The Dow Jones index finished last week with a modest loss, even after a late-week rally in Friday’s session. It marked the seventh week in a row that the Dow posted a weekly loss, it’s longest such streak in two decades. That capped a brutal season of market losses, all across the board. The S&P 500 is down 16% this year, and the NASDAQ, with a year-to-date loss of 25%, is into bear market territory.
Investors have been giving conflicting sets of reactions to the market’s fall. Coming at it from a bearish angle is Morgan Stanley’s strategist Michael Wilson, who writes, “We continue to believe that the US equity market is not priced for this slowdown in growth from current levels. We expect equity volatility to remain elevated over the next 12 months.”
To cope with these market gyrations and increased volatility, Wilson recommends a hard shift into defensive stocks – and plenty of the Street’s analysts have been going that route, too.
Using TipRanks’ database, we’ve pulled up the latest info on two stocks that fit the bill. These are high-yield dividend payers, offering defensive investors yields of 8% or better. Each stock also holds a Strong Buy consensus rating; let’s see what makes them so attractive to Wall Street’s analysts.
Ares Capital Corporation (ARCC)
We’ll start with a business development company (BDC), Ares Capital Corporation. These are specialty finance firms that work in parallel to the banking industry and provide access to capital, credit, and other financial instruments for small- and mid-market enterprises that would not necessarily have access to the major banks. Ares, which is based in New York City, makes it possible for small businesses, America’s traditional economic driver, to remain solvent.
Ares maintains a highly diversified portfolio of enterprise investments, with its hands – and funds – in a wide range of assets classes, industries, and geographic locations. The company’s investment portfolio currently holds 395 companies, backed by over 200 private equity sponsors, and boasts a fair value of $19.5 billion.
The 1Q22 results, however, were somewhat mixed. Net investment income came in at $198 million, or 41 cents per share, compared to $144 million, 33 cents per share, in the year-ago period. Meanwhile, the company reported a core EPS of 42 cents, roughly flat y/y from 1Q21’s 43 cents, and below analyst expectations of 47 cents.
Despite the miss in the financial results, Ares declared a 42-cent per common share dividend for 2Q22. This adds to the already announced 3-cent special dividend, which is scheduled for payments through the end of this year. The regular dividend, of 42 cents, annualizes to $1.68 and yields a robust 8.75%. Add in the special payment, and the current yield rises to 9.37%.
Covering the stock for J.P. Morgan’s Melissa Wedel believes ARCC presents a compelling risk reward. The analyst writes, “We believe the strength of ARCC’s origination platform, sizable balance sheet, access to capital markets, and ample liquidity position the company favorably. ARCC’s scale and industry relationships enable the BDC to continue to make competitive, high-credit-quality investments. We believe ARCC’s position as one of the largest BDC platforms affords an advantage in deploying capital opportunistically during market stress and securing funding. We believe ARCC’s solid capital and liquidity position as well as its position as one of the market leaders is not reflected in the share price, resulting in a compelling entry point for investors.”
Based on all of the above factors, Wedel rates ARCC shares an Overweight (i.e. Buy) and her $22 price target implies a 13% upside by year’s end. Based on the current dividend yield and the expected price appreciation, the stock has ~22% potential total return profile. (To watch Wedel’s track record, click here)
JPM’s bullish stance on this stock is no outlier – the shares have 6 positive analyst reviews, for a unanimous Strong Buy consensus rating. ARCC is priced at $19.51 and its $22.33 average price target suggests ~15% gain from that level over the next 12 months. (See ARCC stock forecast on TipRanks)
Owl Rock Capital (ORCC)
The second dividend stock we’ll look at is another BDS firm. Owl Rock also functions as a financing specialist in the mid-market enterprise niche, providing credit, loan facilities, and capital access for the small and medium enterprise sector. Owl Rock’s portfolio brings in approximately $658 million in annual revenues.
The full portfolio includes 74% first lien senior secured debts, and 14.7% second lien senior secured debts. The company has investments in 157 companies which have an aggregate value of $12.8 billion. Owl Rock’s average investment in a portfolio company is $81.3 million.
In the first quarter of this year, Owl Rock saw its investment income increase year-over-year from $221.6 million to $264.2 million, for a gain of 19%. Per share, net investment income came in at 31 cents. This was down from 35 cents in the year-ago quarter, and also missed the 33-cent forecast. However, the company’s earnings were sufficient to keep up the dividend.
Owl Rock declared a dividend for Q2 of 31 cents, equal to the quarterly investment income. This marked the sixth quarter in a row with the dividend held at this level. Annualized, the payment comes to $1.24 and yields a robust 9.3%. That gives investors a full point above the April inflation rate, and ensures a true realized return.
5-star analyst Devin Ryan covers Owl Rock for JMP Securities, and takes a bullish stand on the firm.
“We remain constructive on Owl Rock Capital despite the lighter quarter of net investment income generation and slight decline in book value/share. We were encouraged to see a 3rd consecutive quarter of covering the dividend with net investment income, particularly given the light quarter of repayment related fee income that had been a material component of results in 2H21 due to elevated activity levels in the back half of the year,” Ryan opined.
“Additionally, management’s diligence in extending duration and building a cost-efficient, predominantly fixed-rate liability structure positions earnings to benefit from a rising rate environment. In short, we believe that Owl Rock should continue to deliver strong performance with a fully-scaled investment portfolio,” the analyst added.
In line with these bullish comments, Ryan rates ORCC shares an Outperform (i.e. Buy), and his $16 price target indicates potential for ~19% upside in the months ahead. (To watch Ryan’s track record, click here)
Overall, Wall Street’s analysts have given these shares 6 recent reviews and they break down 5 to 1 in favor of Buys over Holds, for a Strong Buy consensus on the stock. ORCC is trading for $13.47 and its $15.46 average price target suggests it has ~15% one-year upside to look forward to. (See ORCC stock forecast on TipRanks)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
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.
