What’s been going on 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 if they feel a bit confused or even whiplash trying to follow the rapid ups and downs of the past few weeks.
However, one important fact stands out. For the past three months, since mid-June, we’ve seen rallies and falls — but markets haven’t seriously challenged that mid-June bottom. Tom Lee examines the situation at research firm Fundstrat and makes some extrapolations from this observation.
First, Lee points out that roughly 73% of stocks listed on the S&P are in a true bear market, down more than 20% since their peak. Historically, he notes that such a high percentage is a sign that the market has bottomed – and goes on to note that S&P bottoms tend to be reached shortly after a peak in inflation rates.
Which brings us to Lee’s second point: annualized inflation was 9.1% in June and in the two readings since then it’s down 0.8 points to 8.3%.
To draw the conclusion, Lee advises investors to “buy the dip,” saying, “Even for those in the ‘inflationist’ or even ‘we’re in a long-term bear’ camp, the fact is that headline CPI is believed to have peaked, the June 2022 stock lows should be permanent.”
Some Wall Street analysts seem to agree, at least in part. They currently recommend certain stocks as a buy — but they recommend stocks with high dividend yields, on the order of 8% or more. Such a high yield offers real protection against inflation and provides a cushion for cautious investors – those in the “inflationary” group. We used the TipRanks database to get some details on these recent tips; here they are, along with the analyst commentary.
Rith Capital Corp. (RITM)
We’re talking dividends here, so let’s start with a real estate investment trust (REIT). Long known for their high and reliable dividends, these companies are often used in defensive portfolio arrangements. Rithm Capital is the new name and branding of an older, established company, New Residential, which converted to an internally managed REIT last August 2nd.
Rithm generates returns for its investors through intelligent investments in the real estate sector. The company provides both capital and services – ie credit and mortgage services – to investors and consumers. The firm’s portfolio includes lending, real estate securities, real estate and home mortgage loans, and MSR-related investments, with mortgage servicing accounting for the majority of the portfolio, approximately 42%.
Overall, Rithm has $35 billion in assets and $7 billion in equity investments. The company has paid a total of over $4.1 billion in dividends since its inception in 2013 and reported book value per common share of $12.28 in Q2’22.
In the same second quarter, which last traded as New Resi, the company showed two key metrics that were of interest to investors. First, the revenue available for distribution was $145.8 million; and second, of that total, the company paid $116.7 million through its common stock dividend for a payment of 25 cents per share. This was the fourth straight quarter with a dividend paid at this level. The annualized payment of $1 yields an 11% return. That’s more than enough under current conditions to provide common shareholders with a real return.
RBC Capital’s Kenneth Lee, a 5-star analyst, provides several reasons why he stands behind the name: “We are positive on RITM’s available cash and liquidity position for potential exposure to attractive opportunities. We favor the continued diversification of RITM’s business model and ability to allocate capital across strategies, as well as the differentiated ability to generate assets… We have an Outperform rating on RITM stock as BVPS could benefit from rising interest rates.”
This Outperform (ie, Buy) rating is backed by a price target of $12, suggesting a 33% one-year gain. Based on the current dividend yield and expected share price increase, the stock has a potential total return profile of ~44%. (To see Lee’s track record, click here)
Although only three analysts have covered this stock, they all agree it is a stock to buy, making the Consensus Strong Buy rating unanimous. The shares are selling for $9 and their average price target of $12.50 suggests ~39% upside potential for the year ahead. (See RITM Stock Prediction on TipRanks)
Omega Healthcare Investors (OHI)
The second company we’ll look at, Omega, combines characteristics of both healthcare providers and REITs, an interesting niche that Omega has adeptly occupied. The Company has a portfolio of Skilled Nursing Facilities (SNFs) and Senior Living Facilities (SHFs) with total investments of approximately $9.8 billion. The portfolio leans towards SNFs (76%), the rest towards SHFs.
