Investors with a sense of history are a bit nervous – we’re in the fourth quarter, and Q4 last year saw a 9% drop in S&P 500 index. There is growing evidence of a general global economic slowdown, the UK is on a path out of the EU, but no one knows exactly how, and December’s scheduled Parliamentary elections are not likely bring any clarity. And under everything, the US-China trade tensions continue to simmer. So, the only thing certain these days is uncertainty.
So, what can investors do, to protect their portfolios and income streams? Treasury bonds, the traditional safe-haven investment, are notoriously low-yielding. One solution is dividend stocks, but stocks come with risks, too. Still, plenty of companies are committed to returning income to shareholders, and some of the more established of them will maintain a dividend payout even if earnings run at a loss – as an incentive to investors. We’ve used TipRanks’ Stock Screener tool to find three Buy-rated stocks that meet this profile – a long-term commitment to paying the shareholders, and a high-yield dividend to bake it up.
Artisan Partners Asset Management (APAM)
Artisan is an investment management firm with a 25-year history and over $114.5 billion in total assets under management. The company has offices across the US, as well as in London, Dublin, Singapore, and Sydney.
APAM has seen success in the past year, and the stock is up 38% year-to-date. This growth rate heavily outperforms the broader markets – the S&P 500 has gained 23% this year, and the Dow Jones 27%. Despite the gains, APAM’s growth has been choppy in the last 10 months, and the stock has shown high volatility.
Volatility may worry investors, but Artisan has kept up investor interest in the stock with an 8.82% dividend yield. The average yield for S&P listed companies is about 2%, and APAM’s yield is more than quadruple that value. The annualized payout of $2.60 is based on a quarterly payment of 65 cents. The company also pays out a ‘special’ dividend annually; the last such payment, back in February, was $1.03 per share. The payment ratio, a comparison of the dividend payment to the quarterly earnings, stands at 100%, indicating that APAM returns all of its earnings to shareholders. While this would not normally be sustainable, management has a plan to adjust this – more on that below.
Normally analysts reiterate stock ratings- so when a stock is upgraded, it’s worth taking note. Last week, Citi analyst William Katz upgraded APAM to Buy (from Neutral) and raised his price target to $33 (from $25), which implies about 12% upside from current levels. (To watch Katz’s track record, click here)
Katz noted, “Following an extensive retooling of our model to bridge to product level outlook vs. top down team view, we now see the potential for NNA to inflect positively into ’21. While potentially not much of a swing factor vs. current LSD annualized loss rate, it should be enough to drive modest multiple expansion, against higher EPS outlook. At the margin, we are increasingly encouraged by lead indicators in APAM’s Generation III new business segment, coming at a time when more pronounced legacy DC exposure works lower, driving elevated redemption more recently.”
RBC Capital analyst Kenneth Lee also likes what he sees in APAM. He writes, “We think Artisan Partners’ differentiated investment approach stands apart from most other asset managers…” and goes on to point out important factors in the company’s future growth potential: “Continued growth of non-US domiciled client assets, through the intermediary channel, could help the company’s organic growth rates.” He notes the dividend, too, and of the high payment ratio points out: “Transition to a variable quarterly dividend should enable cash dividends to better match quarterly cash generation.” Lee’s $32 price target suggests an 8% upside for APAM.
All in all, this stock has just two “buy” ratings in recent weeks. Shares sell for $29.41, so the $32.50 average price target indicates room for a 10% upside. (See Artisan stock analysis on TipRanks)
AMC Entertainment (AMC)
Based in Kansas, the world’s largest movie theater company puts up some impressive numbers: 8,200 screens in 661 theaters in the US, and a further 2,200 screens in 244 theaters in Europe. Movies are big business, of course, and not just for Hollywood; AMC posted $5.5 billion in revenue in 2018, netting $110 million in income.
AMC isn’t just relying on traditional box office ticket sales, however. The company is pushing several new ideas, including screening NFL games at selected theaters, and even offering on-demand movies for home viewing. In the last four years, AMC has spent over $3.4 billion acquiring smaller theater companies in the US and Europe. In addition to expansion, the company is undergoing a management transition, as long-time CFO Craig Ramsey will be retiring in February. AMC announced in October that Sean Goodman, of Asbury Automotive Group, will take up the position.
