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Goldman Sachs: 3 High-Yield Dividend Stocks With Growth on the Horizon
Stock Analysis & Ideas

Goldman Sachs: 3 High-Yield Dividend Stocks With Growth on the Horizon

Did the bull market cycle end on September 2? The NASDAQ lost 7% from its peak above 12,000, while the S&P saw smaller losses of 4.5%. Of course, there have been positive trading sessions – and a look at the year-to-date chart suggests that stock markets simply experienced a temporary correction, one of several that have occurred so far, since the bull run began in March.

Still, the market activity of the past two weeks reminds us that every investor should take steps to defend his portfolio, in good times as well as bad. Banking giant Goldman Sachs has taken that reminder to heart, and pointed out three high-yielding dividend stocks with upside potentials starting at 25%.

Turning to the TipRanks database, we’ve pulled up the latest information on the Goldman Sachs picks. Combined with the analyst comments, the data will tell us what else makes these stocks compelling buys.

MPLX LP (MPLX)

Unsurprisingly, all three stocks that Goldman checked are in the energy industry. Oil – and other hydrocarbons – is vital in the modern economy, and the companies that drill it, move it, and sell it generally have the cash available to pay out high dividends. MPLX, which spun off of Marathon Petroleum eight years ago as a separate midstream entity, generates its income from a series of pipelines and oil transport assets, also including river shipping, terminals, and refineries. The company’s operations are focused in the MidWest and Gulf Coast.

MPLX has shown a clear ability to generate cash through its operations. The company’s cash position last year allowed it to return $2.8 billion to shareholders, through a combination of buybacks and dividend payments. In 1H20, MPLX reduced its capital spending in response to lower income, and despite posting a net loss in the first quarter it generated $1 billion in net cash.

In the second quarter, as earnings returned to a strong net profit, the company saw net cash from operations of $1.105 billion. Distributable cash flow in the quarter was almost $1.03 billion, and the company paid out its usual high dividend: 68.75 cents per common share. At $2.75 annualized, this dividend yields well over 15%, and importantly for investors, the company has been gradually growing the dividend for the past 8 years.

Goldman Sachs analyst Michael Lapides writes of this stock, “MPLX is a large diversified MLP with a portfolio of crude and refined products assets … as well as gathering and processing (G&P) assets across various basins, notably the Marcellus/Utica… we see a clear path to improvement: new strategic initiatives for the complex…, a stronger Marcellus/Utica macro outlook, and a clear path to deleveraging…”

With that background in mind, Lapides initiated coverage on MPLX with a Buy rating. His $24 price target suggests that MPLX has a 33% upside potential for the coming year. (To watch Lapides’ track record, click here)

Overall, MPLX gets a Moderate Buy analyst consensus rating, based on 7 Buys and 3 Holds. The shares are selling for $18, and the $22.86 average price target implies an upside of 27%. (See MPLX stock analysis on TipRanks)

Suncor Energy, Inc. (SU)

Next up is Suncor, a Calgary-based company and a major operator in Alberta’s oil patch. Suncor works the tar sand oil deposits that put Alberta on the oil map, producing synthetic crude oil from the semi-solid bitumen. The oil sands are estimated to contain nearly 180 billion barrels of economically viable recoverable reserves, and Suncor is one of the biggest producers in the region.

Suncor has faced serious headwinds so far in 2020. The COVID-19 pandemic has impacted demand and imposed supply, distribution, and labor disruptions, while competition from OPEC and other international producers has pushed prices lower. SU’s earnings turned negative in Q1, and the EPS loss deepened in Q2. At the top line, revenues have slipped from C$9.5 billion in Q4 to C$7.4 billion in Q1 to C$4.2 billion in the second quarter.

With revenues and earnings slipping, and the share price down 57% year-to-date, it only makes sense that Suncor has reduced the quarterly dividend payment in 2020. The dividend was increased steadily from 2017 through the end of 2019, but in 2020, the payment was reduced to 15 cents per common share. It’s been kept at this level for two quarters, and even at the reduced level the dividend yields 4.5%, well above the average found among S&P 500.

Reviewing this stock for Goldman Sachs, analyst Neil Mehta wrote, “Our positive view is predicated on: (1) balance sheet strength, with 1.0x ND/EBITDA versus peers at 1.4x in 2021; (2) strong FCF generation despite some negative earnings revisions; (3) potential for C$2 bn of cash flow growth from debottlenecking and margin enhancing projects through 2025; and (4) attractive valuation after recent underperformance versus peers.”

Mehta sets an $18 price target on SU, representing a 32% upside for the coming year and supporting his Buy rating on the stock. (To watch Mehta’s track record, click here)

Overall, Suncor has a Strong Buy rating from the analyst consensus, after receiving 12 Buy reviews and 2 Holds in recent months. The stock has an average price target of $22.07, even more bullish than Mehta’s and giving it a 62% upside potential from the $13.63 trading price. (See SU stock analysis on TipRanks)

Canadian Natural Resources (CNQ)

The last stock on our list is another large company from the Canadian energy industry. Canadian Natural Resources operates in the heavy crude region of Alberta, and in the natural gas plays of adjacent British Columbia. Canadian Natural’s assets include light, medium, and heavy crude oil, along with oil sands mining rights and both conventional and unconventional natural gas wells. The company is the largest landholder in the Western Canadian Sedimentary Basin. Supplementing its North American assets, CNQ also has offshore operations in the North Sea and on the West African coast.

The company’s stock took a hard hit in February, when the coronavirus pandemic sparked a sharp economic downturn. Shares fell 74%, and have still not fully recovered. Fortunately, the company met the crisis after a strong finish to 2019, a year that saw total production reach almost 1.1 billion barrels of oil equivalent and free cash flow hit $4.6 billion.

In recent months, even as the economy has begun to come back, CNQ has found that its own headwinds have not diminished. Supply and demand are still not in balance in the oil industry, and recessionary pressures are pushing oil prices down.

Despite those headwinds, CNQ has kept up its dividend payment. The most recent dividend, declared in August and set for payment on September 18, is for C$0.425 cents (US$0.32). At this rate, the dividend annualizes to C$1.70 (US$1.29), and gives a robust yield of 7.1%. The company has been raising the dividend steadily for the past several years.

This stock was, like SU, reviewed by Neil Mehta, who notes three important factors behind his Buy rating: “Positive capital intensity surprises, including positive commentary around 2021; sufficient liquidity to navigate the downturn and expectations of deleveraging in 2021-2022; and CNQ’s potential to benefit from an oil price recovery.”

Mehta accompanies his Buy rating on CNQ with a $23 price target, implying a 25% one-year upside potential.

All in all, Canadian Natural has 12 recent Buy reviews, making the Strong Buy analyst consensus rating unanimous. Shares are selling for $18.37 and have an average price target of $24.19, suggesting an upside of 32% for the coming year. (See CNQ stock analysis 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.

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