There is no doubt that 2023 is off to a good start for stock investors. Since January 5th, we have seen a strong rally in the markets: the S&P 500 is up 5% in that time and the NASDAQ Index has gained a stronger 8%. While this does not end the long-term bear market from early last year, it does provide some hope that this year could be better.
Or maybe not. Economist Mohamed El-Erian has been pessimistic about the near-term outlook, noting that there are headwinds that may put additional pressure on markets.
El-Erian does not deny the recent positive turns that have bolstered confidence, in particular the cooling of the inflation rate and the slowdown of the Federal Reserve’s aggressive interest rate hikes. But he also points to four strong headwinds: the possibility of a new COVID outbreak in China; depleted household savings in the US; the probability that US inflation will remain ‘sticky’ at 4% or higher; and a Federal Reserve that may be reluctant to cut interest rates. Either could present a roadblock, and El-Erian sees the combination ending the current rally.
A market environment like this is practically crying out for investors to take defensive action, and that will naturally make them look dividend stock. Reliable, high-yield div payers will provide a steady income stream, guaranteeing a return even when stock markets go down.
With this in mind, we’ve used the TipRanks platform to get the details on two ‘dividend champions’, which boast analyst consensus Strong Buy ratings and yields of 8% or higher to guarantee cash returns. Let’s take a closer look.
Plains All American Pipeline (AAP)
The first is Plains All American Pipeline, a hydrocarbon intermediate company. PAA operates in the area between drilling wells and customers, transporting crude oil, petroleum products, natural gas, and natural gas liquids through a network of pipelines, storage tank farms, transportation hubs, and transfers, refineries and terminals. The company’s assets also include more than 2,000 trucks and trailers and some 6,000 railcars for crude oil and natural gas liquids. The Houston, Texas-based company can handle the movement of more than 6 million barrels per day of petroleum liquids and natural gas.
The business is as big as it gets, and in dollar terms, PAA posted top-line revenue of $14.33 billion in its last reported quarter, 3Q22. This total increased 33% year-over-year and reflected a combination of higher transportation volumes and higher commodity prices. All things considered, the company posted net income of $384 million, a solid turnaround from the $60 million loss reported in the prior-year quarter.
In cash, Plains All American performed strongly in 3Q22, with net cash from operations of $941 million, nearly triple the $336 million cash from operations delivered in 3Q21. Free cash flow decreased year-over-year, from $1.09 billion to $726 million, but was still enough to fully fund a higher dividend payout. After the distributions, PAA had an FCF of $537 million.
As for the dividend, the company’s most recent declaration was made on January 9, for a fourth-quarter payment of $0.2675 per common share. This is up 5 cents since the last payment, and the $1.07 annualized common stock split yields a solid 8.8%. That dividend is not only more than 4 times the average found in the broader markets, but it beats December annualized inflation by 2.3 points, ensuring a real rate of return for investors.
This action caught the attention of 5-star Truist analyst Neal Dingmann, who sees reason for optimism, saying of PAA: “Plains continues to benefit from strong Permian organic and external growth as the basin remains one of the few domestic growth engines. We remain confident that the company will be able to continue to increase its dividend and continue to repurchase capital on an opportunistic basis with $200 million remaining on its authorization. In addition to shareholder returns, we forecast that Plains will continue to reduce leverage while potentially beginning to purchase some preferred stock next year, assuming the stock changes in price.”
With returns of this scale, Dingmann sees fit to rate the stock a Buy, and his $15 price target implies a ~23% gain over the one-year horizon. Based on the current dividend yield and expected price appreciation, the stock has a potential total return profile of ~31%. (To view Dingmann’s history, Click here)
Overall, PAA’s stock has a Strong Buy rating from the analyst consensus, based on 6 recent reviews including 5 Buys and 1 Hold. Shares are selling for $12.16 and their $15.67 average price target implies room or a 12-month upside of ~29%. (Watch PAA Stock Forecast)
OneMain Holdings, Inc. (OMF)
Next up is OneMain, a consumer finance company that offers financial services to a high-risk customer base that typically struggles to access credit and capital through established banks. OneMain has become a leader in this niche and its range of services includes affordable loans, consumer credit and financing, and insurance products. The company carefully screens its clients and uses financial products specifically designed to keep the default rate low, even though it serves a clientele not normally considered creditworthy.
Total company top-line revenue has been remarkably consistent, between $1.2 billion and $1.29 billion; the most recent quarter, 3Q22, generated a top line of $1.29 billion. However, net earnings have been falling for the past few quarters. In the third quarter, the company had diluted EPS of $1.51. While down 36% year-over-year, this EPS beat the $1.32 forecast by a 14% margin. At the end of the third quarter, OneMain had $536 million in liquid assets.
That last piece of information is key for profit-minded investors, as cash assets back the dividend. The company’s most recent statement was made in November, for a 95-cent payment that was made on November 4. The $3.80 annualized common stock dividend yields a 9.6% yield, nearly 5 times the average found in S&P-listed companies, and more than 3 points higher than December’s annualized inflation of 6.5% . With solid cash backing and a significant real rate of return, this is a dividend stock worth a second look.
He gets that second look from JMP analyst David Scharf, who writes: “One Main Financial, with roughly 5x our 2023 outlook, represents one of the most compelling stocks, in our view, based on a more proactive approach to managing risk. credit compared to its peers. in the second half, an outlook for outsized capital generation and stock gains fueled by the pullback of multiple competitors in the personal loan space that are currently struggling due to a lack of funding.”
Turning his attention to OneMain’s ability to generate returns, Scharf is impressed by the company’s efforts on share buybacks, a complementary policy to dividend payments, adding: “Even after a 3Q22 in which dividends were returned Over $1B of equity to shareholders, the company has another $1.4B of repurchases remaining on its current authorization through next June.”
Looking ahead, Scharf gives OMF stock an Outperform (ie Buy) rating, with a $49 price target to indicate confidence in a ~24% gain in the coming year. (To see Scharf’s history, Click here)
Overall, the 9 recent analyst reviews on OneMain support the Strong Buy consensus rating with 7 Buys and 2 Holds. The average price target is $44.78, suggesting a 13% upside from the current trade price of $39.61. (Watch OMF Stock Forecast)
To find good ideas for trading dividend stocks at attractive valuations, visit TipRanks’ The best stocks to buya tool that brings together all of TipRanks’ stock insights.
Disclaimer: The opinions expressed in this article are solely those of the noted 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.
