With EPS beats surpassing misses by a somewhat regular 4:1 ratio, 1Q23 earnings have been characterised as ‘better-than-feared.’ That stated, because the Q1 earnings season started, the S&P 500’s returns haven’t been notably spectacular.
This means to Wells Fargo fairness analyst Christopher Harvey that somewhat than being boosted by earnings/fundamentals, the positive aspects accrued to date this yr have been pushed largely by ‘funding and liquidity.’ If that’s certainly the case, the outlook will not be promising.
“If credit score markets/liquidity (not fundamentals) drove the YTD inventory rally, latest tendencies aren’t as bullish: (1) the price of capital is rising, with Treasury yields lifting and spreads widening; (2) liquidity has been lowered, with the Fed’s stability sheet contracting $230-billion in latest weeks; and (3) the Fed’s pivot could also be delayed because the labor market refuses to crack and inflation could also be stickier than anticipated,” Harvey defined.
Harvey’s evaluation leads him to imagine that the market could possibly be on the point of a downturn. In such a situation, it turns into essential to undertake a defensive place. One efficient approach to navigate by unsure instances is by embracing the tried-and-true technique of investing in high-yielding dividend shares. By doing so, traders can safe a constant and dependable earnings stream, no matter whether or not the general inventory market experiences positive aspects or losses.
Towards this backdrop, Wells Fargo analysts have recognized two potential alternatives, one among which boasts a sky-high 17% yield. Let’s take a more in-depth look.
Blackstone Secured Lending Fund (BXSL)
The primary inventory we’ll have a look at is Blackstone Secured Lending, a enterprise improvement firm (BDC) working beneath the umbrella of the foremost asset administration agency, Blackstone. This BDC features as a monetary companies firm, providing credit score and capital to a various vary of US-based non-public corporations throughout varied sectors, together with software program, healthcare, insurance coverage, aerospace, air freight, and extra. As of March 31 this yr, the corporate’s portfolio investments had been valued at $9.6 billion in honest worth. Practically 98% of those investments are first lien senior secured, with over 99% of the debt investments carrying a floating fee.
At the moment, BXSL’s portfolio consists of loans supplied to 49 corporations, with mortgage quantities starting from roughly $67 million to over $348 million. Launched in 2018, the agency transitioned right into a public entity within the fall of 2021. To draw traders, the corporate boasts a formidable annual internet return of 10.3% since its inception. Blackstone Secured Lending’s place as a defensive inventory is additional strengthened by its major backer, the Blackstone asset supervisor, which manages over $991 billion in complete property beneath administration (AUM).
A have a look at Blackstone’s monetary outcomes from 1Q23, the final quarter reported, exhibits that the corporate realized $265 million in complete funding earnings for the primary quarter, up 42% year-over-year and coming in $5.18 million above the forecast. On the backside line, the web funding earnings of $149 million gave an EPS of 93 cents per share, in-line with expectations and up 52% previously yr.
Blackstone Secured Lending has paid out dividends since going public, and the final declaration, made on Could 10, was for a 70-cent quarterly frequent share dividend cost. This cost, for Q2, maintains the 17% quarter-over-quarter improve implanted within the prior quarter, and the annualized fee of $2.80 provides a yield of 11%.
In his protection of this dividend champ, Wells Fargo analyst Finian O’Shea sees this firm’s high-quality investments as a key level to draw traders. He writes, “The place most ‘seasoned’ BDC portfolios usually have double-digit top-line contributions from lower-quality earnings sources (PIK, price, and dividends), BXSL continues to shine on high quality of income. We view this measure as an indicator of underlying credit score high quality. Extra importantly, it supplies BXSL flexibility to work by potential drawback credit (amendments, restructurings). This flexibility is simply strengthened by BXSL’s liabilities, that are primarily unsecured, and don’t have any restrictions on the underlying collateral in distinction to revolvers and different asset-based services.”
