Markets ended 2019 with an overall gain of 29% on the S&P 500. It was a fine cap to end the year, but will it last? Not so sure; Wall Street is predicting a far more modest run in 2020, with the end-year targets averaging just a 2% gain.
The outlook reflects relative risk assessment, rather than depression. With tensions rising in the Middle East, a US Presidential election just nine months away, 2020 is starting out with plenty of uncertainty on the horizon.
That uncertainty has investors worried, and when investors get worried they look for a safety net in their investment strategy. It’s a draw that naturally pulls them to dividend stocks. Dividend stocks don’t offer the same high share appreciation as growth stocks, but they do offer a steady income stream. And when markets a volatile, a steady income stream is a hot commodity.
Savita Subramanian, Bank of America’s head of US equity and quantitative strategy, put this way in her ‘year ahead’ outlook: “How to hedge against things going wrong? We now prefer utilities (pure domestic, stable earnings) over staples as a way to generate high dividend.”
Utilities – electricity, water, and the like – are strong option for dividends – their reliable cash flows make it easy for them to maintain the payouts. But you can drill down further, to a more basic level, because the utilities won’t run without commodities. And that brings us to the energy companies.
The energy industry has the hallmarks of a recession-proof stock, perfect for periods of volatility. It operates in an essential economic niche, so it will always find a customer base, and it generates high cash flows, which it uses to fund operations and pay out dividends.
We’ve used the TipRanks Stock Screener tool to sort through over 6,500 stocks, looking for great bargains in the energy industry. Setting the filers to show us small- and mid-cap stocks, with upside potentials and dividend payouts exceeding 5%, and Buy ratings from the Wall Street analyst corps, we’ve cut that list to a manageable 68. Here are three that should interest you.
Falcon Minerals Corporation (FLMN)
We’ll get started with Falcon, a small oil and gas company operating in the South Texas Eagle Ford shale formation. The Eagle Ford is smaller than the great headline-grabbing Permian Basin to its west, but a University of Texas study last year predicted that the formation can support up to 5,000 new wells this year, giving it a $20 billion economic impact on its local region. Falcon’s drilling leases are in prime territory.
In the company’s most recent reported quarter, Q3 of last year, EPS missed the estimates by 25%, coming in at 6 cents. Revenue also missed, by 10.8%, and came in at $15.9 million. Despite the misses, FLMN shares rose in the last two months of 2019; the company’s strong dividend position helped to buoy the stock.
Falcon returned $11.6 million, an impressive 72.9% of its total Q3 revenues back to investors through its quarterly dividend. The payment, 13.5 cents per share, annualizes to 54 cents and shows a robust yield of 7.83%. That yield is almost 4 times the average return among S&P listed stocks – and fives times higher than a typical Treasury bond yield. Falcon has a commitment to paying out its dividend, and has a history of adjusting the payment to ensure that it remains sustainable.
Reviewing FLMN for institutional brokerage firm JonesTrading, 4-star analyst Eduardo Seda sees the company as a growth prospect, and singles out the dividend for praise. He wrote, “We still believe FLMN is well positioned to continue benefitting from expanding the breadth of its asset base… we continue to project strong free cash flows of $53.7 million in 2020, and $63.8 million in 2021… the company’s dividend policy of paying out substantially all of its free cash flow in the form of a regular quarterly dividend is intact, and, positioned for continued growth based on current fundamentals.”
Seda adds that FLMN’s is variable, as the company “pay[s] out substantially all (roughly 90%+) of its free cash flow in the form of a regular quarterly dividend.”
In his review, Seda rates FLMN a Buy, and puts a $10 price target on the stock. This target suggests room for 44% growth to the upside this year. (To watch Seda’s track record, click here)
All in all, Falcon Minerals gets a Strong Buy from the analyst consensus, with 5 Buy reviews against a single Hold. The stock sells for a bargain price, just $6.82, and the average price target of $8.38 indicates a 23% upside potential. (See Falcon stock analysis at TipRanks)
Berry Petroleum Corporation (BRY)
Our second stock, Berry, is another small-cap oil producer in the American West. Berry has operations in Colorado, Utah, and California, with combined reserves comprising 86% crude oil. Berry has identified over 5,600 drilling locations, and operates over 3,000 producing wells. The company’s current production mix is 81% oil, 17% natural gas, and 2% natural gas liquids, with 72% of total production coming from the California operations.