Omega’s portfolio generated net income of $92 million in the second quarter of ’22, up 5.7% from $87 million in the year-ago quarter. Per share, this was 22.38 cents per share in the second quarter versus 36 cents a year earlier. The company had adjusted funds from operations (adjusted FFO) of $185 million in the quarter, down 10% from $207 million year over year. Of significance to investors, FFO included $172 million in available-for-distribution (FAD). Again, this was down from Q2’21 ($197 million), but it was enough to cover ongoing dividend payments.
That dividend was declared for common stock at 67 cents per share. That dividend comes in at $2.68 annually, yielding a strong 8.4%. The last dividend was paid in August. In addition to dividend payments, Omega supports its share price through a share repurchase program, and in the second quarter the company spent $115 million to repurchase 4.2 million shares.
Assessing Omega’s Q2 results, Stifel analyst Stephen Manaker believes the quarter was “better than expected”. The 5-star analyst writes: “Headwinds remain, including the impact of COVID on occupancy and high costs (particularly labor costs). But occupancy rates are increasing and should continue to improve (assuming no COVID relapse) and labor costs appear to be rising at a slower pace.”
“We continue to believe the stock is attractively priced; trading at 10.2x our AFFO for 2023, we expect growth of 3.7% in 2023 and balance sheet remains a source of strength. We also believe that OHI will maintain its dividend as long as the recovery continues at a reasonable pace,” the analyst concludes.
Manaker follows his comments with a Buy rating and a price target of $36, showing his confidence in a 14% upside move over a 1-year period. (To see Manaker’s track record, click here)
Overall, the road here is divided in the middle; The stock earns a consensus rating of Moderate Buy based on 5 buy and 5 holds. (See OHI Stock Prediction on TipRanks)
SFL Corporation (SFL)
For the final stock, we’re moving away from REITs and into marine transportation. SFL Corporation is one of the largest maritime transport companies in the world, with a fleet of approximately 75 ships – the exact number may vary slightly as new ships are acquired and old ships are retired or sold – ranging in size from huge 160,000 ton Suezmax freighters tankers to 57,000 ton bulk carriers. The company’s ships can carry just about anything imaginable, from bulk goods to crude oil to finished automobiles. SFL’s owned ships are operated through charters and the company has an average charter backlog through 2029.
Long-term fixed charters from shipping companies are big business, bringing in US$165 million in 2Q22. SFL reported net income of $57.4 million, or 45 cents a share. Of that net income, $13 million came from sales of older vessels.
Investors should note that SFL ships have an extensive charter backlog that will keep them in service for at least the next 7 years. The charter backlog is over $3.7 billion.
We mentioned fleet turnover, another important factor for investors to consider, as it ensures SFL operates a profitable fleet of modern vessels. During the second quarter, the company sold two older VLCCs (very large crude oil carriers) and one container ship, while acquiring four new Suezmax tankers. The first of the new ships is scheduled for delivery in the third quarter.
In the second quarter, SFL paid out its 74th consecutive quarterly dividends, a reliability record few companies can match. The payment was set at 23 cents per common share, or 92 cents on an annualized basis, and had a robust yield of 8.9%. Investors should note that this was the fourth consecutive quarter that the dividend was increased.
Jorgen Lian, DNB 5-Star Analyst, is optimistic about this shipping company and sees no particular downsides. He writes, “Without considering any potential benefit from strengthening offshore markets, we believe there is significant long-term support for the dividend. If we include our estimated earnings from West Hercules and West Linus, we believe the potential for distributable cash flows could be $0.5/share. We see ample upside while the order backlog supports the current valuation.”
Lian expresses his view in numbers with a target price of $13.50 and a buy rating. Its price target implies a one-year gain of 30%. (To see Lian’s track record, click here)
Some stocks slip under the radar and pick up few analyst ratings despite solid performance, and this is one of them. Lians is the only current rating for this stock, which is currently priced at $10.38. (See SFL Stock Prediction on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important that you do your own analysis before making any investment.