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RBC Says These 2 Dividend Stocks Have Strong Growth Potential

The second half of the year is upon us, and that has the forecasters looking for clues to the near-term economic future. The speculations run nearly the full gamut of possibilities, from a full-blown recession to a mild downturn to a steady-state to a rip-roaring recovery.

Lori Calvasina, US equity strategy head for RBC Capital, is leaning toward that latter outlook. She believes that the US will dodge the recession bullet, and that the S&P 500 will end the year at or near 4,700 (a gain of 23% from current levels). Yet, there is still a chance that conditions could worsen. Calvasina puts the odds of avoiding a recession at 60%.

Is Calvasina correct in her assessment? If so, investors should start to see the benefits by the end of the year. For now, however, RBC’s stock analysts have picked out two equities that can shore up a defensive portfolio position – without giving up the growth potential. These are reliable dividend payers that combine above-average yields with double-digit upside potential. We ran the two through TipRanks database to see what other Wall Street’s analysts have to say about them.

Pactiv Evergreen (PTVE)

First up is Pactiv Evergreen, a manufacturing company in the packaging sector. Specifically, Pactiv focuses on development and production of food and beverage packing materials for use in food services – everything from retail groceries and convenience stores to food processing and take away containers. Everyone has to eat, and we need to carry our food in something; Pactiv leveraged that simple fact to more than $5.4 billion in total revenues last year.

The company appears to be on track for continued revenue strength in 2022. In May, the company released its numbers for 1Q22, and management described the top line as ‘a solid start’ for the year. Q1 revenues came to $1.495 billion, a 28% gain compared to 1Q21. The revenue gains were driven by a combination of 26% growth in price and mix and 9% growth from acquisitions. In addition to sound revenues, Pactiv reported strong earnings in the first quarter, with net income of $43 million representing a turnaround from the $11 million net loss in the year-ago quarter.

All in all, this company has shown an attractive combination of rising sales and confident management – which led it to initiate a dividend payment at the beginning of last year. The first common share dividend was paid out at 10 cents, in February 2021; Pactiv has consistently paid out the dividend every quarter since, with the most recent payment going out this past June 15. The dividend, which annualizes to 40 cents per common share, yields an above-average 4.2%.

RBC’s Arun Viswanathan believes that Pactiv is a go-to story for investors, and outlines why: “PTVE is executing well, and we see: 1) strong price/ cost realization; 2) recovery in Foodservice and Food Merchandising; 3) deleveraging opportunities.”

Getting into the details, Viswanathan adds, “We may be early in the PTVE turnaround story and there is still uncertainty on inflation, but we believe there is some conservatism to PTVE’s reaffirmed EBITDA guidance given the strong 1Q, improving labor challenges, and better working capital usage. We also find PTVE’s ESG profile attractive (increased fiber-based packaging, 65% recyclable and recycled content moving to 100% by 2030) and like the company-specific restructuring opportunities in Beverage Merchandising.”

The RBC analyst doesn’t just outline a clear path forward for PTVE shares, he also backs it with an Outperform (i.e. Buy) rating and a price target of $13, which suggests a 35% one-year upside potential. (To watch Viswanathan’s track record, click here)

All in all, the Street’s analysts are split down the middle on this one, although the bulls have the edge; based on 3 Buys and Holds, each, the stock qualifies with a Moderate Buy consensus rating. On where the share price is heading, the outlook is more conclusive; the forecast calls for 12-month gains of ~33%, given the average target stands at $12.83. (See PTVE stock forecast on TipRanks)

NextEra Energy (NEP)

Now let’s change gears and move over to the energy sector, where NextEra holds a leading position among the world’s electric utility companies. The company is based in Juno Beach, Florida and boasts some 45,500 megawatts of power generating capacity. NextEra also has approximately $50 billion in new infrastructure projects planned for the US energy sector through the end of this year. The company has committed to reach net-zero carbon emissions by 2045, and is a leader in renewable energy.

But getting to the most important issues for investors, NextEra reported $281 million in revenues in the first quarter of this year. This was up 14% year-over-year. While revenues were up, net income fell from $202 million in the year-ago quarter to $144 million in the recent report. The $1.72 EPS was also down y/y, from $2.66.

Even though earnings were down, the company still reported a solid cash holding, with cash assets of $168 million representing 48% growth from the year-ago quarter. This figure is important, as it is the cash available to the company for distribution to shareholders.

That distribution is typically given in the form of common share cash dividends, and NextEra has a long history of maintaining a reliable, and steadily growing, payment. The company started paying out dividends at the end of 2014, and has kept up the quarterly payment ever since. The current declaration, for 73.3 cents per common share, is up 15% year-over-year. At an annualized rate of $2.93, the dividend yields 4%. In a move that may help the company to raise the dividend later, NextEra recently announced changes to its incentive distribution rights (IDR) fees, including a cap at $157 million.

That last point is a key one for RBC’s 5-star analyst Shelby Tucker, who writes: “We believe the IDR announcement will help NEP gain financial flexibility through lower equity needs and give the company more ammunition to execute on dropdowns or acquisitions. We believe the vast array of growth avenues… gives NEP the ability to execute on its financial targets… We previously noted that we believed the current IDR structure limited upside for the stock. With the fee flattened, we see the potential for less equity needs and more capital available to return to unit holders.”

Tucker was impressed enough to set an Outperform (i.e. Buy) rating on NextEra shares, and his $89 price target indicates confidence in a 21% one-year upside potential. (To watch Tucker’s track record, click here)

Overall, NEP has attracted a total of 12 analyst reviews recently, including 7 Buys, 3 Holds and 2 Sells for a Moderate Buy consensus rating from the Street. NEP shares are priced at $73.31 and have an average price target of $82.64, giving the stock ~13% upside on the one-year time frame. (See NEP stock forecast 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.