The first half ended last week, and the S&P 500 is now firmly stuck in a bear. The rapid change from record high levels at the end of last year, to a 20%+ drop in these past six months has pummeled investors, who have had to cope with shrinking share values, increased volatility, and an unpredictable and risky equity environment.
The most serious issue facing economists and traders right now is the possibility of recession in the near term. The US GDP contracted by 1.6% in Q1, and preliminary data from the Atlanta Fed is pointing toward a 2% contraction in Q2. That would meet the definition of a recession, albeit a mild one.
Supporting this view is a matter of history: the Fed has started on a rate hiking and monetary tightening regime, and such moves by the central bank have frequently pushed the economy into recession. The alternative, of course, is continued high inflation, which is already running at 8.6% annualized. For policy makers, there are no good choices here.
In a recent note, Goldman Sachs strategist Christian Mueller-Glissman sums it all up clearly, saying, “Until the growth/inflation mix improves volatility is likely to linger as investors are shifting between inflation frustration and recession obsession.” The solution, in the analyst’s view, is a defensive positioning to weather the gathering storm clouds of 2H22.
A strong defensive stance, including high-yield dividend payers, will offer investors much-needed portfolio protection.
Against this backdrop, Wall Street analysts have given the thumbs-up to two dividend stocks yielding at least 11%. Opening up the TipRanks database, we examined the details behind these two to find out what else makes them compelling buys.
Sitio Royalties (STR)
First up, Sitio Royalties, operates in the oil and gas mineral interest sector. That is, the company owns lands in highly productive energy basins, and collects royalties on the oil and gas extraction activities conducted on those lands. Sitio’s portfolio includes over 170,000 net royalty acres with more than 12,700 gross wells situated on them. Sitio formed in early June, through completion of the merger between Desert Peak and Falcon Minerals, and the STR ticker started trading on June 3.
Sitio grows through acquisition moves, and this past June made two important acquisition announcements. First, it had completed the purchase of more than 19,000 net royalty acres from Quantum Energy Partners, in a transaction worth $323 million. And, second, it had entered an agreement to buy another 12,200 net royalty acres from Momentum Minerals for $224 million. Both of these acquisitions lie within the Permian Basin formation of West Texas.
In addition to the Permian, Sitio has land holdings in the Eagle Ford shale region of southern Texas, and natural gas regions of Appalachia, in northeastern Pennsylvania and in the upper Ohio Valley.
The company’s revenue grew 59% year-over-year in 1Q22, while earnings, which had been positive since 2Q21, dipped into negative territory with a 4-cent EPS loss. 1Q21, however, had seen a 12-cent EPS loss.
Like many energy and mineral royalty firms, Sitio pays out a generous dividend. The most recent, paid on May 31, just before the merger was completed, was for 72 cents per common share. At this rate, the dividend annualizes to $2.88 per common share and gives a sky-high yield of 11.8%. This is almost 6x higher than the average yield found among companies listed in the S&P 500 index.
In coverage of STR from RBC Capital, 5-star analyst TJ Schultz sees the company’s acquisition moves as the key factor.
“Sitio is executing on its Permian consolidation strategy more quickly than we expected, and we think increased size and scale are important factors to drive improved mineral valuations. We estimate STR currently trades at ~5.4x 2023E EBITDA, which is about a half-turn discount to the average of its mineral peers. We think Sitio’s increased size and scale should close this valuation discount as its new management team continues to crystallize its new Permian-centric growth strategy to the market,” Schultz opined.
Schultz isn’t just predicting a strong future, he’s backing his stance with an Outperform (i.e. Buy) rating and a $43 price target that implies ~77% one-year upside potential. (To watch Schultz’s track record, click here)
While STR is a new ticker, Wall Street has greeted it with a healthy embrace. The stock’s 5 recent analyst reviews include 4 Buys and 1 Hold, for a Strong Buy consensus rating, while the $35.28 average price target suggests a 45% upside potential from the current trading price of $24.28. (See STR stock forecast on TipRanks)
NuStar Energy (NS)
Sticking with the energy sector, we’ll turn to NuStar, one of the US’ major operators of pipelines and liquids storage. NuStar’s network, which includes some 10,000 pipeline miles and 63 terminals and liquids storage facilities for crude oil, refined products, and renewable fuels, also accommodates ammonia and other specialty liquid chemicals. The company, which operates as a master limited partnership, boasts of 49 million barrels worth of storage capacity in the US and Mexico.
Over the past year, NuStar got a boost to the top line from rising oil prices, and the 1Q22 report showed $409.8 million in total revenues. That top line was up 13% year-over-year. Despite the sound top line, NuStar’s EPS came in negative in the first quarter, with a loss of 22 cents per diluted share. Management attributed the quarterly loss to the one-time cash charge related to divestiture of the Canadian Point Tupper terminal facility.
Of importance to dividend investors, NuStar’s distributable cash flow, which is used to fund the dividend payment, grew 13% year-over-year, matching the revenue gains, and came in at $91 million. The company’s dividend, declared at 40 cents per common share, was paid out on May 13. This marked the ninth quarter in a row that the dividend was kept at its current level. The $1.60 annualized payment gives a robust yield of 11.1%.
Wells Fargo analyst Michael Blum, who holds a 5-star rating from TipRanks, is impressed by NuStar’s positioning, and writes of the company: “NuStar is another play on inflation with 95% of its pipeline under FERC regulated tariffs (subject to PPI adjuster), whereby any reduction in refined product volumes due to demand destruction should be offset by inflation projection. The partnership’s Permian gathering assets continue to grow, and the recent initiative to reduce costs and capital expenses by $50MM should improve margins. NuStar’s significant presence in the CA renewable fuels market should continue to yield low cost, high return projects."
These comments support Blum’s price target, which at $18 indicates his confidence in ~25% upside for the next 12 months. Based on the current dividend yield and the expected price appreciation, the stock has ~36% potential total return profile. Unsurprisingly, Blum rates NS shares an Overweight (i.e. Buy). (To watch Blum’s track record, click here)
Overall, NS stock holds a Moderate Buy rating in the Street’s consensus view, based on 3 recent reviews that include 2 Buys and 1 Hold. NS is trading for $14.43 and its $18 average price target matches that of Blum above. (See NS 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.