The global economy has been emitting various signals recently. On the one hand, US inflation fell to 5% in her March, its lowest point since May 2021, prompting China to shift its strategy away from a strict zero-COVID policy. Additionally, global supply chains were able to respond to the impact of Russia’s invasion of Ukraine. On the other hand, interest rates remain high and there are fears of a possible recession. Moreover, the US banking sector is still in shock from the SVB collapse.
In a recent research note from British banking giant Barclays, Emmanuel Cau, head of European equity strategy, lays out the current outlook and explains why investors should approach equities cautiously.
“Equity flows look subdued relative to the resilient data, but we believe LO investors are likely to stay on the sidelines with earnings declines worrying heading into the second half. A record short position in SPX futures has investors hedging against the downside, although the final capitulation phase that typically accompanies recessions has not yet been seen and seasonality will soon turn negative. However, SX5E futures positions look somewhat bearish. Positioning may continue to provide cushion and still tip the pain trade upwards.”
A cautious approach naturally attracts investors. Dividend stock, classic defensive play. Dividends provide a steady passive income stream, offering investors some protection and usable cash against uncertain market conditions.
Barclays equity analysts have picked up on that lead and are particularly bullish on two dividend stocks. In fact, Barclays analysts aren’t the only ones praising these stocks.according to TipRanks platform – They are rated as strong buys by the rest of the street. Let’s take a closer look.
Sunoko LP (Sun)
The first stock on the shortlist is one of the instantly recognizable stocks in the fuels and energy industry. Sunoco is a major player in the U.S. wholesale automotive fuel market and maintains a diverse portfolio of fuel products, including both branded and unbranded gasoline, diesel, and jet fuel. Sunoco’s distribution network includes more than 10,000 of his locations in over 40 states. In addition to fuel, Sunoco also owns “value-added” retail operations such as convenience stores, gas stations and food and beverage services. Within its specialties, Sunoco also deals with gas station fuel dispenser equipment and fuel station commercial real estate.
Sunoco is also making moves towards green operations, and to that end, the company is working on transmix fuel collection, gasoline, diesel and jet fuel collection and blending in transmission pipelines. . The transmix fuel can then be reprocessed to reduce waste and environmental pollution.
Gasoline and fuel in general is a huge business, with Sunoco reporting $5.92 billion in revenue in its final quarterly report for Q4 2022. That’s a 19.5% year-over-year increase, and he beat estimates by $970 million. Although the top line was strong, the company’s bottom line in the fourth quarter was unimpressive. His GAAP EPS for the company was 42 cents, 35 cents below expectations.
But dividend investors will be more interested in Sunoco’s distributable cash flows. The metric took him to $153 million in the fourth quarter, up $10 million year over year. His DCF for the full year 2022 increased from $542 million to his $650 million. Based on a solid DCF, Sunoco increased its quarterly distribution by just 2% to 84.2 cents per share. The annualized dividend will be $3.368 per common share, rounded to $3.37, for a yield of 7.5%, or approximately four times the average dividend yield for S&P listed companies.
Theresa Chen, a Barclays analyst with a 5-star rating from TipRanks, has coverage for Sunoco and thinks the stock is an attractive defensive option.
“We expect SUN’s trading volumes to remain relatively stable over the long term, reflecting its diversified footprint and asset mix. We also believe there is long-term margin sustainability, given SUN’s proven ability to execute in many commodity pricing environments. In addition to being a relatively resilient and downstream-dependent business, we believe SUN will remain defensive from here on out,” Chen wrote.
According to Chen, SUN deserves an overweight (i.e., buy) rating and a price target of $51, suggesting it could rise 13% over the next 12 months. (To see Chen’s achievements, click here)
However, Mr. Chen is not the only bull. Sunoco’s recent 5 analyst review of his has a strong buy consensus rating, with 4 to 1 favoring buy over hold. At $44.97, the stock has an average target price of $51 and a potential gain of 13% next year. (look SUN stock price forecast)
Western Midstream Partner (Wes)
Next is Western Midstream, another energy company operating in the midstream sector. Midstream companies work in the area between the wellhead and retailers and customers, collecting, transporting, storing, and exporting crude oil, natural gas, and natural gas liquids. Western Midstream, as its name suggests, is focused on operations in the western United States, particularly in Texas and the Rocky Mountain region. The company’s network includes more than 15,000 miles of pipelines fed by 23 collection systems and 72 treatment and treatment facilities.
Western reported fourth-quarter 2022 revenue of $779.4 million, up 8.3% year-on-year but more than $21 million less than expected. However, GAAP EPS was 85 cents, 13 cents higher than expected.
Western is committed to returning capital to shareholders over the long term and is backed by strong cash flow. In the fourth quarter of 2022, the company had operating cash of $489.2 million and free cash flow of $365.6 million. The latter supported a capital return policy, and for the full year ending December 31, 2022, Western repurchased a total of $487.6 million worth of common stock.
In addition to the share repurchase, on April 20, the company announced a combined basic and increased dividend of 85.6 cents per common share. The base dividend of 50 cents is $2 per annum and yields a strong 7.3%. Add in the enhanced payout and the total dividend of 85.6 cents is 12.6% per annum. Full distribution is scheduled for May 15.
Covering this stock for Barclays is Marc Solecitto, another TipRanks five-star analyst. Solecitto was impressed with the company’s ability to generate free his cash his flow and return cash to shareholders.
“Our overweight rating assumes a WES FCF yield of approximately 15% in 2024, a strong balance sheet, and the partnership returning cash to shareholders in a meaningful way through both dividends and repurchases. In that regard, WES is singled out as a mid-tier company that returned the most cash to shareholders in 2022 (on a percentage basis) through a combination of an enhanced distribution framework and share buybacks. It is conservative compared to its MLP peers (trading at 2024e EV/EBITDA 8.0 on average),” said Solecitto.
In addition to its Overweight (i.e. Buy) rating, Solechit has a price target of $32 on WES shares, which suggests a ~18% upside. (To see Solecitto’s achievements, click here)
Overall, there are eight recent analyst reviews of Western’s stock, including seven buys to one hold with a strong buy consensus rating. With a current trading price of $27.21 and an average price of $32.50, WES boasts a potential profit of 19% over his one year period. (look WES stock price forecast)
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Disclaimer: The opinions expressed in this article are those of the featured analyst only. This content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.