October 4, 2023

Morgan Stanley Says Buy These 2 High Yield Dividend Stocks – Including One With An 11% Yield

Markets move in cycles and experience ups and downs influenced by a variety of conditions ranging from inflation rates to consumer confidence. The key to successful investing is following these shifts, avoiding the black swans, and building a portfolio that can generate consistent returns. Dividend stocks, with their steady passive income stream, are a good addition to such an investment strategy.

Morgan Stanley forecasts a recession is expected this year, making dividend stocks more attractive than ever. They are a classic defensive game, guaranteeing a return even if the markets go south. And that downturn seems more likely, according to Morgan Stanley strategist Mike Wilson.

“If this new inflationary regime reflects the post-World War II period, it will be volatile with significant cyclical ups and downs that must be traded if one is to fully exploit the additional yields in this new regime. In short, the boom/bust period that began in 2020 is currently in the bust portion of the earnings cycle — a dynamic that we believe has not yet been priced in,” said Wilson.

Taking this into account, analysts at Morgan Stanley have identified two dividend payers with impressive returns of up to 11% that could potentially provide a solid source of passive income for investors. Let’s take a closer look at that.

Equitrans Midstream (ETRN)

We start with Equitrans, an energy company active in the midstream segment. This segment is a vital part of the energy industry as midstream companies are responsible for transporting hydrocarbon products from wellheads to storage, refineries and distribution points. Equitrans, which spun off from EQT in 2018, is one of the largest natural gas collection companies in North America. The company’s network includes assets for collecting and transporting natural gas, as well as water transportation pipelines, in the gas regions of the Appalachian Mountains, particularly in the region where Pennsylvania, West Virginia and Ohio meet.

Figures show that Equitrans operates more than 1,880 miles of high-pressure collector lines, 1,550 miles of interstate transmission pipelines, and 200 miles of water pipelines; in total, Equitrans has a natural gas transmission capacity of 4.4 bcf.

The company received a dose of good news early this month when debt ceiling legislation was signed. The bill, in its final form, included authorization and federal funding for Equitrans’s Mountain Valley Pipeline (MVP) project. This pipeline should be completed by the end of the year, at a total cost of $6.6 billion.

In the company’s 1Q23 results, reported last month, Equitrans showed revenue of $376.34 million. This was an increase of 10% year-over-year and exceeded expectations at $15.6 million. In the end, the company reported non-GAAP earnings per share of 22 cents, a total that compares favorably with last year’s quarterly earnings of 14 cents per share and was 10 cents per share better than forecast.

Interestingly for dividend investors, Equitrans has been successful in generating cash. The company’s cash flow came in at $224.7 million, up from $185.9 million in 1Q22, and free cash flow of $94.2 million was up 300% year over year from $23. 5 million in the same quarter last year. The strong cash flows support the company’s dividend payments.

Equitrans paid its last declared dividend on May 15. That payment was made at 15 cents per common share, or 60 cents annually. The annualized rate gives a return of 6.3%.

Five-star analyst Devin McDermott, who covers this stock for Morgan Stanley, sees a lot of potential for investors to seize.

“ETRN continues to trade below fair value in our view. Realization of fair value will likely be linked to (1) completion of the project to fully address investor concerns, (2) progress in deleveraging and management communication on capital allocation priorities, and (3) articulation of strategy and drivers for the creating shareholder value after an extended period of focus on the outcome of MVP,” McDermott wrote.

McDermott adds an Overweight (ie Buy) rating to his commentary and completes his stance with a price target of $14, signaling his confidence in ~49% upside over the next 12 months. Based on the current dividend yield and expected price increase, the stock has a potential total return profile of ~55%. (Click here to view McDermott’s track record)

While McDermott represents the upbeat view, Wall Street is somewhat divided on this stock, as evidenced by the 9 recent analyst ratings. These are broken down into 3 Buys, 5 Holds, and 1 Sell, resulting in a Hold consensus rating. Shares in ETRN are trading at $9.42 and the $9.66 average price target suggests a nominal gain of 2.55% over a one-year timeframe. (To see ETRN stock forecast)

Petroleum Brasileiro (PBR)

For the second high-yield dividend stock, we turn our attention south of the border – all the way to Brazil, the largest country in South America and home to Petróleo Brasileiro, or Petrobras, one of the world’s largest oil companies. Petrobras started as a state-owned company, and today the Brazilian government still directly owns just over 50% of the company’s publicly traded shares.

Looking at some raw numbers, Petrobras has more than 5,000 oil and gas production wells and proven hydrocarbon reserves of 9.878 billion barrels of oil equivalent, and the company’s daily production is nearly 2.77 million barrels of oil equivalent per day amounts. In addition to producing oil and gas, Petrobras also operates 12 refineries, with an output of more than 1.85 million barrels of oil products per day.

Petrobras has a strong position in the mid-market, but also in manufacturing. The company operates more than 7,700 kilometers of oil pipelines and another 9,100 kilometers of natural gas pipelines. In addition, the company owns or charters more than 120 tankers.

All this easily puts Petrobras in the ranks of the world’s top oil companies. In terms of US currency, Petrobras generated $26.77 billion in total revenue during 1Q23, resulting in gross profit of $14.11 billion. These numbers represented a 1.5% and 2.5% year-over-year decline, respectively, with the $1.08 billion revenue figure below forecast. In the end, Petrobras reported GAAP EPS of $1.12, beating expectations by 23 cents.

The company saw a small year-over-year increase in net cash from operations, growing from $10.31 billion to $10.35 billion. Free cash flow fell one-tenth of a percent year over year to $7.92 billion.

On the dividend, Petrobras currently pays about 38.16 cents per American Depositary Share each quarter. Calculating ahead, this works out to just under $1.53 per ADS on an annualized basis and yields 11.55%.

Morgan Stanley’s Bruno Monta
nari sees this company with a lot of potential to boost that return, explaining: “Policy changes so far have been much less disruptive than initially expected, and lower oil prices and a stronger BRL contributed to the defensive nature of the market. share. Our new estimates, using lower oil prices from the current forward curve, still have PBR generating $23 billion in free cash flow in 2023, a yield of 30%.And our new dividend expectation, at 40% of the free cash flow (before interest), generates an attractive return of 16%.”

To that end, Montanari gives Petroleo stock an Overweight (i.e. Buy) rating and its $16.50 price target implies a potential 25% one-year upside in the year ahead. (Click here to view Montanari’s track record)

Now tune in to the rest of the Street, where based on 2 more Buys and 3 Holds, this stock claims a Moderate Buy consensus rating. The shares are selling for $13.15 and the average price target of $13.94 suggests a one-year gain of 6%. (To see Petrobras Stock Forecast)

To find great ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that brings together all of TipRanks’ stock insights.

disclaimer: The opinions expressed in this article are solely those of the named analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.

Leave a Reply

Your email address will not be published. Required fields are marked *