What’s been happening in the markets lately? Since the beginning of this year, we have seen a sustained bearish trend and now a cycle of high volatility. Investors can be forgiven for feeling some confusion or even whiplash as they try to follow the rapid ups and downs of recent weeks.
However, one important fact stands out. Over the past three months, since mid-June, we’ve seen ups and downs, but the markets haven’t seriously challenged that mid-June low. Tom Lee looks at the situation of research agency Fundstrat and makes some extrapolations of that observation.
First, Lee points out that about 73% of S&P-listed stocks are in a true bear market, having fallen more than 20% since their peak. Historically, he notes that such a high percentage is a sign that the market has bottomed out — and further notes that S&P bottoms typically come shortly after a peak in inflation.
Which brings us to Lee’s second point: annual inflation was 9.1% in June and in the two readings published since then, it has fallen 0.8 points to 8.3%.
Lee advises investors to ‘buy the dip’, saying, ‘Even for those in the ‘inflationista’ camp or even the ‘we’re in a prolonged bear camp’, the fact is that as headline CPI has peaked, June 2022’s lowest share prices should be sustainable.”
Some Wall Street analysts seem to agree, at least in part. They currently recommend certain stocks as “Buys,” but they recommend stocks with a high dividend yield, on the order of 8% or better. A yield this high offers real protection against inflation and provides a buffer for cautious investors – those of the ‘inflationista’ group. We used the TipRanks database to get some details about these recent picks; here they are, along with the analyst’s commentary.
Ritm Capital Corp. (RITM)
We’re talking dividends here, so we’ll start with a real estate investment trust (REIT). These companies have long been known for their high and reliable dividends and are often used in defensive portfolio schemes. Rithm Capital is the new name and branding of an older, established company, New Residential, which has been converted into an internally managed REIT since August 2.
Rithm generates returns for its investors through smart investments in the real estate sector. The company provides both capital and services – i.e. credit and mortgage services – to both investors and consumers. The company’s portfolio includes lending, real estate securities, real estate and residential mortgages and MSR-related investments, with the majority of the portfolio, some 42%, being in mortgage services.
In total, Rithm has $35 billion in assets and $7 billion in equity investments. The company has paid more than $4.1 billion in total dividends since its inception in 2013, and had a book value per common share of $12.28 as of 2Q22.
In that same Q2, the last to operate as New Resi, the company showed two key metrics of interest to investors. First, revenue available for distribution was $145.8 million; and second, of that total, the company paid out $116.7 million through its common stock dividend, at a payment of 25 cents per share. This was the fourth quarter in a row with the dividend paid at that level. The annual payment of $1 gives an 11% return. That is more than enough in the current circumstances to guarantee a real return for common shareholders.
Kenneth Lee of RBC Capital, a 5-star analyst, explains several reasons why he’s behind this name: “We consider RITM’s available cash and liquidity position to be favorable given its potential stake in attractive opportunities. We prefer RITM’s continued diversification of its business model and ability to allocate capital to strategies, and differentiated ability to create assets… We have an Outperform rating on RITM stock given the potential benefit to BVPS from rising interest.”
That Outperform rating (ie Buy) is supported by a price target of $12, indicating a 33% increase over one year. Based on the current dividend yield and the expected price increase, the stock has a potential total return profile of ~44%. (To view Lee’s track record, click here)
While only three analysts have followed this stock, they all agree that it is a stock to buy, making Strong Buy’s consensus rating unanimous. The shares are selling for $9 and their average price target of $12.50 suggests a ~39% increase for the coming year. (See RITM Inventory Forecast at TipRanks)
Omega Healthcare Investors (OHI)
The second company we’ll look at, Omega, combines features of both healthcare providers and REITs, an interesting niche that Omega has expertly filled. The company has a portfolio of skilled nursing facilities (SNFs) and senior housing facilities (SHFs), with investments totaling approximately $9.8 billion. The portfolio leans towards SNFs (76%), the rest towards SHFs.
