Let’s talk about dividend stocks. These have always been popular with income minded investors, who are attracted to the steady payments and are wiling to sacrifice some share appreciation to mitigate overall risk. That’s both a fair trade and a viable investing strategy.
It should have held together during the height of the coronavirus pandemic. That is, dividend stocks should have performed their usual role for investors, helping to insulate portfolios from a larger shock during a period of recessionary pressures. But they did not. Too many companies were hurt too badly, as earnings and cash flow plummeted, and many formerly reliable dividends were reduced or even suspended during the crisis.
So, 1H20 has been hard on dividend stocks, and just when investors needed them most. Some due diligence, however, can find the continuing dividend champs, those companies that have made it through the initial economic turndown while retaining their dividend policies.
These companies are attracting notice for Wall Street’s analysts, as the go-to choices for dividend investors. Using the TipRanks database, we’ve pulled up some details on three of these stocks.
Capital Southwest Corporation (CSWC)
We’ll start in the finance industry. Capital Southwest, based in Texas, is a business development company – a BDC – with a focus on high-appreciation opportunities. The company provides specialty lending options and financings for middle market players in a variety of sectors. Some of CSWC’s methods include industry consolidations, management buyouts, and recapitalizations.
The company’s strong and heavily diversified portfolio helped to insulate it from the corona-inspired economic shutdown. In fiscal Q4, the company's earnings rose sequentially, coming in at 40 cents per share.
Dividend investors are more likely to be pleased by management’s announcement, in early June, that the dividend would be maintained, and that between the regular payment and a special dividend release, it would total 51 cents per share. This is the same as the previous two quarters, and comes after a solid year of slow dividend growth. At the current payment, CSWC’s dividend has an impressive yield of 12.77%
Covering the stock for JMP Securities, Christopher York sees a company with room to maneuver. He writes, “Capital Southwest remains one of the most attractive ways to gain exposure to lower-middle-market direct originations. We continue to believe core and supplemental dividends remain sustainable… the company has ample liquidity to fund new investments and support portfolio companies, if needed.”
In line with his comments, York reiterates his Buy rating on CSWC. His $17 price target indicates confidence in a one-year upside of 35%. (To watch York’s track record, click here)
Overall, Capital Southwest has a Strong Buy rating from the analyst consensus, based on a 3 to 1 split between Buy and Hold reviews. The stock is selling for $12.60, and the $14.25 average price target implies an upside of 13% for the coming year. (See CSWC stock analysis on TipRanks)
Heritage Commerce Corporation (HTBK)
Next up, Heritage Commerce, is a holding company whose main subsidiary, Heritage Bank of Commerce, serves customers in the San Francisco Bay area as well as Santa Clara and Alameda counties. The company offers general banking and deposit services to the public, and originates a range of consumer and commercial loans.
Like most companies with direct contact customer service models, Heritage saw earnings plummet in Q1. The sequential drop was 77%; reported EPS was only 6 cents. The earnings loss came even as revenues beat the forecast. At the top line, the $41.77 million reported for Q1 was up 24% year-over-year.
Strong liquidity allows Heritage to weather the corona crisis, survive a steep drop in earnings, and maintain its dividend. The company reported $443.4 million in available cash and liquid assets at the end of the first quarter, along with access to another $477.5 million through borrowing. That’s a hefty war chest for any situation.
The company has kept up its dividend payments, without reductions, through the health crisis. The current payment is 13 cents per share quarterly, or 52 cents annualized. At this rate, the dividend offers a yield of 7.65%, far above the 2% average found among S&P listed companies. Better, for investors, Heritage has an 11-year history of prioritizing dividend payments.
Andrew Liesch, of Piper Sandler, points out that a significant portion of Heritage’s service portfolio – upwards of 7% of the total – consists of retail and food service commercial customers, who are likely to see surge in banking needs when the epidemic fades on the West Coast. He writes, “[R]etail trade exposure includes gas stations with convenience stores while the food service portfolio is mostly QSRs, both of which have been operating while under shelter-in-place and should experience stronger customer volume as auto traffic and commuting return.”
Liesch rates this stock a Buy, citing both forward prospects and current liquidity. His $9 price target suggests an upside of 36% in the coming year. (To watch Liesch’s track record, click here)
Heritage gets a Strong Buy from the analyst consensus, and that verdict is unanimous. The stock has 3 recent reviews, and they are all Buys. Shares are priced at $6.80, and the $9.33 average price target – slightly more bullish than Liesch’s – implies a 41% one-year upside. (See HTBK stock analysis on TipRanks)
Kimbell Royalty Partners (KRP)
Last on today’s list of dividend stock is Kimbell Royalty, a land company operating in oil regions across the US. Kimbell invests in mineral and royalty interests, buying up land it can leas to oil and natural gas producers. The company’s revenue is derived from royalties on hydrocarbon extraction from its properties.
Kimbell owns over 38,000 active wells, with 43% of its operations in Texas’ Permian Basin. The company entered 2020 after reporting strong year-over-year gains for both Q4 and CY2019, and had also just completed the acquisition of a competing mineral rights company, Springbok, in a $175 million deal.
The drop in oil prices during the bear market cycle, and overall lower demand during the coronavirus economic shutdowns, put serious pressure on Kimbell’s revenue stream. Q1 earnings fell sharply, to a net loss of $1.29 per share, and the stock price has still rebounded from the crash earlier this year. Nevertheless, Kimbell management has chosen to maintain a common stock dividend – although the payment has been cut back to 17 cents per share. This annualizes to 68 cents, and gives a robust yield of 8.2%. The company has stated its commitment to distributing up to 50% of available cash to shareholders.
Stephens analyst Gail Nicholson cites the company’s dividend policy in his review of the stock, writing, “We are modeling the company’s distribution as a percent of cash flows flat with 1Q20 (~50%) for the remainder of the year and increases to ~100% during 4Q21 (distribution policy is flexible and likely adjusts based on commodity prices). We anticipate the company utilizes the non distributed cash to further improve its balance sheet.”
Nicholson gives weight loss a Buy rating, and supports it by raising his price target from $3 to $11. His new target implies a 32% upside potential for the stock. (To watch Nicholson’s track record, click here)
All in all, the analyst consensus rating on Kimbell Royalty is a Strong Buy; the stock has 4 Buy and 1 Hold review behind that rating. The $10.25 average price target suggests a 23% premium form the current share price of $8.28. (See KRP stock analysis on TipRanks)
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