Last late-week rally in the markets quickly faded and this week is ending with declines in the major stock indexes. It’s the classic patter on the dead cat bounce, a brief recovery that is followed by more losses, and it has investors worried that there is no bottom in sight.
Writing from the global markets strategy team, where he takes a broader look at the worldwide market situation, JPMorgan’s Marko Kolanovic lays out the headwinds running against US investors: “First and foremost, an unprecedented squeeze on household purchasing power looks likely to be extended. Business confidence has also deteriorated and an acceleration in hourly labor costs is compressing corporate profit margins. These challenges are further intensified as higher inflation generates more restrictive central bank policy.”
Against this backdrop, JPM’s stock analysts have picked out two strong defensive plays for investors to consider. These are high-yield dividend payers, with histories of reliable payouts and current dividend yields exceeding 8%. It also doesn’t hurt that both stocks offer investors double-digit upside potential. Using TipRanks database, we examined the details behind these two to find out what else makes them compelling.
Magellan Midstream Partners (MMP)
Starting in the energy sector, we’ll look at Magellan Midstream. This company works in North America’s hydrocarbon transport network, a wide network of assets for the movement of both crude oil and refined products. These asset include 12,000 miles of pipelines, in excess of 75 million barrels of oil and refined product storage capacity, and dozens of terminal facilities including two marine storage terminals for import/export. The company’s network runs across the whole of the Great Plains region, from Minnesota down to Texas, and spreads out to the Rocky Mountains, the Mississippi Valley, the Gulf Coast.
Over the past six months, while the S&P 500 has fallen by 21%, MMP shares, getting a boost from rising prices in the oil industry, outperformed by a wide margin and gained 7%.
At the same time, the company reported $674.7 million in revenues in the first quarter of this year, up 7% year-over-year. It was helped along by high demand, increased prices for crude oil and its refined products, and higher transport volumes through the network. Even though business and revenues were up, earnings were down. The 78-cent common share EPS was down 21% from the previous year.
Magellan has a long history with dividends, having kept up a reliable payment going back to 2001. In recent years, the company has been increasing the payments in small increments, and even at the height of the corona panic Magellan did not cut back on the dividend. The current payment is $1.0375 per common share, which annualizes to $4.15 and gives a robust yield of 8.6%.
JPMorgan analyst Jeremy Tonet reviewed this stock, and found it worth a closer inspection. He wrote of Magellan: “While inflation fears permeate the market, MMP stands well positioned to benefit from higher inflation. Already poised for a 6% tariff increase on July 1, MMP could see an even higher increase next year as YTD inflation tracks in the mid-teens… Overall, MMP’s best-in-class corporate governance, financial flexibility, and value-focused management team put the partnership on the short list of MLPs we would feel comfortable holding over the long term.”
To this end, Tonet rates MMP shares an Overweight (i.e. Buy), along with a $57 price target, showing his confidence in ~19% upside potential for the year ahead. Based on the current dividend yield and the expected price appreciation, the stock has ~28% potential total return profile. (To watch Tonet’s track record, click here)
Turning to the TipRanks data, we’ve found that Wall Street’s analysts hold a range of views on MMP. The stock has a Moderate Buy consensus rating, based on 7 recent analyst reviews, including 4 Buys, 2 Holds, and 1 Sell. Shares are currently priced at $47.76, and the $55.57 average price target implies a one-year upside of ~16%. (See MMP stock forecast on TipRanks)
OneMain Holdings (OMF)
For the second dividend stock, we’ll turn to the financial sector. OneMain is a consumer-oriented finance company, offering a range of services to sub-prime customers who would have difficulty qualifying for credit with larger, more traditional, banks. OneMain offers this customer base a combination of affordable loans, consumer finance and credit, and insurance products. The company screens its customer base carefully, and tailors its products to their needs, keeping the default rate below 10%.
For the past three quarters, OneMain has seen its revenues and earnings come to a steady-state, at a sustainable level. For 1Q22, the company reported interest income of $1.1 billion, and a net income of $301 million. EPS, at $2.35 per diluted share, was just above the analyst expectations. OneMain originated $3 billion in loans, up 30% year-over-year. Of that total, 52% was secured originations. The company has slowly been increasing the proportion of secured loans in its portfolio.
OneMain has a consistent history of keeping up the dividend and supporting share value through repurchases. In Q1, the company bought back a total of 2.3 million shares, spending $110 million to do so. The most recent dividend was declared at 95 cents per share and paid out in May. It was the second consecutive dividend payment at this level. With an annualized rate of $3.80 per common share, the company’s dividend yields just over 10%.
Richard Shane, one of JPM’s 5-star analysts, writes of this non-traditional finance company: “We expect OMF to have leading loan growth as economic activity rebounds for non-prime consumers. Credit normalization should be dampened by favorable employment opportunities in non-prime segment. OMF’s high risk-adjusted margins, short loan durations, and tightened underwriting should allow the company to continue to generate a sector-leading ROE. Its non-bank status allows capital flexibility that is unavailable to depository institutions.”
“OMF’s [10%] dividend yield, $1B share repurchase program through 2024, and potential for moderate multiple expansion creates a multi-faceted return story,” the analyst summed up.
Shane uses these comments to back up his Overweight (i.e. Buy) rating, while his $54 price target implies a potential upside of 45% for the next 12 months. (To watch Shane’s track record, click here)
That bullish view is no outlier. OMF shares have picked up 9 recent analyst reviews, and they are unanimous: this is a stock to Buy. That unanimity supports the Strong Buy consensus rating. OMF’s $64 average price target suggests a strong upside of 71% from the current trading price of $37.38. (See OMF 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.
