What’s been happening in the markets lately? Since the start of this year, we have seen a prolonged downtrend, and now a cycle of high volatility. Investors can be forgiven for feeling some confusion, even a jolt, trying to follow the rapid highs and lows of the past few weeks.
One important fact stands out, however. Over the past three months, since mid-June, we’ve seen rallies and troughs – but markets haven’t seriously challenged that mid-June low. Examining the situation of the research firm Fundstrat, Tom Lee makes some extrapolations from this observation.
First, Lee points out that some 73% of S&P-listed stocks are in a real bear market, having fallen more than 20% from their peak. Historically, he notes that such a high percentage is a sign that the market has bottomed out – and goes on to note that S&P lows usually come soon after a peak in the rate of inflation.
Which brings us to Lee’s second point: annualized inflation in June recorded 9.1%, and in the two readings released since then, it fell 0.8 points, to 8.3%.
Getting to the point, Lee advises investors to “buy the dip”, saying, “Even for those in the ‘inflationary’ camp or even the ‘we’re in a long-term bearish camp’, the fact is that if the main CPI has peaked, the stock market lows of June 2022 should be sustainable.
Some Wall Street analysts would seem to agree, at least in part. They recommend certain stocks as “buy” right now – but they recommend stocks with high dividend yields, in the range of 8% or more. Such a high yield will provide real inflation protection, providing a cushion for cautious investors – those in the “inflationary” group. We used the TipRanks database to get details on these recent picks. here they are, with the analyst’s commentary.
Rhythm Capital Corp. (RITM)
We’re talking about 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 frequently 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 effective August 2.
Rithm generates returns for its investors through smart investments in the real estate sector. The company provides both capital and services – ie loan and mortgage services – to investors and consumers. The Company’s portfolio includes origination of loans, real estate securities, real estate and residential mortgages and MSR-related investments, with the bulk of the portfolio, approximately 42%, being dedicated to mortgage services.
Overall, 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 in 2Q22 had a book value per common share of $12.28.
During this same Q2, the last operating under the name of New Resi, the company showed two key indicators of interest to investors. First, earnings available for distribution were $145.8 million; and second, of that total, the company distributed $116.7 million through its common stock dividend, for a payout of 25 cents per share. It was the fourth consecutive quarter with a dividend paid at this level. The annualized payment, of $1, gives a return of 11%. This is more than enough, under current conditions, to provide a real rate of return to ordinary shareholders.
Kenneth Lee of RBC Capital, a 5-star analyst, explains several reasons why he supports the name: “We favorably view RITM’s available cash and liquidity position given the potential deployment in attractive opportunities. We favor RITM’s continued diversification of its business model and its ability to allocate capital between strategies, and its differentiated ability to create assets… We have an outperform rating on RITM shares given the potential benefits to BVPS of the rate hike.
This outperform (i.e. buy) rating is supported by a price target of $12, suggesting a 33% one-year gain. Based on the current dividend yield and expected price appreciation, the stock has a potential total return profile of approximately 44%. (To see Lee’s track record, Click here)
While only three analysts have tracked this stock, they all agree it’s a stock to buy, which is unanimous in Strong Buy’s consensus rating. The shares are selling for $9 and their average price target of $12.50 suggests an upside of around 39% for the year ahead. (See RITM stock forecast on TipRanks)
Omega Healthcare Investors (OHI)
The second company we’ll look at, Omega, combines the characteristics of healthcare providers and REITs, an interesting niche that Omega has filled with skill. The company has a portfolio of skilled nursing facilities (SNF) and senior living facilities (SHF), with investments totaling some $9.8 billion. The portfolio leans towards NFCs (76%), the rest being in SHF.
Omega’s portfolio generated net income of $92 million for 2Q22, up 5.7% from $87 million in the prior year quarter. Per share, this amounted to 38 cents EPS in 2Q22, compared to 36 cents a year ago. The company had adjusted funds from operations (adjusted FFO) of $185 million in the quarter, down 10% year-over-year from $207 million. Important for investors, the FFO included a fund available for distribution (ADF) of $172 million. Again, that was down from 2Q21 ($197 million), but it was enough to cover current dividend payments.
This dividend was declared for common stock at 67 cents per share. This dividend is annualized at $2.68 and gives a strong yield of 8.4%. The last dividend was paid in August. In addition to dividend payments, Omega is supporting its stock price through a stock repurchase program, and in the second quarter the company spent $115 million to repurchase 4.2 million shares.
Evaluating Omega’s second quarter results, Stifel analyst Stephen Manaker said 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 occupancy is increasing and expected to improve further (assuming there is no COVID relapse) and labor costs appear to be rising at a slower pace.”
“We continue to believe the stock is attractively priced; it is trading at 10.2x our 2023 AFFO, we expect 3.7% growth in 2023 and the balance sheet remains a source of strength. We also believe that OHI will maintain its dividend as long as the recovery continues at an acceptable pace,” the analyst summed up.
Manaker continues his comments with a Buy rating and a price target of $36 that shows confidence in a 14% upside on the one-year horizon. (To see Manaker’s track record, Click here)
Overall, the street is split down the middle on this one; based on 5 buys and holds each, the stock gets a moderate buy consensus rating. (See IHO stock forecast on TipRanks)
SFL Company (SFL)
For the latest stock, we will shift away from REITs and into shipping. SFL Corporation is one of the world’s leading shipping operators, with a fleet of some 75 vessels – the exact number may vary slightly, as new vessels are acquired or old vessels are retired or sold – of which the size ranges from giant Suezmax cargo ships of 160,000 tons to tankers to dry bulk carriers of 57,000 tons. The company’s vessels can transport almost any commodity imaginable, from bulk cargo to crude oil to finished automobiles. SFL-owned vessels are operated through charters, and the company has an average charter backlog through 2029.
Long-term fixed charters for ocean carriers are big business and in 2Q22 they brought in $165 million. In net income, SFL reported $57.4 million, or 45 cents per share. Of this net income, $13 million came from the sale of older vessels.
Investors should note that SFL’s vessels have a large charter backlog, which will keep them in business for at least the next 7 years. The charter backlog totals over $3.7 billion.
We mentioned fleet turnover, another important factor for investors to consider, as it ensures that SFL operates a viable fleet of modern vessels. During the second quarter, the company sold two former VLCCs (very large crude carriers) and a container ship, while acquiring 4 new Suezmax tankers. The first of the new vessels is expected to be delivered in the third quarter.
In Q2, SFL paid its 74e consecutive quarterly dividend, a record of reliability that few companies can match. The payout was set at 23 cents per common share, or 92 cents annualized, and had a robust return of 8.9%. Investors should note that this is the fourth consecutive quarter in which the dividend has been increased.
DNB’s 5-star analyst Jorgen Lian is optimistic for this shipping company, seeing no particular downside. He writes: “We believe there is considerable long-term support for the dividend regardless of the potential benefits of strengthening offshore markets. If we include our estimated earnings from West Hercules and West Linus, the distributable cash flow potential could approach $0.5/share, in our view. We see significant upside potential, while the order book supports the current valuation. »
Lian puts his take on the numbers with a price target 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, garnering little criticism from analysts despite performing well, and this is one of them. Lian’s is the only current review on record 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 solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.