In last week’s trading, stocks showed their best weekly gains in over 40 years, prompting a wave of confidence among investors. But it’s not clear that the bulls really want to start running – today, the S&P slipped 2.5%. Volatility indicators remain high, as daily trading results remain unpredictable.
The market gyrations are the direct result of the strong reactions to the COVID-19 epidemic. New York City, the world’s financial center, is clearly at the center of the epidemic in the US, but social distancing, shutdowns, lockdowns, and quarantines are being applied in varying degrees throughout the country – and worldwide. Economic activity, the ordinary daily business of working, producing, buying, and selling, has ground to near-halt, and economists are debating not if we’ll see a recession – that’s clear already – but if it will turn into a Depression.
In the meantime, stock market investors are looking for ways to rebuild and defend their portfolios. After the heavy losses of late February and March, the recent rally has been a breath of fresh air – although there are worries about how long it will last. Investors are moving toward that classic category of defensive play, the dividend stock, seeking companies that combine positive recent earnings and strong upside potential with high-yield dividend payments. These are the moves that will protect your investment portfolio.
With this in mind, we’ve used TipRanks database to find three affordable stocks that meet a strong defensive profile. All three offer dividend yields of 9% or higher, have consistently positive earnings, and offer upside potential greater than 35%. Let's take a closer look.
Fidus Investment Corporate (FDUS)
Fidus inhabits the business development niche, where it provides debt financing solutions for low- to mid-market companies. Fidus invests in senior secured debt and mezzanine debt, along with equity securities, in companies valued between $10 and $150 million. Fidus has invested in 68 companies worth an aggregated $697 million; a majority of Fidus’ portfolio is comprised of second lien debt, and Fidus holds equity investments in 93% of its portfolio companies, with an average ownership of 6%.
The value of Fidus’ portfolio is clear from the earnings, which have been consistently positive for the past two years. The company finished 2019 with 13% sequential gain in quarterly earnings, reporting 34 cents EPS for Q4 and a total investment income of $19.5 million. For the full year 2019, FDUS reported total investment income of $77.1 million and $1.44 EPS.
Fidus uses its income to fund a steady, reliable dividend. The company has consistently held the regular quarterly payment at 39 cents per share, and added a 4-cent special dividend in each fourth quarter. The total dividend yield is an incredible 19.2%, which, added to the reliability of the payment, makes Fidus a true dividend champion.
Oppenheimer’s 5-star analyst Chris Kotowski is impressed by this company, partly from a general liking for “the business model of FDUS and other BDCs that focus on the smaller end of the middle-market space,” and partly from the company’s commitment to a high-quality dividend. Looking at Fidus’ forward prospects, he writes, “Quarter-to-date for 1Q20, FDUS has already monetized ~$46M of equity investments and generated ~$30.2M of net realized gains, seemingly in line with marks as of 4Q19...”
Kotowski maintains his Buy rating on FDUS shares, while setting a $14 price target that implies an impressive upside potential of 62%. (To watch Kotowski’s track record, click here)
Overall, FDUS has a Strong Buy analyst consensus rating, based on 3 recent Buy reviews against a single Hold. The shares are selling for an affordable $8.11, and the $11.17 average price target suggests a 37% upside potential for the coming 12 months. (See Fidus stock analysis on TipRanks)
PennyMac Mortgage (PMT)
Mortgage investment trusts are a more liquid option for investors seeking to invest in the real estate sector. These companies, subsets of the real estate investment trust (REIT) sector, focus on mortgage assets and mortgage backed securities, rather than the underlying real estate. PennyMac allows investors to invest in the mortgage sector, backed by property, and to profit from both dividends and capital appreciation.
This company has consistently beaten earnings expectation over the past several years, and its most recent report was no exception. In Q4, PMT reported 55 cents EPS, just over the estimates and in line with the year-ago quarter. Top-line revenue came in at $155 million, 16% over the estimates and up a hefty 84% year-over-year.
The solid earnings foundation supports PMT’s dividend. The company held the payment steady at 47 cents through 2019 – but the current payment, to be paid at the end of this month, has been reduced to 25 cents. The reduction was made to put the payment in line with expected quarterly income, which is predicted to show a heavy hit from the economic dislocations of the COVID-19 epidemic. At the current payment and income levels, PMT’s dividend shows a payout ratio of 45% and a yield of 9.54%. The payout ratio shows the dividend is affordable, with room to grow again, while the yield remains excellent.
Two analysts have weighed in on PMT, weighing the risks, the coronavirus hit, and the predicted earnings loss in Q1 against the company’s overall position, and both see the stock as a buying proposition.
Credit Suisse analyst Douglas Harter expects PennyMac to outperform, although he does lower his price target, citing “the expected book value decline in the first quarter and further multiple contraction given the volatility in the mortgage market, as well as funding pressures across the fixed income landscape.” Harter’s target, $15, still implies an upside of 55% and supports his Buy rating. (To watch Harter’s track record, click here)
From Piper Sandler, Kevin Barker takes a more bullish position. He writes, “We expect the stock to remain resilient relative to peers given the company’s liquidity and capital profile, which ultimately should lead to a more stable equity base.” Barker gives PMT a Buy rating, and his $22 price target suggests a powerful 159% upside appreciation. (To watch Barker’s track record, click here)
All in all, with a share price of $9.64 and a consensus average price target of $21.33, PMT shares offer investors a chance for 121% share growth this year. The analyst consensus rating, a Strong Buy, is unanimous, based on 3 Buy reviews. (See PennyMac stock analysis on TipRanks)
Canadian Natural (CNQ)
The energy industry is known for generating high cash flows and paying out generous dividends. Canadian Natural, a hydrocarbon exploration company in Canada’s energy sector, is a major name in Western Canadian Sedimentary Basin, where is owns the largest undeveloped acreage base. The company is a major independent producer of natural gas, and Canada’s largest heavy crude oil producer. CNQ also operates in the North Sea and off the coast of West Africa.
In March of this year, CNQ announced its quarterly dividend of 42.5 cents Canadian (31.75 cents US at the time of announcement). The new dividend was a 9.4% increase in the quarterly payment. At $1.27 in US currency, the annualize payment gives a yield of 9.4%, far higher than the average dividend yield among S&P listed companies (~2%) and US Treasury bonds (less than 1%). The dividend announcement marked the fourth payment increase in the past three years for CNQ.
CNQ’s dividend was supported by strong financial performance in 2019. The company generated record cash flows of $10.3 billion, with a free cash flow of $4.6 billion. High production levels, also a company record, underlay the company’s cash flow generation. CNQ reported 1.098 billion barrels of oil equivalent in production for the year, 2% higher than the year before despite a difficult price environment.
Covering the stock for CIBC, analyst Jon Morrison is favorably impressed by CNQ’s management. He writes, “We view CNQ as a company that is focused on building a long-term enduring business that is structured to handle the inevitable industry cycles and is focused on controlling that which is within its control.”
In line with this upbeat view of the company, and its prospects for weathering current economic difficulties, Morrison rates CNQ a Buy, with a price target of C$34 (US$24.45). His price target implies a robust 12-month upside potential for the stock of 191%. (To watch Morrison’s track record, click here)
All in all, Canadian Natural is another Strong Buy stock, based on the analyst consensus rating. The rating is based on 12 reviews, split between 9 Buys and 3 Holds. Shares are priced at a discounted US$13.47, and the average price target of US$22.34 indicates room for nearly 88% upside over the next 12 months. (See Canadian Natural stock analysis on TipRanks)
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