On the negative side, AMC’s expansion activity has cut deeply into the company’s net cash position. In 1H19, AMC reported a 48% drop in net cash, to $154 million, while the free cash flow dropped from 1H18’s $187.3 million to just $50.3 million. The decline in cash flow explains AMC’s reluctance to raise the dividend, which has paid out 20 cents per share since 2014. The company has instead manipulated the yield to keep the payment stable.
That yield manipulation, after share price declines, leaves AMC with a dividend yielding 8.62%. The stock has been trading in a $3 range – between $8.70 and $11.90 – since July, so assuming the share price remains stable, AMC offers a high return. The 8.62% yield is more than 4x the average dividend yield on the S&P 500.
Assessing the full picture, Wedbush analyst Michael Pachter sees reason for optimism in AMC. He writes, “AMC should outperform the industry… as it expands its upgrades throughout Europe and expands its footprint in the Middle East… AMC has committed to using its incremental free cash flow toward paying down its high debt balance. We view the CFO transition to Sean Goodman as an overall positive, given his extensive international experience… We see little downside to AMC’s new on-demand offering, given its reach to loyal customers.” Pachter puts a $15 price target on AMC, suggesting an impressive 61% upside. (To watch Pachter’s track record, click here)
Other analysts share a similar enthusiasm with Pachter when it comes to AMC. TipRanks data shows out of 9 analysts, 7 are bullish and 2 are sidelined. With a consensus price target of $15.11, the potential upside is about 63%. (See AMC stock analysis on TipRanks)
Targa Resources (TRGP)
The last few years have seen the US move into the number one slot among energy producers worldwide. The country produces nearly 12.5 million barrels per day of oil, and is on track to become a net energy exporter in 2022. The increase in oil production has restarted the Texas oil industry, and created a boom in North Dakota’s Bakken formation.
All of this oil activity has created a huge opening for midstream energy companies – the companies that provide pipeline, storage, and transport facilities for the oil and gas drillers. Targa, based in Houston, is a major player in the Texas-New Mexico-Oklahoma-Louisiana region, as well as in North Dakota. Targa recently sold its West Texas oil gathering network to Oryx Midstream in a $135 million deal. The move allows Targa to focus on its 28,500 miles of natural gas pipelines, which moved 3.9 trillion cubic feet of gas in 2018, along with 415,000 barrels of natural gas liquids.
Energy is a high-overhead sector, and Targa’s sale of Permian oil gathering assets was a move to control costs. It’s an important move, as the company missed revenues and earnings in the recent Q3 report. Quarterly revenue came to $1.9 billion, against a forecast of $2.17 billion, and the company’s forward guidance indicates continued capital expenditure in 2020 of $1.2 to $1.3 billion. CEO Joe Bob Perkins put a good spin on it, saying, “We are beginning to demonstrate the strategic benefits of our premier integrated midstream position and our cash flow profile is expected to strengthen meaningfully, positioning Targa well over the long-term.”
As part of the company’s strong positioning, Targa pays out a quarterly dividend of 91 cents. The company has kept that dividend stable since 2015, like AMC manipulating the yield to keep the payout steady. TRGP’s current dividend yield is an impressive 9.38%.
4-star analyst Jeremy Tonet, of JPMorgan, looks at Targa and sees plenty of potential for the future. The analyst writes: “…with $4bn of growth projects entering service since the beginning of 2019, and capex moderating going forward, we see TRGP at an important growth inflection point where the company has evolved into full value chain integration and can achieve improved financial flexibility.” Tonet’s $49 price target implies a healthy 26% upside to the stock. (To watch Tonet’s track record, click here)
TRGP’s Moderate Buy consensus rating reflects the company’s earnings difficulties in recent months, and is based on 6 “buy” and 5 “hold” ratings. The stock’s $44.90 average price target suggests room for a 15% upside form the share price of $38.81. (See Targa stock analysis on TipRanks)