We are in the midst of a broad uptrend, with solid year-to-date gains, but the past week has seen a drag on that rally, with a losing week on the major indices.
Call it a warning sign. While sentiment remains strong, headwinds are gathering. The Federal Reserve kept interest rates steady at its June meeting, after more than a year of hikes to fight inflation, but inflation, though down to 4% annualized, is still twice the target rate. Conventional wisdom says that the Fed is not done climbing, even if it means increasing the risk of recession. We are already seeing the effects of the credit crunch on housing markets and consumer spending.
In short, now may be the time to take advantage of the buying mood and get into defensive stocks, especially dividend stocks. Their steady income stream and potential return of up to 10% provide protection against inflation and economic slumps, key points in their popularity with investors.
But how do you find the best dividend payers? This requires further examination of the data. We used TipRanks Smart Score, a sophisticated data analysis algorithm, to do this. The Smart Score measures each stock against 8 factors all known to correlate with outperformance, and assigns them a score on a scale of 1 to 10. Take a closer look.
So here are two dividend payers, one paying as much as 10%, both of which scored perfect 10s from the Smart Score. We’ll also be reviewing recent commentary from Street analysts to add color and detail.
Franklin BSP Real Estate Trust (FBRT)
We’ll start with a real estate investment trust (REIT), Franklin BSP Realty. REITs are well known as dividend champions; these companies operate by buying, owning, managing and leasing real estate of all kinds, as well as mortgage-backed securities – and tax regulations require that they return a certain proportion of profits directly to shareholders. Dividends are a convenient mode of compliance, and the result for investors is often a reliable, high-yielding passive income stream.
Franklin BSP Realty has a portfolio that primarily focuses on commercial real estate debt. The company acquires and creates these debts and provides both management and underwriting services. Franklin has built his business on a wide range of loans, ranging from $10 million to $250 million, and lends up to 80% of property value. The company will facilitate mortgages on commercial properties of any type, in the United States.
In the last reported quarter, 1Q23, Franklin’s total revenue was $62.77 million, a strong result that was up from $55.1 million in the prior year quarter and exceeded estimates by $8.76 million. The company’s bottom line, a non-GAAP EPS of 44 cents, was 7 cents higher than expected and much better than the 99 cent EPS loss reported a year earlier. Franklin ended the first quarter with an impressive total liquidity of $1 billion, including $230 million in cash.
Franklin has been paying quarterly dividends since late 2021, and the current payout, 35.5 cents per common share, has been in place since early 2022. The common share dividend was last declared on June 20 for a payment on July 10.; the annualized rate of $1.42 gives a robust return of 10.5%.
Franklin’s Perfect 10 smart score is based primarily on 3 strong metrics: 100% positive blogger sentiment, a 306,200 share increase in hedge fund holdings last quarter, and insider buying totaling over $36,800 over the past 3 months. Additionally, the company’s simple moving average – the ratio of the 20-day average to the 200-day average – is positive.
For Sarah Barcomb, who covers this BTIG stock, the key point here is Franklin’s low exposure to problem loans and its ability to cover the dividend. She writes of the stock: “We believe FBRT should endure less pain compared to its CMEIT peers who average 25% exposure in the office (compared to 6% for FBRT). Interest rate cap expirations will trigger difficult conversations. That said, we expect multi-family sponsors to commit to assets in most cases, given the strong growth in rents and cash supported by the Agency.
“We believe strong dividend coverage, advances in asset management and significantly lower exposure to ‘problem loans’ relative to its peers should enable FBRT to continue to acquire higher yielding loans. with a favorable basis while preserving liquidity,” added Barcomb.
These comments confirm Barcomb’s Buy rating on the stock, while its $15 price target indicates the potential for 11% appreciation in the stock over the next 12 months. (To see Barcomb’s track record, Click here)
The recent 5 analyst reviews on FBRT are split 4 to 1 in favor of buys over holds, and add to a consensus strong buy rating from analysts. The stock’s average target price is $15.38, suggesting a gain of 13.5% over the one-year horizon. (See FBRT Stock Analysis)
Bank of NT Butterfield & Son (NTB)
Next, Bermuda-based Butterfield Bank, officially the Bank of NT Butterfield & Son. It is a small banking company, with a market capitalization of $1.33 billion, and it strives to be the leader among independent offshore banks. Butterfield’s operations are located in Bermuda, Cayman Islands, Bahamas, Channel Islands, Singapore and Switzerland. The bank’s services include wealth management and specialist finance, and it also provides residential mortgages in the UK.
Butterfield is an ancient company, dating back to Nathaniel T. Butterfield’s founding of Bermuda’s first bank in 1858. Prior to this, the Butterfield family was involved in international commerce based in Bermuda, through a trading company established in 1784. Butterfield Bank has used this long experience in international financial matters to provide the combination of qualified and discreet banking services sought by its clientele.
Looking at revenue and earnings growth, we see that Butterfield has had a good year. The company reported $147.5 million in revenue for 1Q23, up 15.5% year-over-year and beating forecast by $1.14 million. Ultimately, the company delivered earnings per diluted share of $1.24, 8 cents per share ahead of expectations and up 39% from EPS of 89 cents in the prior year quarter. .
The company ended the first quarter with $8.3 billion in liquid assets, including cash, bank deposits, reverse repurchase agreements and other equivalent liquidity assets. This represented just over 60% of the bank’s total assets, giving Butterfield a very liquid position.
Butterfield pays a regular dividend and declared a payout of 44 cents per common share for 1Q23. This was paid on May 22; at this rate, the dividend cancels out at $1.76 per common share and provides a solid yield of 6.7%. The company has maintained a reliable dividend payout, at 44 cents per share, since February 2019.
On the Smart Score, we see that NTB’s Perfect 10 is based primarily on three metrics. These include return on equity over 12 months, which was 26%; sentiment among financial bloggers, which was 100% positive, compared to an industry average of 67%; and hedge fund activity, which posted an increase of 232,200 shares last quarter.
Butterfield’s strong cash position and strong balance sheet caught the eye of David Feaster of Raymond James. Even taking into account the negative aspects of the last quarter, the 5-star analyst sees a lot to like here. He writes: “Although deposit outflows were higher than expected, management anticipated this and positioned its balance sheet with enough cash to fund them quickly. Importantly, the bank still retains significant liquidity (cash = 9.8% of assets) and outflows have been mostly limited to the Channel Islands, which are one of its costliest jurisdictions and were a function normal business activity. Going forward, we expect deposit balances to stabilize, which, combined with decelerating funding cost increases and continued asset repricing, supports the stabilization of the NIM and its potential expansion in the future. ‘coming.
“All-inclusive,” summed up Feaster, “given its strong fee income contribution, low-risk balance sheet and strong profitability profile combined with its updated P/E valuation and attractive dividend/ well hedged, we continue to view risk/reward favourably.
To that end, Feaster rates Butterfield as an outperformer (buy), while its price target of $32 implies 20% one-year upside potential. (To see Feaster’s track record, Click here)
There are only 4 recent analyst reviews on record for NTB, but they are all positive, giving the stock its consensus Strong Buy rating. The shares are trading at $26.58 and the average price target of $35.75 suggests they will gain 34% over the coming year. (See BNT Stock Analysis)
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Disclaimer: The opinions expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.