Mohamed El-Erian says stock market rally could be short-lived; Here are 2 ‘Strong Buy’ dividend stocks for stable cash returns

There is no doubt that 2023 has got off to a good start for stock investors. Since January 5, we have seen a sharp rally in the markets – the S&P 500 is up 5% in that time and the NASDAQ index has gained a stronger 8%. While this doesn’t end the longer-term bearish market since early last year, it does give some hope that this year will be better.

Or maybe not. Economist Mohamed El-Erian looks gloomy at the near-term outlook, noting that there are headwinds that could put additional pressure on markets.

El-Erian does not deny the recent upturns that have bolstered sentiment, notably the cooling in the rate of inflation and the slowdown in aggressive interest rate hikes by the Federal Reserve. But he also points to four strong headwinds: the potential for another COVID outbreak in China; depleted US household savings; the likelihood of US inflation remaining ‘fixed’ at 4% or higher; and a Federal Reserve that may be reluctant to lower interest rates. Anyone can be a stumbling block and El-Erian sees the combination bring an end to the current rally.

A market environment like this almost cries out for investors to take defensive action – and that will naturally encourage them to look at dividend stocks. Reliable, high-yield div payers provide a steady stream of income and guarantee returns even when stock markets fall.

With this in mind, we used the TipRanks platform to get the details of two “dividend champions,” with Strong Buy ratings by analyst consensus and yields of 8% or better to guarantee the cash return. Let’s take a closer look at that.

Plains All American Pipeline (PAA)

The first is Plains All American Pipeline, a mid-stream hydrocarbon company. PAA operates in the area between wells and customers, transporting crude oil, petroleum products, natural gas and natural gas liquids through a network of pipelines, storage tank farms, transportation hubs and transfers, refineries and terminals. The company’s assets also include more than 2,000 trucks and trailers and some 6,000 railcars for liquid crude oil and natural gas. Based in Houston, Texas, the company can move more than 6 million barrels of petroleum and natural gas liquids per day.

The company is as big as it sounds, and in dollar terms PAA saw revenue of $14.33 billion in its last reported quarter, 3Q22. This total was 33% higher year-on-year and reflected a combination of higher transport volumes and higher raw material prices. Getting to the nitty-gritty, the company had a net profit of $384 million, a solid turnaround from the $60 million loss reported in the quarter last year.

In cash, Plains All American delivered a strong performance in 3Q22, with net cash from operations of $941 million, nearly 3x the $336 million cash from operations delivered in 3Q21. Free cash flow fell year-over-year from $1.09 billion to $726 million, but was still enough to fully fund an increased dividend payment. After distributions, PAA had an FCF of $537 million.

As for the dividend, the company’s most recent statement was made on Jan. 9, for a Q4 payment of $0.2675 per common share. This is 5 cents more than the last payment, and the annualized common stock div of $1.07 returns a solid 8.8%. Not only is that dividend more than 4x the average of the broader markets, it exceeds December’s annual inflation rate by 2.3 points, guaranteeing a real return for investors.

This stock caught the attention of Truist’s five-star analyst Neal Dingmann, who sees cause for optimism and says of PAA, “Plains continues to benefit from solid organic and external growth in the Permian as the Basin remains one of the few domestic growth engines. We remain confident that the company will be able to continue increasing its dividend while continuing to opportunistically repurchase equity with $200 million remaining at its approval. In addition to shareholder returns, we predict that Plains will continue to reduce leverage and may start redeeming some preferred shares next year, assuming the shares are re-priced.”

With returns on this scale, Dingmann deems it appropriate to rate the stock a buy, and his $15 price target implies a gain of ~23% over the one-year horizon. Based on the current dividend yield and expected price increase, the stock has a potential total return profile of ~31%. (Click here to view Dingmann’s track record)

In general, PAA stocks have a Strong Buy rating by analyst consensus, based on 6 recent ratings, including 5 Buys and 1 Hold. The shares are selling for $12.16 and their $15.67 average price target implies room or a 12-month upside of ~29%. (See PAA stock forecast)

OneMain Holdings, Inc. (OMF)

Next up is OneMain, a consumer finance company that offers financial services to a subprime customer base that normally struggles to access credit and capital through established banks. OneMain has become a leader in this niche and its portfolio of services includes affordable loans, consumer finance and credit, and insurance products. The company carefully screens its customers and uses specially designed financial products to keep the default rate at a low level – even though it targets a customer base that is typically not considered creditworthy.

The company’s total revenue totals have been remarkably consistent, with between $1.2 billion and $1.29 billion; the most recent quarter, 3Q22, brought in revenue of $1.29 billion. However, corporate profits have fallen in recent quarters. In the third quarter, the company had diluted earnings per share of $1.51. Although this profit fell 36% per year, it beat the forecast of $1.32 by a margin of 14%. At the end of the third quarter, OneMain had $536 million in cash.

The latter is key for yield-oriented investors, as cash assets support dividends. The company’s most recent statement was made in November, for a payment of 95 cents paid out on November 4. The $3.80 annualized common stock dividend returns 9.6%, nearly 5x the average found in S&P-listed companies – and more than 3 points higher than December’s 6.5% annualized inflation rate. With solid cashback and significant real returns, this is a dividend stock that deserves a second look.

It gets that second look from JMP analyst David Scharf, who writes, “One Main Financial, at about 5x our 2023 outlook, represents one of the more compelling values ​​in our view, based on a more proactive approach to managing credit risk relative to colleagues. in the second half, an outsized outlook for capital generation and market share gains due to the pullout of several competitors in the personal loan industry currently struggling due to lack of funding.

While drawing attention to OneMain’s ability to generate returns, Scharf is impressed by the company’s share buyback efforts, a policy complementary to dividend payments, adding: another $1.4 billion in buybacks on its current authorization through June next year.”

Looking ahead, Scharf gives OMF stock an Outperform rating (i.e. Buy), with a price target of $49 to indicate confidence in ~24% gains in the coming year. (Click here to view Scharf’s track record)

Overall, the 9 recent analyst reviews on OneMain support the Strong Buy consensus score with 7 Buys and 2 Holds. The average price target is $44.78, suggesting a 13% upside from the current trading price of $39.61. (See OMF stock forecast)

To find great ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites 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.