Canadian investment bank RBC has been taking the temperature of institutional investors, and the results are fascinating – and, perhaps, illuminating. The analysts start by pointing out the obvious, “We view capitulation as a necessary, though not sufficient, condition for stock market bottoms in major drawdowns,” but go on to note that a “surprisingly high level of bullishness supports our own view that we haven’t yet seen investor capitulation.”
Dipping into some numbers, RBC surveyed 185 investors in the last week of March, and nearly two-thirds of them believed that the S&P 500 would hit bottom at a level above 2,100. On March 23, just two days before the survey began, the S&P hit a low level 2,237. This is in line with the respondents’ view, and lends support to investors’ bullish mood. If the market bottom has already been hit, then the worst may be behind us, and the V-shaped recovery (steep down and steep up) could be in the offing.
The RBC team urges market watchers to track gross domestic product in the US, seeing a 20% drop as the key datum. According to RBC, “If evidence emerges that the impact will be less severe, it can help the stock market stabilize and move higher.”
So, investors are looking to buy – and that sentiment has the potential to turn a mild stock rally into something larger. In a climate of heightened risk, investors should remember an old Wall Street saw: Bulls and bears make money, while the pigs get slaughtered. Money can be made whether markets rise or fall – the key is not to get greedy.
Today’s market climate of heightened risk, should naturally draw investors toward dividend stocks. A modest rally in a bear market is a good time to buy in – the bear has pushed prices down, while the rally creates a positive mindset for buying. And dividend stocks offer a steady income stream, should the share price fail to appreciate. Look for stocks with reliable dividend histories and higher than average yields; the rest should fall into place naturally.
And now we get to the real meat of RBC’s recent market report. The bank’s analysts have made several concrete recommendations to put the macro report into practical operation. These are stocks with dividend yields over 9%, backing up plenty of share price upside. Let’s open the TipRanks database and look at the details.
Schlumberger Limited (SLB)
We’ll start in the oil patch, where so much economic energy has its beginnings. Oil field services is a vital niche, as the drilling companies cannot get the crude out of the ground without the support offered by companies like Schlumberger. Its services and products – in the drilling, well completion, and oil production segments of the industry – brought in $33 billion in revenue for 2019.
Schlumberger’s Q4 performance was slightly disappointing. EPS, at 39 cents, was down 9% sequentially – but up 8% year-over-year. The quarter saw $8.2 billion in revenue, yielding $1.5 billion in free cash flow. And the Board once again approved the 50-cent quarterly dividend.
That dividend has been held steady at 50 cents for the past five years, and the company has a 14-year history of reliably maintaining the payments. The annualized payout, $2, gives an impressive yield of 14%, 7x the average yield among S&P listed companies. With the Fed’s key rate cut to near zero, and Treasury bonds yielding well below 1%, this makes SLB a highly attractive move for return-minded investors.
RBC’s Kurt Hallead sums up the case for SLB in a succinct statement: “We would expect some lingering effects during 2020 as governments go into lock down mode… Internationally, the company expects activity to decline with Mid East and Russia relatively resilient… Our price target is supported by the fundamental outlook for its international business and its strong free cash flow generation.”
Hallead gives the shares a Buy rating, with a $27 price target that implies a strong upside potential of 89%. (To watch Hallead’s track record, click here)
Schlumberger keeps a Moderate Buy rating from the analyst consensus, based on 8 Buys and 6 Holds. Shares are selling for $14.29, and the average price target of $28.63 suggests room for a potential upside of 100% in the coming 12 months. (See Schlumberger stock analysis on TipRanks) Halliburton Company (HAL)
Up next is another major name in oilfield services, Halliburton. This giant corporation is one of the largest in its niche, operating in more than 70 countries. Halliburton’s operations are carried out through hundreds of subsidiaries, and overseen by two headquarters, one in Houston and one in Dubai. The company is involved in all aspects of the oilfield industry: drilling, well completion, pipeline services, even construction of refineries and chemical plants. Halliburton brings in over $22 billion in annual revenues.
Halliburton reported 32 cents EPS in Q4, down 6% sequentially but more than enough to support the 18-cent quarterly dividend. At 72 cents annualized, the dividend gives a yield of 9.5%; combined with its 14-year history, this makes HAL shares one of the market’s dividend champs.
Looking ahead, Wall Street expects HAL to report 25 cents EPS in Q1. While down sequentially, this will be an 8.6% increase year-over-year. And, it will keep the company on track for maintaining its generous dividend policy.
RBC’s review of this stock was, like SLB’s, written by Kurt Hallead. He said of Halliburton, “Company leadership is bracing for a sharp downturn with no expectation of a meaningful recovery... Management’s primary focus is to generate sufficient FCF to pay down the $685 million of debt coming due in 2021… The lower oil price environment is likely to lead to delays or cancellations of existing tenders and new projects.” Hallead also notes the company’s “disciplined approach to maximizing profitability, free cash flow and shareholder returns.”
In line with his comments, Hallead sets a $12 price target on HAL shares, indicating a 58% upside for the coming year and backing his Buy rating.
This stock is another with a Moderate Buy analyst consensus rating, but the split – 4 Buys and 11 Holds – shows that there is some reason for caution here. Shares are selling for just $7.61, and the average price target of $12.29 implies an upside potential of 62%. (See Halliburton stock analysis on TipRanks)Phillips 66 Partners (PSXP)
Last on our list is a partnership company, affiliated with the Phillips 66 oil giant. PSXP owns and operates crude oil and natural gas pipelines, terminals, and refining and processing plants. The company boasted record Q4 earnings of $255 million in its last quarterly report.
Not only was its fourth quarter a record for earnings, but its full year 2019 report also showed a company record: $923 million, or $1.06 per share. The strong earnings results prompted management to increase the dividend to 87.5 cents quarterly; the new payment went out in mid-February, to shareholders of record as of January 31.
PSXP has been raising its dividend steadily, every quarter for the past three years. It’s part of the company’s pattern of raising the payout, which has pushed the payout ratio up to 86%. The $3.50 annualized payment makes the yield 9.1%, a strong boon for investors, especially given the growth history.
RBC likes this stock, as shown by 5-star analyst Elvira Scotto’s comments: “Our upside scenario reflects a scenario in which PSXP accelerates organic growth projects at attractive multiples, or completes an accretive dropdown acquisition resulting in additional cash flow growth.”
Scotto rates the stock a Buy, and her $43 price target implies a modest upside potential of 13%. (To watch Scotto’s track record, click here)
PSXP shares have 5 Buys and 3 Holds, making the analyst consensus rating here a Moderate Buy. The stock is the most expensive on this list, at $38.10 per share, and the $46.86 average price target is indicative of a 23% upside potential for the coming months. (See Phillips 66 Partners stock analysis on TipRanks)