Markets have been nosediving in recent sessions, as the coronavirus scare spreads. While public health professionals are trying to cope with the spread, and to educate the public, the economic effects are real. Quarantines and travel restrictions have impacted airlines, shipping companies, and factories. Demand for oil is down, pushing down prices and hurting energy stocks. Tech companies, especially those with supply chains based in China, are feeling the pain as well.
But in the markets, what goes down will (usually) come back up. Low prices may hurt right now, but they are also an opportunity – to buy in. A savvy investor can find deals now, on stocks with high potential and real return value. Dividend stocks are clear choice for investors looking to buy in. On one level, their appeal is obvious – a reliable, high yield dividend represents a steady income stream even when markets turn south. But there is another, less obvious attraction: dividend payments are a conservative strategy for companies to follow, and conservative strategies are usually sign of strong defensive stocks. These are the stocks that are likely to keep a portfolio viable during an extended market correction.
So how to make your portfolio choices? Following the market leaders is a viable strategy. After all, the big fund managers had to make some good decisions to reach the top, and their stock picks can work at smaller scales, too. Steve Cohen, the billionaire trader behind Point72 Asset Management, has shown that he can survive the vicissitudes of Wall Street. After recovering from Federal investigations earlier this decade, he went back into the trading business and built Point72 into a $19 billion giant. And in the fourth-quarter he moved heavily into high-yield dividend stocks.
We’ve pulled up three of Cohen’s recent moves, and used the TipRanks Stock Screener tool to take a closer look at them. All three offer some clear advantages for today’s market conditions: a dividend yield over 5%, and over 20% upside potential for the next 12 months. In short, these are the stocks to buy when prices fall. Let’s dive into the details.
Helmerich & Payne, Inc. (HP)
The energy sector is not the monolith it may appear to be. Many of the companies engaged in oil production are highly compartmentalized. There are exploration companies, production companies, midstream companies, refiners: the list is nearly endless. Helmerich & Payne inhabits this universe, as a contract driller. That is, HP drills the wells that the exploration and production companies use to get the oil out of the ground. Splitting various aspects of the industry among different companies allows each to pursue greater specialization and efficiency.
HP ended Q1 with over $355 million cash-on-hand. The full pocketbook allowed the company to maintain its generous dividend at 71 cents per share quarterly. This payment has been kept steady for the last two years, and the company has a 14-year history of keeping up the payments and modestly growing them. At $2.84 annualized, the yield is a heft 7.7%, almost quadruple the average dividend yield among S&P listed companies.
A firm industry position, profitable operations, and a reliable high-yield dividend are attractions in any stock, and Cohen’s firm took notice. The billionaire bought up over 814,000 shares of HP, boosting his position in the stock by 7,689% to a total of 825,583 shares. That holding is now worth $30.414 million, and at the current yield Cohen will pocket over $2.3 million in dividend payments.
Wall Street’s analysts are also bullish on this stock. Writing for Stephens, Tommy Moll says, “…we expect the Company to 1) remain firmly disciplined on pricing as the super spec market leader, 2) continue to drive earnings power growth through innovation on both technology and contracting models, and 3) generate more-than-ample FCF to cover a dividend now yielding a compelling 7% annually.”
Moll’s Buy rating is supported by a $65 price target, which indicates confidence in an impressive 76% upside potential. (To watch Moll’s track record, click here)
David Anderson, of Barclays, points out strengths in company’s international operations: “A year ago HP had 1 rig working in Bahrain with 2 idle in addition to 2 idle rigs in the U.A.E.; today all 5 rigs are fully utilized as the company has been able to capitalize on the momentum in the region. This combined with the likelihood of additional rigs deployed in the region will help lessen the blow of the 8 YPF rigs in Argentina rolling off contract throughout the year.”
Anderson sets a $48 price target here, suggesting a 30% upside in the next 12 months, to back up his Buy rating. (To watch Anderson’s track record, click here)
Overall, with 12 analyst ratings, including 7 Buys, 3 Holds and 2 Sells, TME gets a Moderate Buy from the analyst consensus. Shares are selling for $36.84, and the average price target of $45 suggests a 22% upside potential in coming months. (See Helmerich & Payne’s stock analysis at TipRanks)
Chevron Corporation (CVX)
Next up is Chevron, one of the giants of the oil industry. Chevron’s pockets – the company has a market cap over $175 billion – are deep enough that the company can weather a market drop, even in a time of low oil prices and falling revenues. Chevron will need those resources, as low oil prices have pushing down on revenue; 2019 saw the company bring in ~$2.9 billion in earnings compared to ~$14 billion in 2018.
