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…