Multiple headwinds are currently buffeting the markets, pulling stocks, bonds, and commodities in different directions. The potential market shocks are enough to make any investor’s head spin, with stubbornly high inflation, the war in Ukraine, the continuance of COVID, and even the emerging volatility in Chinese real estate. They’re also a powerful motivator to start taking a protective approach to one’s investing portfolio.
At least, that’s what Morgan Stanley’s chief investment officer and US equity strategist Mike Wilson has to say about it. When it comes to the markets, Wilson advises caution, adding, “We remain pessimistic on the S&P 500 index from a risk reward basis, particularly following the recent gain.” Our end-of-year base case objective of 4400 is 4% lower than current levels. At the stock level, we continue to advise investors to seek for defensive companies with reliable cash flow.”
This is a simple formula for investors to follow, and it leads us to two recent Morgan Stanley stock recommendations – both of which are reliable dividend payers with good growth potential. We searched TipRanks’ database for both names to see what other Wall Street analysts had to say about them.
Agree Realty Corporation (ADC)
We’ll start with REIT, which is one of the market’s perennial dividend champions. Real estate investment trusts acquire, own, operate, and manage a wide range of real estate assets, including residential, multi-family, commercial, retail, and industrial buildings, as well as mortgages and mortgage-backed securities. REITs are required by government authorities to return a large percentage of profits directly to shareholders, and dividends are a frequent method of doing so. This is of importance to defensive investors. As a result, REITs are known for paying out high-yielding and dependable dividends.
Located in the Detroit metro area Agree Realty specialises on commercial property ownership, development, and leasing for big retailers. Autozone, Costco, Aldi, Best Buy, Walmart, and Sherwin-Williams are among the company’s 1,400 properties, which comprise 29 million square feet and are leased out to big retailers like Autozone, Costco, Aldi, Best Buy, Walmart, and Sherwin-Williams.
Agree exhibited strength on several important indicators in its most recent reported quarter, 4Q21. The company’s top line revenue, which is mostly made up of property rents, increased for the eighth time in a row to $91.4 million. The top line increased by 28% year over year. The firm’s core funds from operations (FFO) came in at 92 cents per share, while net income was 44 cents per share. These figures increased by 10% and 5% year over year, respectively.
The dividend was the most important factor to consider in ADC for a defensive investor. ADC distributes a monthly dividend of 22.7 cents per common share. This works out to $2.72 per common share on an annualised basis, yielding 4%. While there are companies that offer bigger dividends, what sets Agree apart is its consistency — the firm has paid its dividends on time since going public in 1994.
Morgan Stanley analyst Ronald Kamdem, who covers ADC, begins his analysis of the stock by highlighting the high quality of Agree’s tenants, which is a key difference for a REIT.
“Among triple net REITs, Agree Realty Corporation has the greatest quality portfolio and a significant growth runway. ADC partners with industry-leading and rapidly expanding retail tenants to offer them with 1) growth funding through sale leasebacks and 2) development capabilities, in which ADC constructs additional locations for the retailer. We believe the business’s growth potential and defensive features are underestimated. Indeed, the multiple premium to peers has decreased from +46 percent to +3 percent in the post-COVID period. As a result, we believe there is an attractive entry position for this high cash flow, low capex, and defensive business,” Kamdem said.
As a result, Kamdem commenced coverage on ADC with an Overweight (Buy) rating and a $75 price target. From current levels, the projection predicts a 12.5 percent increase. (Click here to see Kamdem’s track record.)
Morgan Stanley isn’t the only business that thinks highly of this REIT; the stock has 11 recent reviews, with 9 Buys outnumbering 2 Holds. The stock is currently trading at $66.66, with an average target price of $75.86, implying a 14 percent one-year gain. (For further information, see TipRanks’ ADC stock forecast.)
AT&T, Inc. (T)
The second dividend stock we’ll look at is self-explanatory. AT&T has one of the most famous corporate brands in the world, as well as a long history in the critical telecom sector. AT&T today provides landline telephone services, broadband internet via fiber-optic and wireless networks, and is substantially involved in the deployment of 5G in the United States. AT&T has a market capitalization of $173 billion and yearly revenues of over $170 billion.
AT&T made an interesting divestiture manoeuvre in recent months. The company bought TimeWarner in 2018, but stated earlier this year that as part of a merger between WarnerMedia and Discovery Inc., it will spin off its interest in the acquisition (now called WarnerMedia) to shareholders. This merger would form Warner Bros. Discovery, a new entertainment firm, and AT&T stockholders will receive 0.24 shares of the new company for each share of AT&T stock they possess.
AT&T has also declared a stock dividend, which will be paid in May, in conjunction with the stock spinoff. The quarterly dividend was established at 27.75 cents per common share, or $1.11 on an annualised basis, yielding 4.63 percent. AT&T’s considerable free cash flow, which was $8.7 billion in 4Q21 and $26.8 billion for the full year of 2021, supports the dividend. The dividend’s consistency is also significant; AT&T has shown a long-term commitment to the payments, having not missed a single quarterly payout since the payments began 38 years ago in 1984.
“We were encouraged with the enhanced visibility into free cash flow generation and EBITDA growth over the next couple of years,” Morgan Stanley analyst Simon Flannery wrote of his recent visit to an AT&T investor day. With a pro forma dividend yield of over [4%], a double digit free cash flow yield, and a pro forma P/E multiple of just 7x on newly provided guidance, AT&T is one of the greatest buys in our covered universe… After the spin is completed, we expect the stock will experience increased investor interest.”
Based on the foregoing, Flannery rates AT&T shares as Overweight (Buy) with a price objective of $28, implying a 16 percent upside in the next year. (Click here to see Flannery’s track record.)
Overall, based on 14 assessments, the analyst consensus rating is a Moderate Buy, with 8 Buys, 5 Holds, and 1 Sell. The average price objective of $29.69 represents a 23 percent increase over the current market price of $24.18. (See TipRanks’ AT&T stock outlook.)
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