At the same time, however, CVX saw sufficient cash flow to keep up the dividend payments. The company pays out $1.29 per share – after raising the payment from Q3’s $1.19. Annualized, this makes the dividend $5.16 with a yield of 5.5%, an impressive payment by any standard. The payout ratio is high, at 86%, but shows that current earnings levels are enough to keep up the payment, with some slack available. With Q2 forecasts predicting EPS of $1.75, the dividend is clearly sustainable.
So, if Steve Cohen is seeking solid dividend performers, it’s no wonder that he’s drawn to CVX. His purchase here, of 817,071 shares, represents a new position for his firm, and is worth over $76 million at current share values.
Analyst Ryan Todd, with Piper Sandler, likes what he sees in Chevron. He writes, “CVX's modest beat should be just enough in what has been a challenging week for Integrated peers. Underlying results were slightly mixed, but the core drivers of the investment case continue to deliver, namely accelerating shareholder distributions and Permian production beat.”
Todd reiterates his Buy rating and $143 price target, implying a 53% upside here. (To watch Todd’s track record, click here)
Chiming in from Wolfe Research, 5-star analyst Sam Margolin sees a profitable future for CVX investors: “We feel comfortable that CVX should trade at least to its 25-year dividend yield spread because risks to the dividend are low and the outlook for ongoing dividend growth are at the high end, and so a yield dislocation should no longer persist in the stock. In the higher FCF based valuation, we also would argue that current FCF and growth dynamics support the stock at its longer-term valuation…”
Margolin’s review includes a Buy rating and a $151 price target, indicating confidence in a robust 61% upside potential. (To watch Margolin’s track record, click here)
All in all, Chevron’s Moderate Buy analyst consensus rating is based on 7 Buys, 3 Holds, and a single Sell. Shares are selling for $93.33, and the $132.90 average price target suggests room for 42% upside growth. (See Chevron stock analysis at TipRanks)
PPL Corporation (PPL)
The final stock on today’s list is PPL, an electric utility company based in Allentown, Pennsylvania. In the US, PPL operates 8,000 megawatts of generating capacity, and serves over 10 million customers in the US and the UK. PPL brings in over $7.7 billion in annual revenues.
The financial position allows PPL to keep up its dividend payment, of 41 cents per share quarterly. The next dividend is due out on March 9. Annualized the payment is $1.66, with a yield that matches CVX at 5.5%. The 72% payout ratio shows a commitment to sharing profits with investors while keeping the payment sustainable.
Cohen picked up over 2.5 million shares of PPL, his largest of these three purchases. It was a 3,563% increase in his holding of the stock, and brings his total ownership to 2,571,953 shares. It’s a clear sign that he is impressed by what he sees in PPL.
Turning to Wall Street, Wolfe Research analyst Steve Fleishman gives PPL a $41 price target, implying a 36% upside potential. Backing up his Buy-side review, Fleishman writes, “PPL is expected to grow rate base 4% through 2024... we believe investors will view favorably PPL’s LT opportunities, such as electrification in the UK and coal replacement in KY. Meanwhile, PPL’s yield is the best among US utilities by a wide margin.” (To watch Fleishman’s track record, click here)
5-star analyst Ali Agha of SunTrust Robinson is also bullish on PPL. He says of the stock, “Earnings growth visibility (driven by cap ex plans and internal growth), a discounted valuation, prospects for valuation expansion as UK exposure concerns dissipate, and an above average dividend yield, provide an attractive total return proposition for investors.”
Agha maintains his Buy rating on PPL, and, like Fleishman, gives the stock a $41 price target. (To watch Agha’s track record, click here)
PPL stock is another with a Moderate Buy analyst consensus rating, this one based on 5 Buys and 4 Holds. Shares are priced at $30 and the average price target of $37.31 suggests room for 24% growth to the upside in the coming year. (See PPL stock analysis at TipRanks)