Wall Street is back on a rollercoaster as investors try to navigate the path between high inflation and aggressive interest rate hikes by the Fed. The former is raging, whether you blame Russia or Biden, there’s no getting around the fact of high inflation anymore, while the latter is rising, but whether it’s rising fast enough to slow inflation remains to be seen .
Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program, tracks the bond market, where the 2-year US Treasury note is up to 4.3% recently. According to Cramer, this sharp increase in the medium-term Treasury note indicates more aggressive action by the Federal Reserve on interest rates, and this carries a greater risk of a general economic recession.
That, in turn, leads Cramer to a specific investment choice: high-yielding dividend stocks. “You want to take refuge in high accidental returns because their dividends will give you a cushion,” Cramer noted.
To find these “accidental high returns,” Cramer examined the S&P 500 index, looking for stocks with 30% or more of peak values and paying 4% or better in dividends.
Cramer gives his personal approval to several of these actions. We’ve pulled the details of two of his picks from the TipRanks database and will analyze them along with comments from Street analysts.
Devon Energy Corporation (DVN)
The first of Cramer’s picks we’ll check out is Devon Energy, an Oklahoma City-based independent hydrocarbon exploration and production company focused on onshore assets in the US. Devon operates primarily in the Delaware Basin, one of the major oil and gas formations on the border between West Texas and New Mexico. But while Texas operations form the core of the company’s work, Devon is also active in Colorado, Montana and Oklahoma.
Devon is in the midst of an expansionary move and in early August the company announced a definitive acquisition agreement for Validus Energy, an operator of the Texan Eagle Ford formation. The acquisition is an all-cash transaction, valued at $1.8 billion, that will be effective as of June 1, 2022, at the close of the third quarter.
Meanwhile, Devon has reported its 2Q22 financial results and investors can take heart. The company had its highest revenue in more than two years at $6.27 billion, but that was just the top line. Drilling down, Devon reported net income of $1.9 billion, or $2.59 per diluted share. This was up from just 60 cents of diluted EPS in the year-ago quarter, and is indicative of the company’s rapid growth in revenue and earnings over the past 6 quarters. Even better for investors was the $2.1 billion in free cash flow reported for 2Q22, a company record for Devon.
This free cash flow is important because it ensures the funding of the dividend. The payout, on a fixed-plus-variable model, was last reported for a Sept. 30 payout of $1.55 per common share. This was up 22% from the previous quarter and the highest single dividend Devon has ever paid. On an annualized basis, the div comes in at $6.20 and yields 10.4%.
Giving Devon a bullish outlook, Truist 5-star analyst Neal Dingmann notes that the Validus acquisition is a positive, but sees the company as strong even without it.
“Devon continues to demonstrate highly successful operating results that, coupled with strong pricing and contained costs, lead to record returns for shareholders. The company returned to paying a high dividend while simultaneously buying back stock and paying down debt,” he noted. Dingmann.
“We still get questions from investors about whether DVN will continue its strict capital discipline, with the short answer that growth per share not absolute production growth will continue to be the mantra. So while the base dividend could still rise more and share buybacks could expand, in our view all factors should continue to add up to one of the group’s best cash return models,” the analyst added.
Based on these comments, Dingmann rates DVN a Buy, with a $115 price target that implies a 92% one-year upside potential. Based on the current dividend yield and expected price appreciation, the stock has a potential total return profile of ~102%. (For Dingmann’s history, click here)
Overall, there are 10 recent reviews on DVN and they are evenly split: 5 buys and 5 holds. This gives the stock a moderate buy analyst consensus rating. Meanwhile, DVN shares are trading at $60.05, and their average price target of $83.79 implies a 40% upside from that level. (See DVN Stock Forecast on TipRanks)
KeyCorp (KEY)
We’ll shift our focus now, as Cramer’s second high-yielding div stock is a Bancorp, KeyCorp, the holding company that owns KeyBank. This large-cap banking company operates through more than 1,000 branches and full-service offices, plus approximately 1,300 ATMs, in 15 states, and has more than $181 billion in total assets.
This is a solid foundation on which to support a business, and KeyCorp has been successful in doing so for nearly 200 years. The company offers a full range of banking services, including loans, savings and current accounts, online and mobile banking, mortgages, wealth management, all known banking needs, for retail, small business and commercial customers.
In the recent second quarter of 2022, the company had total revenue of $1.8 billion, well above the $1.7 billion to $2 billion it has come in over the past 8 quarters. On the earnings side, KeyCorp reported net income of $504 million, up 20% year over year, and EPS came in at 54 cents per diluted common share. That was down from the 72 cents reported in last year’s quarter, but is still solidly profitable, and more than enough to cover the dividend payout of 19.5 cents per common share.
This dividend was last declared in July for payment on September 15. At its current rate, the annual dividend works out to 78 cents and yields a solid 4.8%. The long history of dividend reliability (the company has never missed a payment, dating back to 1990) helps show why it held Cramer’s interest.
KeyCorp has reformed its business practices in recent months, and 5-star analyst Gerard Cassidy of RBC sees that as a net positive.
“The rebuilt, de-risked and better managed CLAU continues to demonstrate to investors that it is not the ‘old CLAU’. This change can be seen in its strong credit metrics and diversified business model. Its strategy” Targeted Scale”, which is not all things to all customers, but is relevant to the customers KEY wants to be relevant, has increased shareholder returns in our view. Also, its strong “right side” of the balance sheet will be more valuable in a rising interest rate environment. Finally, KEY should continue to reward shareholders with strong capital action plans in 2022-2023,” Cassidy opined.
Cassidy quantifies his comments with Outperform (i.e. Buy), as well as a $29 price target that indicates 79% upside potential over the next 12 months. (For Cassidy’s history, click here)
Overall, KEY earns a Moderate Buy from analyst consensus, based on 6 Buy ratings, 7 Holds and 1 Sell. The stock’s average price target of $22.19 offers a 37% upside from the current price of $16.17. (See KEY Stock Forecast at TipRanks)
To find great ideas for dividend stocks that trade at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock knowledge.
Exemption from liability: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
