According to JP Morgan, these 2 dividend stocks are great choices. Is that really true?

The year 2023 has started quite nicely for us. You can see that market sentiment has calmed down, and investors are becoming optimistic. However, analysts at JP Morgan don't see the current situation as good, and recommend the following 2 dividend stocks for investors to defend.

A lot of investors started to get positive about the future of the economy and stock markets earlier this year. Fundamentals such as the slowing rate of inflation, the resurgence of the Chinese economy, and even the relatively low unemployment rate have contributed a lot. Many investors have therefore started to look for the light at the end of the tunnel. But analysts at JP Morgan do not share this view and point out that there are still plenty of pressures on the economy. In fact, they believe that the stock rally we saw earlier this year has only delayed the onset of a recession until sometime later this year.

Unless the Fed begins to cut its nominal interest rates, these restrictive real interest rates will represent a continuing headwind that will keep the risk of a potential recession later this year relatively high.

Indeed, analysts believe that there is still some weakness in the economy, which has just been exacerbated by the Fed's interest rate hikes. Therefore, according to analysts, investors should also take this scenario into account and properly secure their portfolios. Help from JP Morgan analysts comes in the form of recommendations for two dividend stocks that they believe should not be hit as hard.

Brookfield Renewable Corporation $BEPC-2.0%

A chart of the stock price over the past 3 years.

The company operates one of the world's largest renewable energy platforms. The company is focused on building a portfolio of hydro, wind, solar and storage facilities. These facilities are located in North America, South America, Europe and Asia. It operates approximately 25,400 megawatts of installed generating capacity and can capture 8 million tons of carbon annually.

The company's revenues have grown at an average annual rate of about 15% over the past 5 years. In 2022, the company has seen a rapid increase in net profit. If we look at the 4 previous years, net profit grew by an average of about 228% per year. This was partly due to the year 2021, which was quite successful for the company.

How did the company fare in 2022? Given rising energy prices, 2022 was a very successful year for the company. After the outbreak of the war in Ukraine, everyone started to deal with energy substitutes. They were also, of course, trying to get energy at the best possible prices. A huge advantage for the company was that it needed virtually no input materials to produce energy, so it was not hit as hard by high inflation. The company reported revenues of USD 3.78 billion, an increase of around 12% year-on-year. The company's lower costs were mainly reflected in its net profit, as the company reported a net profit of USD 1.5 billion, an increase of about 58% year-on-year. The company's net margin for 2022 was close to 40%.

When I look at the balance sheet, I see one key thing here. The company is unable to cover its short-term liabilities with its short-term assets. The large amount of current liabilities is mainly due to the presence of a portion of long-term debt that is due in a given year. As far as the company's indebtedness is concerned, the amount of long-term debt seems to me to be fine. It would just be a good idea to look at the maturities of the different parts of the long-term debt. If a larger portion is due in any year, the company could be affected. As for the asset value net of liabilities, here I'm coming up with a net asset per share of $15.

The company's operating cash flow has grown at an average of about 6% per year over the last 5 years. The company has not yet been able to keep its capital expenditures, which have been trending upward, at bay. This of course has an impact on free cash flow, which has been declining since 2019, averaging about 10% per year. The renewable energy market is relatively new, and the company is more or less settling in. What's interesting here is the dividend yield the company offers. It currently stands at almost 4.5%. There's a catch, though. The company's dividend payout fluctuates, so one would expect the dividend yield to fluctuate along with it. So I would count the dividend here more as a nice bonus.

Analysts at JP Morgan are quite optimistic about this company, and even consider this company suitable for portfolio inclusion.

We believe BEPC is best-in-class in developing and owning renewable energy projects, offering high-quality cash returns and good growth visibility. We believe this stock should appeal to investors seeking long-term exposure to the secular growth theme of renewable energy.

Analyst Expectations.

This positive analyst sentiment is reflected in the analysts' target price for the stock, which they set at $39.

Oneok, Inc. $OKE+1.2%

A chart of the stock price over the past 5 years.

This is a midstream natural gas company where its network of assets connects natural gas liquids suppliers in the Rocky Mountain, Mid-Continent and Permian Basin regions with important marketing and distribution centers. In addition, the company is expanding its footprint to include operations in the prolific Bakken region of the Northern Plains. The Company's assets include infrastructure for gathering, processing, storing and transporting natural gas liquids.

The company's revenues have grown at an average annual rate of approximately 8% over the past 5 years. In terms of net profit, it has grown by an average of about 57% over the last 5 years. This indicates the company's growing net margins. The net margin in 2021 was roughly around 9%. 2021 was a relatively successful year for the company, causing a more dramatic increase in net profit.

And how was 2022? The company was tentatively able to generate revenues of about $23 billion for 2022, representing a year-over-year increase of about 33%. Net profit for 2022 was about $1.6 billion. This represents a year-on-year increase of approximately 6%. This is likely to be due to an increase in company costs. We will have to wait for the company's annual report for more information.

As far as the company's liabilities are concerned, the company's current liabilities are not backed by its current assets, hence there is a negative working capital. From a long-term perspective, the company's debt seems to me to be already quite large. However, it is still an acceptable ratio. In fact, the long-term debt is roughly twice as large as the company's assets. The net asset value here comes out to about USD 14 per share.

The company's operating cash flow has grown at an average of about 18% per year over the past 5 years. The company has relatively volatile capital expenditures, which of course has an impact on free cash flow, which has grown at an average of about 45% per year over the last 5 years. However, it should be taken into account that the company has had negative cash flow at a time of high capital expenditure. It should also be taken into account that this high growth rate of cash flow was mainly due to 2021, when the company managed to reduce its capital expenditure to a minimum and therefore reported the highest free cash flow in the last 5 years.

As for analysts from JP Morgan, they are also very positive and optimistic about this stock.

In a remarkable risk-averse event, OKE also announced the resolution of the Medford incident, not only by removing the share overhang but also, in our view, by surprising growth expectations.... Despite currently trading at a somewhat fuller valuation, OKE's leverage to the Bakken with a supportive basin fundamental environment and an option on ethane upside presents a favorable risk-reward profile, in our view, especially given the lack of direct natural gas price exposure.

Analyst Expectations.

This optimism is reflected in the stock's price target, which is now set at $75 per share.

DISCLAIMER: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.


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