There are only three weeks left in 2021, and the analysts like to start summing up the market situation when the calendar is about to turn. So it’s no surprise to find that Bank of America’s senior US equity strategist, Jill Carey Hall, is doing just that. Her take on the markets will be of interest to investors – especially for investors interested in dividend stocks.
To start with, Hall believes that the ongoing corona situation will be key to economic and market performance next year. Given current news – new variants Delta and Omicron, political fights over vax mandates – that’s an obvious take. Hall adds, however, that if the COVID situation improves instead of surging again, “we could see a continued recovery in… services spending.”
The real reason Hall’s analysis may turn investors toward dividend is her longer-term forecast for the S&P: “Our view going into 2022 is that… the S&P 500 index [is] where we’re actually looking for flattish returns… Our frameworks today are spitting out that based on today’s valuations, you could actually see slightly negative price returns on an annualized basis over the next decade for the S&P 500.”
If markets decline, that’s a natural sign to move toward dividend stocks. These are the classic defensive plays, giving investors a dual path toward returns, from both the share appreciation and the dividend payments.
Wall Street’s analysts have been doing some of the footwork for us, pinpointing dividend-paying stocks that have kept up high yields, at least 7% to be exact. Opening up the TipRanks database, we examine the details behind two such stocks to find out what else makes them compelling buys.
Enterprise Products Partners (EPD)
First on the list is Enterprise Products Partners, a midstream company in the energy sector with a wide network of assets for collecting, moving, storing, processing, and exporting crude oil, refined petroleum products, natural gas, and natural gas liquids. This network is centered on the Gulf Coast in Texas and Louisiana, and includes some 50,000 worth of pipelines stretching out to the Rocky and Appalachian mountain regions, the Southeast, the Great Lakes, and the upper Plains. The company also has storage facilities for more than 14 billion cubic feet of gas and 160 million barrels of oil.
Midstream is both a necessary and a lucrative sector of the larger energy industry, and EPD’s recent 3Q21 revenue and earnings reflected that. At the top line, the revenue of $10.8 billion was up 56% year-over-year. Earnings, at 53 cents per share, were up 10.4% yoy, and beat the forecast by the same margin. The company reported free cash flow in the quarter of $1.8 billion, a significant gain from the FCF of $430 million in the year-ago quarter.
That hefty free cash flow supported a strong dividend. The company made a payment of 45 cents per common share, $1.80 annualized, in November, the fourth payment in a row at that level. The annualized rate gives a yield of 8.5%, compared to the ~2% yield found among the S&P listed companies. Just as important, for hardcore dividend investors, Enterprise has a 13-year history of keeping the payment reliable.
In her coverage of EPD for TD Securities, analyst Linda Ezergailis notes, “EPD’s well-positioned integrated system of assets, connectivity, scale, incumbency, and expertise. Our thesis assumes some valuation expansion as investors recognize the long-term growth possibilities that EPD has associated with its hydrocarbon-related exports to growing markets, and transition to a lower carbon energy future and value-chain extension to midstream petrochemicals opportunities.”
These comments back up her Buy rating on EPD, and her one-year price target stands at $29, suggesting a 37.5% upside. Based on the current dividend yield and the expected price appreciation, the stock has ~46% potential total return profile. (To watch Ezergailis’ track record, click here)
Overall, EPD shares have a Strong Buy rating from the analyst consensus, based on 6 recent reviews that include 5 Buys and 1 Hold. The shares are selling for $21.08 and their $28 average price target implies room or a 12-month upside of ~33%. (See EPD stock analysis on TipRanks)
Ternium SA (TX)
The second stock we’ll look at is Ternium SA, a leader in heavy industry and one of Latin America’s largest steel producers. Ternium is involved in all aspects of the steel industry, from its two iron ore mining operations in Mexico to its 18 steel production plants throughout the Latin American region. The company produces up to 13.8 million tons of hot rolled steel per year, for a range of industries including automotive manufacturing, home appliances, construction, and HVAC. Ternium boasts a global product distribution network for customers worldwide.
The company’s stock has registered gains of 57% this year, solidly outperforming the broader markets, while both revenues and earnings have been growing, too.
At the top line, the company’s most recent quarter report (3Q21) showed $4.57 billion. This was up 116% year-over-year, and 17% from Q2. On EPS, the company showed $6.12 per share, up 17% from Q2, and a huge turnaround from the 25-cent per share loss in 3Q20. On the balance sheet, Ternium reported a sound position: free cash flow of $475.5 million, and a net cash position that had improved from $200 million in debt on June 30 to $300 million in cash as of September 30.
This situation left the company with the confidence to pay out a dividend of 80 cents per American Depositary Share, or $157 million in total payments to shareholders. At the current rate, the company’s dividend is yielding ~7%. Ternium has a dividend payment history going back to 2017, and a policy of adjusting payments to keep them in line with distributable cash.
HSBC analyst Jonathan Brandt takes a detailed look at this company, and sees it in a strong position for the near future. He writes, “Ternium expects to maintain the strong performance in 4Q21, though with a slight sequential decrease in fourth quarter EBITDA (and margins) on relatively stable shipments… Given the strong free cash flow, positive sector outlook and low leverage, we expect the company will continue to pay a dividend in excess of its c30% payout policy in the short term…. Ternium is one of our preferred names in our LatAm steel coverage universe given its attractive valuation, low leverage, and high profitability.”
To this end, Brandt gives TX shares a Buy rating, along with a price target of $56, indicating room for ~31% share appreciation in the year ahead. (To watch Brandt’s track record, click here)
Overall, TX has 5 recent reviews, and they break down to 3 Buys and 2 Holds, for a Moderate Buy analyst consensus rating. At $54.50, the average price target implies a one-year upside of 26% from the current share price of $43.25. (See TX stock analysis on TipRanks)
To find good ideas for 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.