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After a nearly month-long stretch of losses that saw markets decline by some 5%, both the S&P 500 and the NASDAQ are climbing back to the record-high levels they posted last this past summer. The story here wasn’t so much the market decline, as it was the volatility. The market was reacting to a series of economic and political crosswinds, making it difficult for investors to keep abreast of developments.
Writing from RBC Capital, head of equity strategy Lori Calvasina describes the main headwinds as a combination of the COVID Delta variant and the ongoing supply chain problems. Regarding the latter, she writes: “Supply chain pressures are already well understood by markets and may already be largely baked in…” Looking forward, she adds that “Supply chain data – delivery times and unfulfilled orders/backlogs have shown some improvement – plus possible gains in freight costs – all gives reason for hope that situation may be reaching its turning point.”
Supporting her thesis, the RBC strategist notes that the Q3 earnings reports, which have just started coming in, are largely ‘good enough.’ The recent market pullback had stoked fears that third quarter results would be unimpressive, but Calvasina believes those fears were overblown.
But that doesn’t mean stocks are out of the woods. Calvasina believes that 2021 is likely to end on a rocky fourth quarter, with increased market volatility making this a good time for investors to shore up the defenses in their portfolios.
In other words, it’s the right time to move into dividend stocks. One of Calvasina’s colleagues among the RBC stock watchers – 5-star analyst Kenneth Lee – has been scouring the market to locate Buy-rated, reliable, high-yield dividend payers – stocks that will ensure investors an income stream no matter what. We’ve used the TipRanks platform to pull up the data on two of Lee’s picks that are yielding 8% or better. Here are the details.
Artisan Partners Asset Management (APAM)
We’ll start with Artisan Partners, an asset management firm with over $173 billion in total AUM. The firm offers clients a wide range of services, from portfolio management to financial planning to investment supervision. Artisan Partners has offices across the globe, including the US financial hubs of Atlanta, Boston, Chicago, and Denver, as well as global cities like Hong Kong, London, Sydney, and Dublin.
APAM shares have seen volatile trading this year, with the stock price bouncing in a $10 range between $44 and $54 per share. This share performance comes as both revenues and earnings moved steadily upward since bottoming out early last year when the COVID crisis hit. The company’s EPS bottomed out at 66 cents in Q1 of last year, and has since risen to $1.28 in the last reported quarter, 2Q21. That value came in just above expectation, and was up 13% sequentially and 80% year-over-year.
At the top line, the 2Q21 revenue was up 69% from the pandemic low of $187 million in 1Q20. The $317 million reported in 2Q21 was also up 6.7% sequentially, reaching its highest point in more than two years. The company reported $228.7 million in available liquidity as of the end of 1H21, up from $155 million as the end of 2020. Artisan Partners will report its 3Q earnings on October 26. EPS for the third quarter is forecast at $1.32.
Artisan has a policy of keeping the quarterly dividend reliable, and of supplementing it when possible with special dividend payments. The regular common stock payment is currently set at $1 per share, annualizing to $4 and giving a yield of 8.32%. This compares favorably to the 1.4% average yield among S&P-listed companies.
RBC’s Kenneth Lee writes of Artisan Partners: “We think what has really set APAM apart from peers is its ability to generate excess returns over time, and we believe maintaining discipline on investment capacity is a key aspect. Importantly, we think, looking long term, compounding AUM through excess returns, on top of market returns, would be the key driver for revenue growth (historically, organic growth has played a much smaller proportion of AUM growth contribution)."
In line with these comments, Lee rates APAM shares an Outperform (i.e. Buy), and sets a $60 price target that suggests the stock has room to grow 24.5% in the year ahead. Based on the current dividend yield and the expected price appreciation, the stock has ~33% potential total return profile. (To watch Lee’s track record, click here)
Overall, Artisan Partners shares have a Moderate Buy rating from the Wall Street consensus, as the recent reviews are evenly split between Buy and Hold. The stock’s average price target of $53.50 implies a one-year upside potential of 11% from the current share price of $48.20. (See APAM stock analysis on TipRanks)
Sixth Street Specialty Lending (TSLX)
The second RBC-pick we’ll look at is Sixth Street Specialty Lending, another denizen of the financial sector. Sixth Street is one of the many firms in the credit industry that provides access to capital and credit for small- to mid-market companies, companies that may slip under the radar of the big banks and so might otherwise not have access to such funding. These small and medium enterprises are key job creators in the US economy, and their financial health is vital to economic growth; companies like Sixth Street provide that liquidity necessary for success.
Sixth Street will be reporting its Q3 results in the first week of November, but a look back at the company’s Q2 report may be informative, as a snapshot of the company before the updated financial results are released.
TSLX shares have been rising steadily for the past 12 months, up 63%. The share gains have come even as earnings slowly slipped and revenues wavered in the past year. For Q2, EPS was 38 cents, down 35% yoy and 17% sequentially. At the top line, revenues came in at $67.8 million for Q2, roughly flat from the $68.6 million reported in the year-ago quarter, but down 19% from the $83.9 million in Q1 revenues.
Sixth Street carries a high debt, of $1.326 billion, but it has liquid assets more than sufficient to meet operational needs. The company has $18.5 million in available cash as of the end of Q2, along with almost $1.1 billion in undrawn credit.
Even though earnings and revenues have not been rising, Sixth Street has been able to maintain its regular 41-cent common share quarterly dividend. This payment annualizes to $1.64 per share, giving a solid yield of 7%.
Kenneth Lee writes of Sixth Street, “Outlook for TSLX's potential originations remains very favorable, in our view. We continue to like TSLX's strong liquidity position, ability to underwrite complexity, very high-quality portfolio and well-supported dividend."
The analyst added, "Management indicated TSLX has a strong backlog for originations in 2H. Overall, our sense is that the backdrop for originations activity remains very favorable, with management noting elevated transaction levels across the industry as sellers look to monetize favorable valuations..."
Along with his positive outlook, Lee rates TSLX an Outperform (i.e. Buy) and gives the stock a $25 price target, although the recent share appreciation has cut into the one-year upside. The real return here is from the dividend. (To watch Lee’s track record, click here)
TSLX has slipped under most analysts’ radar; Lee is the only bull in the picture right now- with the stock displaying a Moderate Buy analyst consensus. (See TSLX stock analysis on TipRanks)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched 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.