There’s plenty of talk around about the dreaded ‘R’ word, recession, as the markets are obviously cooling off following the prolonged bull runs of late 2020 and 2021. With inflation running at 40-year highs, and GDP growth slipping in Q1, it’s no wonder that people are talking about a return to the late ‘70s, and Carter-era economic malaise.
But have we taken the pessimism too far? Covering the market situation for Wells Fargo, senior equity analyst Chris Harvey believes so. He sums up the forecast with a less grim view, in fact, with guarded optimism: “Despite daily calls for recession from anyone with a megaphone, we do not expect one over next 12 months. Rather, stagflation (high inflation/slower growth) likely will prevail, arguing for stable growers and low-vol stocks.”
Harvey backs up that view with some specific data citations that should encourage investors, saying, “We do not expect the consumer to wilt given that jobless claims are at lows not seen since 1968 and US household net worth as of 12/31/21 was at an all-time high of $150T (10yr CAGR: 8.4%). This suggests recession risk is more fear than fact…”
Still, we can’t discount continued inflation and equity volatility, nor can we fully discount recessionary possibilities; in all of those chances, a strong defensive stance, including high-yield dividend payers, will offer investors much-needed portfolio protection.
Against this backdrop, Wells Fargo analyst Finian O’Shea has given the thumbs-up to two dividend stocks yielding 8% or better. Opening up the TipRanks database, we examined the details behind these two to find out what else makes them compelling buys.
Crescent Capital BDC (CCAP)
We’ll start with Crescent Capital, a business development company (BDC) with a focus on private mid-market firms. Crescent both originates and invests in the debt and equity of its target market, and has built up a portfolio totaling some $28 billion in assets under management.
Turning to the company’s top and bottom lines, we find that Crescent saw $24.1 million in total investment income for 4Q21, the last quarter reported. This was nearly 4x the $6.6 million reported in 4Q20. At the bottom line, the firm reported EPS of 42 cents, just over the 41-cent forecast – but down from the 47 cents reported in the year-ago quarter. As 2021 ended, Crescent reported having $23.5 million in liquid assets on hand, along with $197 million in undrawn credit on its borrowing facilities.
One clear attraction for investors here is Crescent’s high dividend. The most recent common share payment was made on April 15, at 41 cents; this annualizes to $1.64, and gives a yield of 9.2%. That yield is well over 4x higher than the average dividend yield found among S&P-listed firms. As additional inducements for dividend investors, Crescent has 5-cent per share special dividend payments scheduled for June and September of this year.
Evaluating CCAP shares for Wells Fargo, analyst Finian O’Shea sees potential for the company deriving from its particular niche in the financial universe.
“CCAP primarily originates in the lower middle to middle market, where we believe there is still some premium for origination vs. larger market deals, which are likely more widely shopped vs. syndicated or lightly syndicated markets. We see this corner of the private credit universe as providing incumbency benefits, wherein lenders can extract economics at the margin by being able to provide add-on and delayed draw term loans to buy and build PE-backed companies,” O’Shea opined.
These comments help to back up the analyst’s Overweight (i.e. Buy) rating on this stock, while his $19.50 price target implies a one-year upside potential for the shares of ~10%. Based on the current dividend yield and the expected price appreciation, the stock has ~19% potential total return profile. (To watch O’Shea’s track record, click here)
The Wells Fargo view is one of three recent analyst reviews on CCAP shares, and all are positive, giving the stock a Strong Buy consensus rating. CCAP is currently trading for $17.79, and the $20 average price target implies ~12% upside potential. (See CCAP stock forecast on TipRanks)
Barings BDC, Inc. (BBDC)
The second dividend stock we’ll look at is Barings, another BDC firm. Barings BDC is part of the larger Barings LLC asset manager, a financial giant with over $390 billion in total AUM. Barings BDC occupies one of the smaller niches, providing credit and equity investment in mid-market companies – and leveraging its support from the larger Barings LLC parent company to support its portfolio. Barings BDC’s portfolio currently has a fair value of $1.8 billion.
According to the last quarterly release, for 4Q21, Barings BBDC’s portfolio value includes 54 investments newly made in Q4, totaling $489.5 million. The portfolio brought Barings BDC a total investment income of $36.6 million, and a net investment income per share of 23 cents. Q4 revenues were more than double the year-ago quarter’s total of $17.8 million, while the 23-cent EPS was up 4 cents, or 21%, from the 19 cents recorded in 4Q20.
For dividend investors, this company’s recent payment history is clear attraction: Barings BDC has raised its quarterly common share dividend payment 9 times in the last 12 quarters. The company’s current dividend payment, of 23 cents per common share, annualizes to 92 cents and yields a high 8.6%.
In another move of interest to investors, BBDC has been expanding its footprint through acquisitions. In its most recent combination, the company merged with Sierra Income Corporation, forming a combined entity with more than $2.7 billion in assets under management. The merger, an all-stock transaction, was completed in late February and resulted in Barings BDC shareholders owning 58.75 of the combined company.
Covering the stock for Wells Fargo, O’Shea highlights the key points driving his bullish thesis for the stock.
“We believe BBDC presents an intriguing risk-adjusted yield based on several downside mitigants — credit support agreements, and a total return lookback — which are only enhanced by its industry best hurdle rate of 8.25% per year… Given an increase in the low hurdle to 8.25%, and likely NAV improvement in 1Q22, owed to the addition of the Sierra CSA to the balance sheet, we believe there is a relatively smooth path toward a quarterly dividend of $0.24,” O’Shea wrote.
To this end, O’Shea rates BBDC an Overweight (i.e. Buy) along with a $13 price target. This figure implies ~22% upside from current levels.
The Wall Street analyst corps agree with the Wells Fargo view; BBDC gets a unanimous Strong Buy consensus rating based on 3 positive reviews. Looking forward, the $12.50 average price target predicts ~17% upside from the share price of $10.64. (See BBDC 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.