2 large dividend stocks with a yield of at least 7%; Oppenheimer says “Buy”
Market signals are starting to change, after a long year of steady uptrends in the S&P 500 and NASDAQ indices. The Federal Reserve has made it clear that it will start cutting its bond purchases, possibly next month, and the low-to-zero interest rate policy could end early next year. GDP growth in the second quarter was 6.7%, but the forecast for 1H22 calls for a slowdown in the range of 3% to 4%. And to top it off, inflation is on the rise, with the Consumer Price Index gaining 4.3% yoy in August of this year, while the September jobs report was disappointing at best with less. 200,000 new positions.
It’s a market environment made for defensive stocks, according to Mike Wilson, chief investment officer at Morgan Stanley, who noted: “The quality leadership of large caps since March signals what we believe is about to happen. : a deceleration in growth and tighter financial conditions. “
Morgan Stanley isn’t the only major investment firm to take this stance. Weighing in Oppenheimer, John Stoltzfus, chief investment strategist, notes that dividend-paying stocks “are worth considering, especially for investors seeking current income with the potential for capital gains.”
Following Stoltzfus’ lead, Oppenheimer’s stock analysts selected potential dividend winners, stocks that are “good” to bolster a defensive portfolio. They are big dividend payers, with a track record of long-term dividend reliability – and current yields of 7% or better. Let’s take a closer look.
Barings BDC (BBDC)
We’ll start with Barings BDC, a business development company that is part of Barings LLC. The parent company is a major asset manager, with more than $ 382 billion in assets under management across the business; Barings BDC manages debt investments in mid-market companies. Barings BDC offers these businesses a combination of asset management and access to affordable capital.
BDC saw its revenue hit hard at the height of the corona pandemic, but revenue turned positive again in 4Q20 and has remained since. In the most recently released quarter, 2Q21, revenue was $ 33.7 million, a strong rebound from the loss of revenue of $ 458,000 reported in the prior year quarter. The company’s EPS fell year over year, from $ 1.14 to 45 cents.
On the dividend side, however, Barings BDC has delivered consistent returns regardless of general economic conditions. The company’s most recent payment was made in September, at 21 cents per common share. This is up from 20 cents in the previous quarter and 16 cents in the previous year quarter. In fact, Barings BDC has been steadily increasing its dividend for the past three years. At the current rate, the payout is annualized at 84 cents per common share and returns a solid 7.58%.
In BBDC’s coverage for Oppenheimer, analyst Mitchel Penn begins his coverage with a bullish stance on the company’s ability to generate a return for shareholders: at a full-year ROE of 7.4%. We estimate that Barings will likely earn $ 0.93 / share in 2022, which equates to an ROE of 8.2%. We believe that the additional income from cross-platform investments and cheaper borrowing will likely allow Barings to achieve an ROE of 9%.
Consistent with these comments, Penn rates the stock as an outperformance (i.e. a buy), along with a price target of $ 12. (See the analysis of BBDC shares)
Golub Capital BDC (GBDC)
The second stock we’ll look at, Golub Capital, is another BDC that caters to a mid-market clientele. Golub invests between $ 10 million and $ 75 million in its corporate clients, and by the end of 1H21, it had invested in the debt and equity of 275 companies. This portfolio totaled approximately $ 40 billion in capital under management and consisted primarily – approximately 96% – of senior loans. The top two business segments represented in the portfolio were software, at 26%, and healthcare providers and services, at 10%.
As for the dividend, we see that Golub has kept the payout stable at 29 cents per common share for the past 6 quarters. The payment was adjusted downward in early 2020, under pressure from the corona crisis, but Golub’s management has kept it stable since then. The company’s ability to maintain positive earnings and income – albeit below expectations – in the challenging investment environment of the pandemic year supported the stable dividend. At current levels, the dividend is annualized to $ 1.16 per common share and earns 7.2%.
Once again, Oppenheimer’s Mitchel Penn initiates hedging this dividend stock with an Outperform (i.e. buy) rating. Its target price is set at $ 16.
In his comments, Penn notes that GBDC is positioned for a strong return for its shareholders, based on a company with a strong cash position. He writes: “We forecast earnings per share of $ 1.89 and $ 1.20 for 2021 and 2022, respectively, which would equate to an ROE of 13.2% and 8.0%… GBDC’s liquidity would support the growth of our portfolio estimated at $ 500 million, with sufficient liquidity remaining. to finance its unfunded commitments, if necessary. (See the analysis of GBDC shares)
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Disclaimer: The opinions expressed in this article are solely those of the analysts presented. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.