How do you manage risk when no one agrees on what the risks will be? Markets are rising right now, but today’s higher interest rates threaten a credit crunch, among other things, which could dampen the positive sentiment. The inflation numbers from May, just 4% annualized, were better than expected, which could justify the Fed dialing back its monetary tightening – but we don’t know if that will happen in time. In short, optimistic sentiment collides with unpredictable conditions.
The uncertain environment is aptly summed up by Stifel strategist Barry Bannister who writes: “Since Oct-2022, economic resilience and policy prudence indicated to us no immediate ‘textbook’ recession. In turn, that led to a slightly easier Financial Conditions Index which lifted (reflexively) the S&P 500 P/E ratio. We also believe recessions and bear markets are surprises and not so widely (perhaps universally?) anticipated, leaving consensus sentiment since Oct-2022 off-sides, but risk may indeed rise in 4Q23 and beyond.”
“As the 2023 slowdown proves mild the economy encounters resource constraints late-2023 or 1H24, and because there is no economic reset as sought by the Fed, then between 4Q23 and 2Q24 there may be policy or economic risk,” Bannister added.
In this environment, it’s only natural to move toward defensive stocks, as a proactive step to provide a level of protection against an adverse market. That will turn our attention to the high-yield dividend stocks, the classic defensive move. With their steady income streams and inflation-beating yields, these stocks can bring investors some peace of mind at a difficult time.
Using the TipRanks platform, we’ve pulled up details on two div payers, with one offering a yield up to 11%. Here they are, with comments from the stock analysts at Stifel.
DHT Holdings, Inc. (DHT)
We’ll start in the energy sector, where DHT Holdings operates in a vital part of the world’s energy transport network. DHT, based in Bermuda, is an owner-operator of some of the world’s largest cargo vessels, very large crude carriers, or VLCCs. These are the largest class of crude oil tanker vessels, which mass approximately 300,000 tons, and DHT’s fleet totals 23 vessels. Moreover, these ships are typically operated on a charter basis, and in Q1, they brought the company time charter equivalent earnings of $49,100 per day.
DHT has seen benefits from higher tanker rates over the past year, which are visible in the company’s annual revenues. These totaled $295.8 million in 2021, and rose almost 22% to $360.4 million in 2022. The company has been working to actively expand its fleet, and in May of this year announced an agreement with Hyundai Heavy Industries to acquire a VLCC for $94.5 million. The vessel, built in 2018, is expected to be delivered during 3Q23.
While the new acquisition is expensive, DHT has the resources to handle it. The company had $117.5 million in cash assets at the end of Q1, which is an increase from $58.6 million in 1Q22. Revenues in 1Q23 reached $93.9 million, reflecting a year-over-year growth of 142%. However, the Q1 top line fell short of expectations by $3.46 million. On the bottom line, DHT reported a GAAP EPS of 23 cents, missing the forecast by 1 cent per share. Nevertheless, this result represents a significant improvement from the 15-cent per share EPS loss in the year-ago quarter.
Despite missing expectations in the Q1 financial results, DHT was able to use its strong cash growth to fund its dividend. The company declared a Q1 dividend payment of 23 cents per share, which was paid on May 25. That Q1 dividend marked 53 consecutive quarters of dividend payments, a solid record for investors to consider. And, at 92 cents per share annualized, the dividend yields 11.1%.
Among the bulls is Stifel’s 5-star analyst Benjamin Nolan who writes: “Given the orderbook nears record lows, the company is well positioned to ride the momentum to deliver solid results, which should flow through to continued strong dividends. Given the stock trades at only 5x our EBITDA estimate, we see valuation expanding as strong rates materialize… DHT has a good, modern fleet, a strong balance sheet, and excellent strategy and discipline.”
These comments back up Nolan’s Buy rating on DHT shares, and his $12 price target implies a one-year gain of 38% for the stock. Based on the current dividend yield and the expected price appreciation, the stock has ~49% potential total return profile. (To watch Nolan’s track record, click here)
Overall, DHT gets a Strong Buy consensus rating from the Street’s analysts, based on 6 recent reviews that favor Buys over Holds by 5 to 1. The stock’s $8.69 trading price and $12.72 average price target suggests an upside of ~47% for the next 12 months. (See DHT stock forecast)
Philip Morris International (PM)
Changing focus, we’ll turn from crude oil tankers to a classic ‘sin’ stock, Philip Morris. This cigarette maker has long been known for its strong dividends, as well as its leading position in the global tobacco industry. Philip Morris owns the right to produce and market the iconic Marlboro brand cigarettes outside of the United States; among its other brand names are Next, Chesterfield, L&M, and, of course, Philip Morris. The company can boast a first- or second-place market share position in most the 175 markets where its products are sold.
The global tobacco industry is huge, valued at $867.6 billion last year and expected to reach $1.05 trillion by 2030, but the social and political trends are set against Big Tobacco. Philip Morris, like many of its peers, has been planning for a future of reduced tobacco consumption, and in recent years has invested more than $10.5 billion into a line of smokeless tobacco products. The company generated 29.1% of its total revenue from such products in 2021, and in 2022 it expanded that share to 32.1%. Philip Morris’ smokeless product line includes heated tobacco and e-vapor smoking substitutes, as well as oral smokeless tobaccos that provide nicotine with out the side effects of smoke.
In the first quarter of 2023, Philip Morris reported net revenues of $8.02 billion, for a 3.5% increase year-over-year – but missed the estimates by $10 million. At the bottom line, the pattern was the opposite; the non-GAAP EPS of $1.38 per share was down from $1.56 in the prior-year quarter, but beat the forecast by 4 cents per share. The company had an operating cash flow reported at $10 billion to $11 billion, ‘at prevailing exchange rates, subject to year-end working capital requirements.’
Philip Morris has an active capital return policy for shareholders, which in 1Q23 was conducted entirely through the dividend. The company’s most recent declaration, for $1.27 per share, was made on June 9 for a July 11 payout. At the annualized rate of $5.08 per common share, the dividend yields a solid 5.5%.
Covering the stock for Stifel, analyst Matthew Smith writes that he remains bullish on PM, including among his reasons: “PMI maintains one of the strongest growth profiles amongst its Consumer Staples peers. Also, the acceleration on both a sales and EPS basis, driven by the development of its reduced risk products (RRPs), provides upside potential to its growth outlook. We believe there is a solid case for ownership of PM, given the strong and accelerating growth profile of IQOS [heated tobacco product], supporting robust long-term growth for the business alongside a discount valuation. We believe the strong free cash flow generation, which the company returns to shareholders in the form of a top-tier dividend (pushing up to over 5% yield), provides solid downside support for the shares.”
Looking ahead, Smith rates PM shares as a Buy. His price target, set at $114, indicates his belief in a 23% upside on the one-year time frame. (To watch Smith’s track record, click here)
Of the 10 recent analyst reviews on record for PM, 9 are to Buy against a single Hold – giving the stock its Strong Buy consensus rating. The average price target of $115.11 suggests a 24% one-year increase from the current trading price of $92.63. (See PM stock forecast)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
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