors, the natural move in this climate is toward a defensive position, moving into stocks that will shore up the portfolio’s income stream against a rainy day – or a fresh pandemic wave. Dividend stocks are the logical place to look, and Calvasina’s colleagues among RBC’s stock analysts have been picking high-yield dividend payers that look primed to gain in coming months. According to TipRanks' database, these are Buy-rated stocks with dividend yields of at least 8%. Here are the details.
We’ll start in the energy sector, where Magellan Midstream is an important player in the North American oil and gas distribution network. The company has a wide-ranging network of transport and storage assets for both crude oil and refined products, stretching from the Rocky Mountains to the Mississippi Valley and on to the Southeast. The company’s assets include pipelines and export shipping terminals.
In its most recent quarter, while revenues edged down slightly sequentially, from $714 million to $694 million, EPS jumped. The $1.26 per-share profit was the best since the 1Q20 print, and more than double the 59 cents reported in the year-ago quarter.
During the quarter, Magellan moved to shore up the balance sheet through an asset sale. The company sold 26 independent refined petroleum product terminals in the American Southeast, with a total capacity of 6 million barrels of storage space, for $435 million.
Sound financial results underpinned Magellan’s dividend, with the company declared at $1.0275 for the second quarter. At this rate, the payment annualizes to $4.11 per common share, and gives a yield of 8.8%. This compares favorably to the ~ 2% yield found in the broader markets. And better yet – from a dividend investor’s perspective – Magellan has a 13-year history of keeping the payment reliable.
RBC’s 5-star analyst Elvira Scotto sees the asset sales, noted above, as a key factor here, putting Magellan in control of its own destiny.
“…MMP's recently announced sales of its interest in the Pasadena terminal and its independent terminals increase MMP's flexibility to return more cash to unitholders via unit repurchases. We believe its strong balance sheet, free cash flow growth potential and financial flexibility position MMP well as refined products demand continues to recover,” Scotto opined.
To this end, Scotto rates MMP shares an Outperform (i.e. Buy), and sets the price target at $53 to suggest an upside of 11% for the year ahead. Based on the current dividend yield and the expected price appreciation, the stock has ~20% potential total return profile. (To watch Scotto’s track record, click here)
With 9 recent reviews, including 4 Buys and 5 Holds, MMP has a Moderate Buy rating from the analyst consensus. The stock sells for $47.77, while the $52.11 average price target indicates room for ~10% upside potential. (See MMP stock analysis on TipRanks)
Rattler, the next dividend champ on our list, is another energy midstream company. Rattler spun off of the oil producer Diamondback Energy back in 2018, and now operates the parent company’s midstream assets in the Texas Permian Basin. In addition to operating the legacy midstream network, Rattler works at developing and acquiring new assets in the Midland and Delaware formations.
Rattler generated an impressive $100 million in free cash flow during the first half of 2021, and used that money to both pay returns to shareholders (through dividends and buybacks) and to pay down its revolving credit facility. The company finished Q2 with in the enviable position of having fully paid down the revolver, to a $0 net balance.
The company generated that free cash from solid financial performance. Total revenues in Q2 jumped almost 14% year-over-year, to $101.1 million, while earnings came in at 29 cents per share. The EPS print was the highest in over 2 years.
Rattler showed its confidence in the Q2 results by increasing its dividend payment 25%, from 20 cents per common share to 25 cents. The new annualized payment of $1 gives the dividend a yield of 8.5%.
TJ Schultz, another of RBC’s 5-star analysts, was impressed by Rattler’s cash generation and debt payments, but even more impressed by the company’s commitment to returning cash to shareholders.
“RTLR is among the first to materially increase payouts in an improving commodity price environment with a 25% higher distribution of $0.25/unit in 2Q given an increased confidence in future free cash generation,” Schultz noted. "We believe RTLR is positioned to withstand commodity volatility given its solid balance sheet."
Based on the above, Schultz rates RTLR an Outperform (i.e. Buy) along with a $13 price target. Investors could be pocketing gains of 24%, should Schultz's thesis play out as expected. (To watch Schultz’s track record, click here)
For the most part, Wall Street agrees with Schultz’s call on this company; 3 out of 4 recent reviews are positive. The odd one out, however, is a Sell, and the stock has a Moderate Buy consensus rating. RTLR shares are priced at $10.51 with a $13 average price target, indicating room for ~24% growth in the year ahead. (See RTLR stock analysis on TipRanks)
Last up is Owl Rock, and here we’ll make a change of focus. This company operates in the world of finance, as a mid-market specialty financing provider. Owl Rock holds a portfolio of investments in 129 companies, and the company’s assets total $12.6 billion. Of these, 93% are senior secured loans, and a majority of those are first-lien.
In the second quarter of the year, Owl Rock showed an EPS of 38 cents on net income of $150.2 million. While down sharply year-over-year (the year ago quarter’s print was 79 cents), this result was a modest beat of analyst expectation. Over the past quarter, the company has added 10 companies to its investment portfolio, and increased its total loans by $1.3 billion.
The company has a sound liquidity situation, and reported having $627.2 million in total cash, both free and restricted. This is nearly double what was reported at the end of 2020. Along with this, Owl Creek has $1.6 billion in undrawn capacity in its credit facilities.
For the second quarter, Owl Creek reiterated its 31-cent per common share dividend, with the payout at the end of September. The company has a history of adjusting its dividend payment to keep it in line with available funds for coverage. At the current rate, the dividend yields a robust 9.6%, far higher than the market’s average dividend, and more than 6x the 10 year Treasury yield.
In his report on ORCC, RBC’s Kenneth Lee, rated 5-stars at TipRanks, writes: “A key highlight is the very strong originations seen in the quarter. While management is focused primarily on first-lien loans, there could be opportunistic investments in other areas of the capital structure to earn incremental spread. ORCC continues to optimize its liability mix, and we continue to see it being able to generate earnings to cover its dividend in 2H.”
Lee puts an Outperform (i.e. Buy) rating on the shares, and his $16 price target implies a one-year upside potential of 10.5%. (To watch Lee’s track record, click here)
Wall Street tends to agree with Lee's confidence on the credit-investment firm, considering TipRanks analytics reveal ORCC as a Strong Buy. Shares in ORCC are selling for $14.48 each, and the average target of $15.25 indicates a modest upside of 5%. Based on the current dividend yield and the expected price appreciation, the stock has ~15% potential total return profile. (See ORCC 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.
