In this piece, we used TipRanks’ Comparison Tool to have a closer look at three dividend stocks – AVGO, MGA, AEP – that Wall Street continues to love, even as their yields compress in this market rally.
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Due to the robust market rally, some of this market’s top dividend payers have seen their yields come down to Earth in recent weeks. As share prices climb, yields tend to go down.
Though many solid dividend raises are sure to be on the horizon for a wide range of companies, there’s concern that a coming recession or slowdown could weigh heavily on capital return programs. Indeed, dividends are hefty commitments when rates rise and times get tougher.
In any case, the three high-yield stocks in this piece seem well-positioned to make it through a choppier economic environment without having to slash their dividend payout.
Broadcom (AVGO)
Broadcom is a semiconductor company that’s made major strides in the software space in recent years. The firm’s gravitation toward higher-margin software could act as a major boon for operating margins over the next several years. Though a recession could act as some sort of road bump, I do view Broadcom as a unique tech firm that has the ability to balance reinvestment in innovation with a generous dividend payout.
Broadcom’s 3% dividend yield is a thing of beauty. Though the payout ratio is a tad on the higher end at just south of 74%, Broadcom’s forward-looking growth trajectory seems more than enough to fuel many years worth of dividend increases.
The latest acquisition of VMWare in a cash deal worth $61 billion represents a massive splash in the virtualization software space. Though the price tag appears lofty, I think Broadcom actually walked away with a great deal as it bought the steep dip in shares.
Now, VMWare has its fair share of baggage. It’s baggage that Broadcom must deal with. VMWare has seen its revenue numbers slip amid a bumpy transition to a subscription model. Undoubtedly, many Sofware-as-a-Service (SaaS) firms have had to make the transition. As VMWare makes it through the last of its transitory headwinds, Broadcom will look to bring out the best in the firm.
Broadcom has done a terrific job of diversifying its portfolio into software over the years. The VMWare addition fits well with CA Technologies and Symantec, Broadcom’s past software deals.
Though the VMWare deal will take a while to digest, I wouldn’t rule out further deals as Broadcom looks to become a force to be reckoned with in enterprise software.
The stock trades at 26.7 times trailing earnings and 7.7 times sales. Not too high a price to pay for a semi-kingpin that’s growing its moat with every deal it makes.
Wall Street remains upbeat, with 12 Buys and no Sells or Holds assigned in the past three months. The average AVGO price forecast of $698.64 implies upside potential of 26.7%.
Magna International (MGA)
Magna International is a Canadian auto-part manufacturer that’s been slipping of late. Down more than 35% from its all-time high just north of $125 per share, Magna stock now finds itself closing in on a $60-$75 consolidation channel that it was stuck in for many years prior to the pandemic.
The pandemic-induced surge in auto demand helped propel Magna stock to new heights, but eventually, the market pulled the rug from underneath investors, causing shares to shed nearly half of their value from peak to trough.
At writing, shares trade at 27.7 times trailing earnings and 0.5 times sales. That’s a modest multiple for a firm that still has a lot to gain by supplying many automakers that are fuelling the ongoing electric vehicle (EV) boom. While an economic downturn could weigh on coming results, I do think secular tailwinds in the auto sector are too strong to keep a robust parts supplier like Magna down for too long.
Demand for vehicles remains robust. Still, such strength didn’t help the company in its latest quarter, which saw Magna miss earnings ($0.83 EPS vs. the $0.93 consensus estimate). Inflationary pressures, including higher energy and transportation costs, were reasons why Magna’s earnings came up shy. Upward pressure on wages may also act as a sore spot on margins over the foreseeable future.
In any case, Magna steered through the same environmental headwinds as most other companies. Despite the disappointing results, the firm remained upbeat with its sales outlook. As the last of the semi shortage passes, auto production could pick up in a meaningful way. The only question is whether demand will still be there as consumers feel the pinch going into year’s end.
Wall Street stands by the Canadian auto-part kingpin, with five out of five analysts touting the stock as a Buy. The average upside is 16.7%, implying an MGA price target of $73.61.
American Electric Power (AEP)
American Electric Power is a sleep-easy dividend stock for investors rattled by volatility. The 3%-yielding electric power behemoth boasts a mere 0.36 beta, meaning shares are far less likely to move based on the day-to-day action of the S&P 500.
U.S. President Joe Biden’s recent passing of the U.S. Inflation Reduction Act bodes well for AEP as well as the broader utility space. The company’s increased investment in renewable power projects puts it in the government’s good books. Further, AEP may have fewer hurdles standing in its way should it spot an M&A opportunity.
With such a heavily-regulated mix of assets, AEP is great for those looking for a solid foundation going into an economic recession. Management is calling for long-term EPS growth to fall into the 6-7% range. That’s some solid recession-resilient growth for a well-run firm that won’t deliver too much in the way of surprises.
At 20.6 times trailing earnings, AEP stock does not come cheap. The recent run-up in utilities has brought shares within striking distance of new highs of around $105 per share.
In any case, Wall Street still loves the name, with seven Buys and two Holds. Despite sporting a “Strong Buy” consensus rating, the implied upside is just 1.5%. I think price target upgrades for AEP stock could be on the way as analysts look to react following a sharp rally.
Conclusion
Broadcom, Magna, and AEP are three dividend heavyweights well-positioned to move through a period of subtle economic contraction. Of the three names, Wall Street expects the most from Broadcom in terms of upside potential.