Omega’s portfolio generated net profit of $92 million for 2Q22, up 5.7% from $87 million in the same quarter last year. Per share, this was 38 cents EPS in 2Q22, compared to 36 cents a year earlier. The company had adjusted $185 million in operating funds (adjusted FFO) in the quarter, down 10% year over year from $207 million. Of interest to investors, the FFO included a $172 million available-for-distribution fund (FAD). Again, this was lower than in 2Q21 ($197 million), but it was enough to cover current dividend payments.
That dividend was set for common stock at 67 cents per share. This annualized dividend comes in at $2.68 and provides a strong return of 8.4%. The last dividend was paid in August. In addition to the dividend payments, Omega is supporting its share price through a share repurchase program, and in the second quarter, the company spent $115 million to repurchase 4.2 million shares.
In reviewing Omega’s Q2 results, Stifel analyst Stephen Manaker believes the quarter was “better than expected.” The 5-star analyst writes: “Headwinds remain, including the effects of COVID on occupancy and high costs (particularly labor). But capacity utilization is increasing and should improve further (assuming there is no relapse from COVID) and labor costs appear to be rising more slowly.”
“We continue to believe the stock is attractively priced; it trades at 10.2x our AFFO in 2023, we expect growth of 3.7% in 2023, and the balance sheet remains a source of strength. We also believe OHI are dividend will maintain as long as the recovery continues at an acceptable pace,” the analyst summed up.
Manaker follows up on his comments with a buy rating and a price target of $36, demonstrating his confidence in a 14% gain over the one-year horizon. (To view Manaker’s track record, click here)
In general, the street here is split in the middle; based on 5 Buys and Holds each, the stock achieves a moderate buy consensus rating. (See OHI stock forecast at TipRanks)
SFL Corporation (SFL)
For the last supply, we are turning away from REITs and switching to sea transport. SFL Corporation is one of the world’s largest ocean carriers, with a fleet of some 75 ships – the exact number may vary slightly as new ships are acquired or old ships are scrapped or sold – ranging in size from giant Suezmax freighters from 160,000 tons to tankers to 57,000 tons of dry bulk carriers. The company’s ships can carry almost any cargo imaginable, from bulk cargoes to crude oil to finished cars. The vessels owned by SFL are operated through charters and the company has an average charter backlog through 2029.
Long-term firm charters of ocean carriers are big business, bringing in $165 million in 2Q22. In net income, SFL reported $57.4 million, or 45 cents per share. Of that net income, $13 million came from the sale of older ships.
Investors should note that SFL’s vessels have an extensive charter backlog that will keep them in service for the next 7 years. The charter backlog totals more than $3.7 billion.
We mentioned fleet turnover, another important factor for investors to consider as it ensures SFL operates a viable fleet of modern vessels. During the second quarter, the company sold two older VLCCs (very large crude oil tankers) and one container vessel, while buying 4 new Suezmax tankers. The first of the new vessels is scheduled for delivery in the third quarter.
In Q2, SFL paid its 74 . frome consecutive quarterly dividend, a record of reliability few companies can match. The payment was set at 23 cents per common share, or 92 cents year on year, and delivered a robust 8.9% return. Investors should note that this was the fourth quarter in a row in which the dividend was increased.
DNB’s 5-star analyst Jorgen Lian is optimistic about this shipping company and sees no specific disadvantage. He writes: “We believe there is significant long-term support for the dividend without considering any potential benefit from the strengthening offshore markets. Taking into account our estimated earnings from West Hercules and West Linus, we believe the potential for distributable cash flows could approach 0.5 USD/share. We see ample upside potential, while the contract backlog supports the current valuation.”
Lian translates his vision into numbers with a price target of $13.50 and a buy rating. Its price target implies a one-year gain of 30%. (To view Lian’s track record, click here)
Some stocks slip under the radar and garner few analyst ratings despite good performance, and this is one. Lian’s is the only recent review registered for this stock, which is currently priced at $10.38. (See SFL stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are those of the recommended analysts only. The content is for informational purposes only. It is very important to do your own analysis before making any investment.