Trying forward, O’Shea provides BXSL shares an Chubby (i.e. Purchase) ranking, backed by a $26 worth goal. (To observe O’Shea’s observe report, click on right here)
Turning now to the remainder of the Road, the place this inventory will get a Reasonable Purchase ranking from the analyst consensus, based mostly on 9 latest opinions that embrace 6 Buys and three Holds. The shares have a median worth goal of $27.11, suggesting a 12-month achieve of seven.5% from the present share worth of $25.24. Based mostly on the present dividend yield and the anticipated worth appreciation, the inventory has 18.5% potential complete return profile. (See BXSL inventory forecast)
Angel Oak Mortgage (AOMR)
Shifting gears barely, we’ll flip our sights on Angel Oak Mortgage. Whereas nonetheless a monetary firm, Angel Oak is an actual property funding belief specializing in financing residential actual property properties. The corporate payments itself as providing options for ‘underserved’ debtors within the mortgage market, and makes a speciality of providing non-QM loans. Briefly, Angel Oak is working on the downscale finish of the mortgage enterprise, with debtors who would in any other case not qualify for the loans wanted to purchase a property.
Whereas Angel Oak’s major profit to lenders is its dedication to the non-QM market, the corporate additionally provides a streamlined, paperless software course of, utilizing a tech platform to automate your entire mortgage software, from receiving the borrower’s info to figuring out eligibility. The corporate boasts that the entire course of can take minutes, as an alternative of days.
The dangers are larger when working with Angel Oak’s clientele, and that was mirrored within the latest 1Q23 earnings outcomes. Angel Oak reported a internet curiosity earnings of $6.8 million, down from $16.9 million within the prior-year quarter and lacking the forecast by $3.3 million. On the backside line, the corporate had a detrimental non-GAAP distributable EPS; that’s, a lack of 37 cents per share. That determine was 55 cents beneath the anticipated 18-cent EPS revenue. Headwinds within the quarter included a tighter credit score market and rising mortgage charges, making it tougher for property consumers of all stripes – and squeezing the decrease finish most of all.
On a constructive be aware, Angel Oak completed the primary quarter of 2023 with a stable money place. The corporate’s money and liquid property had been up 25% from the earlier quarter to a complete of $36.7 million. And we must always be aware that the inventory is up by a formidable 72% to date this yr.
Regardless of the hefty loss in distributable EPS, Angel Oak continued paying out its quarterly dividend, and declared the final cost, for a Could 22 payout, on the fourth of this month. The 32-cent frequent share dividend annualizes to $1.28 and provides a sky-high yield of 17%.
This resi-REIT has caught the attention of analyst Donald Fandetti, who, in his be aware on the inventory for Wells Fargo, states: “With its deal with buying and investing in non-QM mortgage loans, we view AOMR as a singular mortgage REIT. We view non-QM as a gorgeous long-term market alternative. Observe that AOMR advantages from its affiliation with the broader Angel Oak platform, together with proprietary deal stream from Angel Oak Mortgage Lending (the biggest non-QM lender within the U.S.) and experience from its exterior supervisor Angel Oak Capital Advisors… Progress on liquidity this qtr and extra securitizations may additional assist scale back financing danger…”
Fandetti goes on to present AOMR shares an Chubby (i.e. Purchase) ranking, and he units his worth goal at $9, implying the inventory will achieve 19.5% within the yr forward. (To observe Fandetti’s observe report, click on right here)
Whereas Fandetti and Wells Fargo are prepared to purchase right here, the Road usually is extra cautious. The inventory has 3 latest opinions, cut up evenly with 1 Purchase, 1 Maintain, and 1 Promote, for a Maintain consensus ranking. (See AOMR inventory forecast)
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Disclaimer: The opinions expressed on this article are solely these of the featured analysts. The content material is meant for use for informational functions solely. It is vitally necessary to do your personal evaluation earlier than making any funding.