Strong oil operations makes for strong earnings, and Berry beat the estimates in Q3 2019. Revenues came in at $194.7 million, 21% over the forecast and up 3.6% year-over-year. The EPS beat was more modest – the 40-cent figure was a penny higher than the 39-cent estimate. It was the first time in a year that Berry had beaten the expectations.
Berry went public in the summer of 2018, and since then has maintained a reliable dividend. The payment started at 9 cents quarterly, but has been held at 12 cents for the past 5 quarters. The annual payment of 60 cents gives a yield of 5.76%. The payout ratio, a comparison of the dividend to quarterly earnings, is a low 30%, indicating that the payment is easily sustainable for the company.
Kashy Harrison, from Piper Sandler, reviewed BRY and came away impressed by the company’s ability to cope with a changing regulatory environment in California. He wrote in his comments, “The more near-term consideration was the double-edged nature of operating in California. Specifically… BRY possesses a differentiated business model when compared to tight oil development (i.e. low base declines, decades of historical data, robust operating margins after maintenance capital, minimal competition, etc.). However, those advantages come with a significantly more adverse regulatory environment that operators in Texas generally don't have to deal with…” Harrison sees California’s regulatory regime as forcing BRY into a more competitive configuration than producers in less-regulated Texas.
Harrison gives this stock a Buy rating, and backs it with a $12 price target. His target implies an upside potential of 44%. (To watch Harrison’s track record, click here)
Overall, Berry gets a Moderate Buy consensus rating, based on mixed reviews. The recent ratings behind the consensus include 3 Buys, 4 Holds, and 1 Sell. Like Falcon, the stock sell for a bargain – just $8.33 per share. The average price target of $10.57 suggests room for a 26% upside. (See Berry Petroleum's price targets and analyst ratings on TipRanks)
Equitrans Midstream Corporation (ETRN)
Not every energy player actually extracts the oil and gas. The midstreaming sector – that is moving the operation of oil and gas transport, pipeline, and storage networks – is huge and growing, as extraction companies have to get their product to markets and to customers. There has been a trend in recent years for large energy conglomerates to spin off midstream operations onto subsidiaries and limited partnerships, allowing exploration/extraction operators and midstream companies each to specialize. Equitrans in the midstream spin-off of EQT, and has operated independently since the middle of 2018.
Volatile oil prices in 2019 took a toll on Equitrans in the second half. The company’s Q3 earnings – the most recent released – were disappointing. Revenues came in at $408.43 million, below the $417.39 million expected. EPS was worse, with a net loss of 26 cents per share. The company was able to compensate by drawing $136 million cash from its ownership interest in EQM.
The rough quarter did not stop Equitrans from paying out its dividend. The company started the quarterly payments in February 2019, and has paid consistently since. The current 45 cent quarterly payment annualizes to $1.80 per share, or a most impressive yield of 13.45%. That’s nearly seven times the S&P average, and qualifies Equitrans as a dividend champion.
Wolfe Research analyst Alex Kania is not worried about the recent quarterly miss, writing, “Via its ownership stake in EQM, Equitrans Midstream has significant cash flow growth potential over the next several years as key contracted growth assets go into service, including Mountain Valley Pipeline and create a platform for future growth. We see Equitrans' high yield with visible dividend growth as compelling at current levels, and a simplified structure should help the story over time.”
Kania sets a $21 price target on the stock, suggesting a 56% upside to support his Buy rating. (To watch Kania’s track record, click here)
Cautious optimism circles this midstream player, as TipRanks analytics exhibit Equitrans as a Moderate Buy. Out of 6 analysts tracked in the last 3 months, 3 are bullish on ETRN stock, 2 remain sidelined, and 1 is bearish. With a return potential of nearly 9%, the stock’s consensus target price stands at $14.50. (See Equitrans' stock-price forecast on TipRanks)