The biggest news of the week is coming from the Federal Reserve. The central bank’s open market committee (FOMC), tasked with setting interest rates to match the current environment, closed its meeting with the announcement of a 75-basis point increase in the benchmark interest rate. The hike, which was the Fed’s largest single move since 1994, brings the rate to the range of 1.5% to 1.75%, and shows that the central bank is committed to fighting inflation.
What will happen now is anyone’s guess. The higher rates will find reflections in revolving credit and mortgage loans, putting a damper on consumer spending and business investment alike. The specter of a recession is drawing nearer – consumer spending accounts for some 70% of all US economic activity, and the combination of high inflation and rising interest rates bodes ill for consumers in the short term.
It also raises some important questions for investors, the most important, perhaps, being how to cope now that conditions no longer favor easy money and cheap credit. Watching the market right now is Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program. Cramer is never shy about giving his opinion, and his opinion now is that investors need to take defensive steps.
Putting that into actionable advice, Cramer says, “You’ve got to be selective because the market remains horrific. That means picking at the kind of defensive stocks that can hold up just fine even with inflation and the very real possibility of a Fed-mandated recession.”
Cramer has used a set of three criteria to assemble a list of defensive picks that investors should consider. His criteria include a minimum 3.5% dividend yield, to beat the current Treasury bond yields; an expectation for earnings growth extending into next year; and finally, a current share price less than the market average of 16.5x earnings. In short, Cramer says to buy cheap and maximize the return potential.
Now let’s take a look at the top two dividend stocks on Cramer’s list. We’ve used the TipRanks database to pull up the latest data on both, and we can check them out in conjunction with recent commentary from the Wall Street analysts.
Devon Energy (DVN)
The first Cramer pick we’ll look at is Devon Energy, an independent hydrocarbon exploration and production firm based in Oklahoma City. Devon is one of the largest players in the independent niche, and works to develop onshore oil and gas assets in the US. The company’s largest operations are in the Delaware Basin of Texas and New Mexico, but it is also active in Montana, Colorado, and Oklahoma.
In recent days, Devon has announced a new agreement to purchase the leasehold and related assets of RimRock Oil and Gas in the Williston Basin. The bolt-on deal is expected to close in 3Q22, and will be an all-cash transaction worth $865 million.
Devon has the resources to afford an acquisition like that. The company reported an operating cash flow in 1Q22 of $1.8 billion, up 14% from the year-ago quarter. Of that total, some $1.3 billion was free cash flow. The company’s net earnings of $1 billion translated to core earnings of $1.88 per diluted share. Devon listed a cash balance at the end of the quarter of $2.6 billion.
This oil and gas company isn’t just expanding its operations, it is also active in returning profits to shareholders. Devon has an active share repurchase program, and as of the end of April has bought back some 19.1 million shares worth $891 million. In Q1, the board authorized an expansion of those repurchases to $2 billion.
Of particular interest to defensive-minded investors – and with Cramer’s advice in mind – Devon also pays out a generous dividend. The company declared a common share payment of $1.27 in Q1, an increase of 27% from the previous quarter. Devon has increased its dividend payment in each of the last five quarters. The current payment annualizes to $5.08 and yields an impressive 7.2%.
Covering Devon Energy for JPMorgan, 5-star analyst Arun Jayaram sees the acquisition of Rim Rock Oil & Gas as a key factor for Devon going forward, with positive implications for both production levels and dividend payouts.
“We are fans of DVN’s Williston Basin bolt-on as the deal appears ~5% accretive to our 2023 cash flow estimate using recent strip pricing, which are below current levels, and the deal was accompanied by a 13% increase in the fixed quarterly dividend to 18c per share. Our analysis suggests that the transaction will boost the company’s 2023 FCF by over $200mm on an after-tax basis, suggesting an attractive valuation, albeit at elevated strip pricing. The transaction includes an effective date of April 1 so we are modeling $750mm of cash outflows at the estimated closing date of July 31,” Jayaram commented.
With that kind of upbeat outlook, it’s no wonder that Jayaram rates DVN an Overweight (i.e. Buy). His price target, set at $80, suggests an upside of ~17%. Based on the current dividend yield and the expected price appreciation, the stock has ~24% potential total return profile. (To watch Jayaram’s track record, click here)
So, that’s JPMorgan’s view, let’s turn our attention now to rest of the Street: DVN’s 11 Buys and 6 Holds coalesce into a Moderate Buy consensus rating. DVN is trading for $68.46 and its average price target of $83.59 implies a one-year upside of 22%. (See DVN stock forecast on TipRanks)
Oneok, Inc. (OKE)
Sticking with the energy sector, we’ll turn to Oneok, a midstream company in the natural gas sector, and one of Jim Cramer’s favorite stocks. Oneok holds a network of pipeline, processing, and storage assets ranging from the Permian Basin to the Mid-Continent area, and through the Rocky Mountain states, all important natural gas production regions.
The company’s financial results have been trending modestly upwards. In the first quarter of this year, reported last month, Oneok saw net income grow year-over-year from $386.2 million to $391.2 million, while diluted EPS came in at 87 cents, the second-highest reading in the past two years.
These results are supported by strong operational numbers. In the Rocky Mountain, operations have been expanding. Natural gas liquids raw throughput feed volumes (a measure of how much product is in the pipeline) reached 385,000 barrels per day in April, while the company’s natural gas processing volumes in the same region hit 1.4 billion cubic feet per day. In Texas, Oneok completed a 1.1 billion cubic foot natural gas storage facility, and in Oklahoma, a 4 billion cubic foot expansion project is set for completion in 2Q23.
In addition to solid operations, Oneok benefits from a sound balance sheet. As of the end of Q1, the company had no outstanding borrowing – and available credit facilities for up to $2.5 billion.
All of this gave the company the confidence to keep up its dividend payment, which is currently set at 93.5 cents per common share. The payment has been held at this level for two and a half years now. With an annualized rate of $3.74 per common share, the dividend is yielding 6.2%.
Justin Jenkins, 5-star analyst with Raymond James, says of Oneok simply, ‘we like the story.’ Describing that story, he writes: “OKE is an investment grade rated C-Corp. with a solid yield, substantial asset integration (driving growth and returns), and respected management, that is well suited to recruit generalists. On top of this solid foundation, ONEOK morphed into a leading operating leverage story amid today’s commodity backdrop.”
This optimistic outlook leads into Jenkins’ Outperform (i.e. Buy) rating for the stock, and his $75 price target indicates potential for ~26% upside in the next 12 months. (To watch Jenkins’ track record, click here)
Overall, based on 3 Buys and 8 Holds, the analyst consensus rates the stock a Moderate Buy. With an average price target of $72.18, the analysts except shares to add ~21% in the months ahead. (See Oneok stock forecast on TipRanks)
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Disclaimer: 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.
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