Well, the numbers came in this week, and the Fed did what we had all been expecting, while inflation beat the forecasts. That is, inflation slowed its rate of increase, from 7.7% in October to 7.1% in November, and the Federal Reserve responded by raising interest rates 50 basis points. And the next day, markets responded with a nosedive.
The across-the-board drop came after investors had a chance to digest the numbers and the Fed’s recent comments. The Fed has signaled that while it will boost interest at a slower pace, to match the slower inflation, it will still boost interest – to 5.1% by the end of 2023. That increases the risk of tipping the economy into a recession, a risk that the November retail sales report, showing a slowdown in consumer activity, only highlighted.
Looking at the market situation, Morgan Stanley chief US equity strategist Mike Wilson writes, “CPI’s peaked. Inflation’s peak. We’re pretty confident it’s going to come down pretty hard next year. And the real question is, ‘What does that mean about growth? The growth slowdown is not yet priced. And that’s what’s going to determine the winners — it’s a stock-picking game.”
Playing Wilson’s stock-picking game, we’ve used the TipRanks database to find two defensive stocks that are beating the market trends. These are high-yield dividend payers, yielding 9% or better, that are also showing strong share appreciation this year. They’re beating the market losses and offering two routes for investors to realize real returns. And even better, they both have a ‘Strong Buy’ consensus rating from the analyst community. Let’s take a closer look.
Crestwood Equity Partners (CEQP)
We’ll start with Crestwood Equity, an energy company heavily involved in the midstream segment of the industry. Crestwood has a wide-ranging network of assets, in the Marcellus shale of New York-Pennsylvania and into the Great Lakes region, in the Powder River and Williston basins of Wyoming, Montana, and North Dakota, in the Delaware basin of Texas-New Mexico, and in several states of the Southeast. The company’s assets work in collection, transport, and storage of hydrocarbons, mainly crude oil, natural gas, and natural gas liquids.
Crestwood reported mixed results in its recent 3Q22 report. The company showed a top line of $1.57 billion, up 27% year-over-year, while at the bottom line the diluted EPS loss of 64 cents was an improvement over the $1.03 loss reported in the year-ago quarter – but missed the forecast of a 19-cent gain.
Overall, Crestwood’s stock has performed well this year. The company’s shares are up more than 9% year-to-date, far outpacing the 18% loss in the S&P 500 over the same period.
Looking at the dividend, we find that Crestwood is in a solid position that will benefit shareholders. The company reported a 53% year-over-year gain in distributable cash flow (DCF) for Q3, up from $85.8 million to $131 million. The DCF supported the common stock dividend, which was declared in November for $0.655 per share, up 5% y/y. At the annualized rate of $2.62, the dividend yields 9.35%, far above the average among S&P-listed firms and more than 2 points above the current rate of inflation.
In his coverage of this energy sector dividend champ, Truist’s 5-star analyst Neal Dingmann notes the company’s potential for increased cash flow – and consequent increased capital returns – going forward as an incentive to buy.
“Crestwood’s focus the next few quarters will be to continue to integrate and optimize its recent attractive assets, which we forecast will deliver notable earnings and cash flow upside next year. We believe the company now has a strategic portfolio in leading US plays with diversified G&P infrastructure assets along with solid accompanying storage and logistics,” Dingmann opined.
“We forecast CEQP to generate well over $600mm of 2023 distributable cash flow versus just over $500mm this year. We estimate the company will hit its 3.5x long term leverage target by mid-2023 potentially allowing for more shareholder return thereafter,” the analyst added.
Dingmann’s comments support his Buy rating on the stock, while his $35 price target implies a 25% upside potential for the coming year. Based on the current dividend yield and the expected price appreciation, the stock has ~34% potential total return profile. (To watch Dingmann’s track record, click here)
Dingmann’s take is not an unusual one on Wall Street; based on 4 additional Buys, the stock boasts a Strong Buy consensus rating. Moreover, the $34.40 average target implies the shares will be changing hands for ~23% premium a year from now. (See CEQP stock forecast on TipRanks)
Alliance Resource Partners (ARLP)
We’ll stick with the energy sector, but take a look at coal. Despite the social and political push toward ‘green’ energy, most electricity in the US, and indeed, in the world, is still generated from coal-fired power plants, and coal is also essential in the production of steel from iron. In short, this is a fuel that’s not going away any time soon – and Alliance Resource Partners, which operates in Appalachia and the Illinois basin, is the second largest coal producer in the eastern US, operating as a major supplier to both utility and industrial customers.
Alliance has had a profitable year, and seen its revenues grow to record levels. The top line in 3Q22 came to $628.4 million, up more than 51% year-over-year. The increase in revenue was driven by a 40.5% increase in coal prices, which pushed coal sales revenues up y/y from $188.3 million to $550.6 million. Alliance also earns royalties on oil and gas holdings, and reported $35.5 million in revenue from that source – up an impressive 75.6% y/y.
At the bottom line, Alliance also saw strong gains. Net income rose from $57.55 million in 3Q21 to $164.61 million in 3Q22; looking at diluted EPS, the bottom line grew from 44 cents per share to $1.25, a jump of 184%.
The company’s stock has done well on the strength of Alliance’s top and bottom lines, rising by almost 80% in 2022, even in the unsettled market conditions we’ve been facing.
Solid revenues and earnings supported Alliance’s dividend, which was increased in the last declaration by 25%, from 40 cents per common share to 50 cents. The new, higher, dividend was paid out on November 14. At the annualized rate of $2 per common share, the dividend gives a yield of 9.17%. This yield is well above the average, and well above inflation. Alliance Resource has kept up a reliable dividend payment since 2001.
Nathan Martin, 5-star analyst with Benchmark, has looked under the hood at Alliance and sees reasons for optimism on the company’s ability to maintain its high-yield dividend return going forward.
“Full-year 2023 is expected to be another record year with a heavily contracted book, additional production of up to 2M tons, and average coal pricing still anticipated to be ~$10/ton higher y/y…. Given this cash flow visibility, the board approved a 25% q/q increase in ARLP’s quarterly distribution to $0.50/unit, exceeding the prior targeted 10%-15% increase. The company is also investing in growth, both organically with additional reserves at River View and Tunnel Ridge to help maintain ARLP’s low-cost position,” Martin explained.
Heading into next year, Martin rates ARLP shares a Buy, along with a $28 price target, indicating his confidence in a gain of 28.5% on the one-year horizon. (To watch Martin’s track record, click here)
While this coal producer hasn’t picked up a lot of analyst attention, all 3 of the recent analyst reviews on the stock are positive, making the Strong Buy consensus rating unanimous. The shares are priced at $21.79 and their $28.67 average target implies ~32% upside potential in the next 12 months. (See ARLP stock forecast on TipRanks)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a 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.
