Last week, the Fed’s open market committee raised its benchmark interest rate by 0.75%, the largest such increase in almost 30 years. The move marks a shift to an aggressive stance against inflation, and an attempt by the Fed to head off a potential recession.
In fact, preliminary data leaked from the Atlanta Fed earlier in the week showed that the US is in a technical recession. While official numbers won’t be released until after the second quarter ends, the early numbers show that 2Q22 will end with 0.0% GDP growth. Following the 1.5% contraction in Q1, that’s two quarters in a row of negative or zero growth – the definition of a recession.
From an investor’s perspective, such an environment means it’s time shore up the portfolio’s defenses. Defensive stock plays are going to get a lot more attention going forward – as noted by Deutsche Bank in a recent report on current conditions.
Against this backstop, the investment bank’s analysts have picked out potential winners among the dividend stocks, the classic defensive plays for downturns of all types. We’ve looked up the details on two of those picks, using TipRanks’ database. Now let’s dive in, and look at the numbers and the DB commentary together.
Digital Realty Trust (DLR)
First up, Digital Realty Trust belongs to that long-time champion category of the dividend sector, the real estate investment trust (REIT). These companies are required to directly return a high percentage of profits to shareholders, and frequently use dividends as the vehicle. As a result, REITs can usually be relied on for reliable high-yield dividends.
Some REITs are generalists, investing in any sort of property, while others take a more narrow focus. Digital Realty is one of the latter, and its focus is on data centers. The company owns data center properties, and provides colocation and interconnection solutions between its properties and its tenants’ businesses. With a market cap of $36.2 billion, and an enterprise value of $56 billion, the company is the 7th largest REIT to be traded on Wall Street.
Some recent announcements from the company will help to demonstrate the size of its operations. Last month, DLR announced it had contracted for 158 megawatts of new solar power installations for its ops in California and Georgia. And this month, the company announced the expansion of its international footprint with the commitment to open a new data center project in Israel. The move will enhance DLR’s operations in the Eastern Mediterranean region.
On the financial side, Digital Realty reported 1Q22 revenue of $1.1 billion, in-line with the previous quarter and up a modest 3% from the year-ago quarter. These revenue supported a net income of $76.9 million, which led to an EPS for common shareholders of 22 cents per diluted share. This number was down sharply from the $1.32 diluted EPS reported in 1Q21. That said, funds from operations (FFO) per share, a key metric in the industry, grew from $1.50 in 1Q21 to $1.60 in the recent report, a gain of 6.7%.
The FFO supported the company’s $1.22 common share dividend. This payout annualizes to $4.88 for each common share. At this rate, it yields 3.8%, almost double the average dividend found on the broader markets. Even better for investors, the dividend has been increased three times in the last three years, and the company has a 17-year history of keeping the payment reliable with gradual increases.
In his review of Digital Realty for Deutsche Bank, analyst Matthew Niknam sees this company with a solid foundation from which to weather the economic difficulties. He writes, “Customer demand has been robust across both hyperscale and enterprise customers, driving elevated leasing volumes in recent periods. While we do not believe record volumes can be extrapolated looking forward (especially as macro conditions deteriorate), we do think recent strength and a very healthy backlog (~ $400mn+) helps de-risk the growth outlook into 2023.”
Niknam doesn’t stop there. He also upgrades his stance on the shares from Hold (Neutral) to Buy, and sets a price target, $144, that suggests a one-year upside potential of 13% for the stock. (To watch Niknam’s track record, click here)
Overall, the Moderate Buy analyst consensus rating on this stock is derived from 10 recent reviews, which include 7 to Buy against 3 to Hold. The shares are currently selling for $127.13 and have an average price target of $159.80, giving ~26% average upside for the year ahead. (See DLR stock forecast on TipRanks)
NetApp (NTAP)
The next dividend stock we’ll look at is NetApp, a San Jose-based company working in cloud-based data services and data management. NetApp works with major enterprise customers – including such names as AstraZeneca, DreamWorks, and even Dow Jones – on a range of data applications, all aimed at getting the right data to the right place at the right time, where the customer can make the most efficient and profitable use of it.
Data has become big business, and even after seeing share losses in recent months (NTAP stock has fallen 31% year-to-date, underperforming the S&P 500), the company still boasts a market cap over $14.5 billion.
Financial results for the most recent quarter, Q4 of fiscal year 2022, came in strong. NetApp saw net revenues of $1.68 billion, up from $1.56 billion in fiscal 4Q21. The company’s Hybrid Cloud Segment led the way, with $1.56 billion of the revenue total. NetApp finished the quarter with $4.13 billion in cash and other liquid assets.
Those strong cash holdings are getting sent back to the company’s shareholders. NetApp has an active program of share repurchases and dividend payments, totaling $361 million in fiscal 4Q22, and $1.05 billion for the full fiscal year. The common share dividend is set at 50 cents per share, or $2 annualized, and yields 3%.
All of this has Deutsche Bank’s 5-star analyst Sidney Ho willing to upgrade these shares from Hold (i.e., Neutral) to Buy. Explaining his stance, Ho writes, “We believe NTAP’s share underperformance year-to-date of down -30% (vs. down -18% for IT hardware peers) creates a buying opportunity… We are also encouraged that the company will shift its cash usage in the near term from M&As to share buybacks, which should be a positive for EPS growth.”
Believing the risk-reward is “compelling,” along with the upgrade and the upbeat outlook, Ho’s $84 price target implies a one-year upside potential of 32%. (To watch Ho’s track record, click here)
All in all, the analyst consensus rating on NTAP is a Moderate Buy, based on 13 reviews. These include 6 Buys against 7 Holds. The stock’s current trading price is $63.73 and its average price target of $88.38 suggests an upside of ~39% in the year ahead. (See NTAP 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.
Source: finance.yahoo.com