Buy The Dip: High Dividends Get Way Too Cheap

The dividend stock sector ( SCHD ) has bounced back strongly in recent weeks after lagging the broader market since early 2023 as the AI ​​boom, along with high interest rates, lifted tech stocks by mega- head, while they weighed a lot. on interest rate sensitive yield sectors such as REITs and utilities.

That said, some high-yield stocks have largely failed to rally with the broader dividend sector, including some high-quality ones that appear to be significantly undervalued at the moment. As a result, we’re buying these stocks aggressively in our portfolio, and I’ll share two of them with you today.

#1 High Dividend Stocks

The first is Brookfield Renewable Partners (BEP) (BEPC). As the chart below illustrates, BEP has not only underperformed the high-yield space and the utility space recently (XLU), but also underperformed peers such as Clearway Energy (CWEN)(CWEN.A). However, BEP’s poor market price performance does not reflect the underlying performance and quality of its portfolio.

First, BEP is arguably the strongest and most diversified renewable energy producer in the world, as it has a presence in all major energy markets in 20 different countries. BEP has a significant presence in hydropower, wind power, utility-scale solar, distributed energy, battery storage and nuclear reactor manufacturing through its Westinghouse stake. It also has an extensive development pipeline, particularly in utility-scale solar and battery storage, as well as onshore wind and hydropower. About 60% of its assets are in North America, with about 15% in Europe and the rest in the Asia Pacific region, including geographies such as China, India and Australia.

The company also has an exceptional track record, generating FFO per unit CAGR of 12% since 2016 and growing distribution at a CAGR of 6% over the past two decades plus. In addition, BEP’s balance sheet and business model are set up to be quite defensive and withstand all kinds of macro environments, including higher inflation and interest rate environments, as well as lower inflation and rate environments interest. Seventy percent of its earnings are indexed to inflation, meaning that even if interest rates and inflation rates remain higher for longer, its organic growth would likely increase to help offset rising interest expenses. This is especially true because 95% of its debt is fixed rate, and the average maturity of corporate loans is 12 years, and at the asset level, debt is 11 years. This means BEP will only have a small portion of its debt maturing each year, while 70% of its revenue will see accelerated organic growth due to higher inflation. This suggests that BEP should not suffer much at all in a longer environment.

However, if interest rates were to fall, it would also boost BEP as the net present value of its cash flows would likely increase as 90% of its cash flows are contracted for an average of 13 years. It would also likely lower its cost of capital, allowing it to invest more aggressively in growth. In addition, BEP has a BBB+ credit rating, which means it should have access to attractively priced debt compared to many of its peers. As most of its peers are junk rated, this should allow BEP to invest on a higher basis and also make acquisitions more attractive as it can refinance the debt into the assets it acquires, in many cases at significantly higher rates lower interest rates, thus unlocking additional cash flows from purchases. BEP also has $4.4 billion of available liquidity that it can invest in growth opportunities on a strategic basis, including potentially acquiring its units, as it has been known to do in the past.

Not least between its huge development book and the very low headwind risk of rising interest rate spending, given that BEP has almost no debt maturing before 2029 or later, as well as escalating inflation and other increases of contract revenue, its margin- Enhanced programs, which are designed to reduce costs and increase cash flows on re-contracting, as well as its robust capital recycling program, BEP sees a clear path to generating 10% or more high FFO per unit growth per year for the foreseeable future. Combined with its current yield of 6%, BEP looks poised to offer very attractive risk-adjusted returns, especially as its long-term contracted assets should give it considerable cash flow stability even in a downturn economic. Additionally, BEP’s recent 10.5 gigawatt deal with Microsoft to provide renewable energy to power its AI investments gives it another very exciting growth opportunity and could also lead to additional deals with other tech giants in the future.

High Dividend Stocks #2

Another attractive dividend stock right now is Nutrien (NTR). NTR is a leading agricultural business that manufactures fertilizers, nutrients such as potassium, nitrogen and phosphate and also operates a retail segment that provides more stable cash flows through the distribution and sale of crop nutrients, protective products of plants, seeds and commodities. products. NTR is currently investing in improving the profitability and efficiency of its retail business, as well as the efficiency of potash mine operations through increased automation. NTR is also investing in nitrogen expansion and brownfield reliability projects, which should increase its nitrogen production. While this space faces some price headwinds, NTR still expects its business to deliver solid performance this year, with retail EBITDA likely to grow significantly year-on-year from 2023, while spending of capital should decrease by between 400 million and 500 dollars. million year over year, which should help unlock additional cash for shareholder returns in the second half of the year.

NTR also believes that supply and demand are eventually balancing out, which should support the price of the nutrients in the crops it produces. Management also pointed out that in the second half of 2024 and as the company moves into 2025, depending on cash flow generation, they are certainly interested in buying back shares alongside potential opportunistic retail opportunities in North America and Australia.

NTR looks attractive from a valuation perspective as it is currently trading at a discount to its historical value on an EV to EBIT basis, currently trading at 6.79x versus 7.66x for its historical average. Despite facing recent industry weakness, NTR’s dividend yield of ~4.5% is very attractive compared to its historical average of 3.4%, while its free cash flow yield of 15.4% it is also quite high compared to the historical average of around 10%.

Combining the potential for strong buybacks with NTR’s history of growing its dividend at a solid rate over time and expected to continue to do so, NTR is a good portfolio diversifier as well as a relatively inexpensive way to gain access in the agricultural space, benefiting at the same time from a diversified business model, which also has a balance sheet at investment level.

Investor Takeaway

With stocks like BEP and NTR, investors can get yields ranging between 4.5% and 6% right now, along with expected inflation-beating dividend growth in the near term, supported by strong balance sheets, business models of well-diversified quality, and attractive long-term growth per share and intrinsic value growth potential. By building a diversified portfolio of stocks like these, investors can have well-diversified portfolios that have significant growth potential, along with attractive current income, which puts these types of portfolios at an advantage to outperform over the long term, especially if are combined with an opportunist. capital recycling program that I like to implement.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.