Markets are volatile, with an overall bear trend combining with short rallies to confuse investors. Economic headwinds are piling up, in the form of stubbornly high inflation, rising interest rates and tighter money from the Federal Reserve, growing evidence of a slowing economy, and an increased potential for a deep recession in the next few months.
For investors focused on defense, blue chip dividend stocks are natural plays. The blue chips are stocks with reputations for high quality, capable of retaining their value even in a difficult economic climate. Add in quality dividends, with long histories of reliability current yields of 5% or better, and the combination is unbeatable for portfolio protection: value, income stream, and insulation against inflation.
Wall Street’s analysts have picked up on the theme, and high-yield blue chip dividend payers feature prominently among their recent recommendations. We’ve opened up the TipRanks database and pulled the details on two of these stocks, blue chips with easily recognizable names and long histories as solid defensive options. Let’s take a closer look.
We’ll start with a true stock market stalwart, a long-time fixture of the Dow Jones index, and a name that everyone will recognize: IBM. The company is known as a producer of computer hardware and software, and a provider of cloud and consulting services. IBM boasts a market cap of ~$119 billion, so its pockets are deep enough to weather an economic storm.
IBM has also been bringing in the revenue results, giving the company additional resources to survive in today’s tough conditions. The company reported $14.1 billion at the top line for 3Q22, reported earlier this month, a total that was up 6% from the year-ago quarter. IBM’s top line was supported by gains in all four of its major segments: a 5% gain in consulting, a 7% gain in software, and larger gains in hybrid cloud and infrastructure, of 15% and 23% respectively. In addition, IBM showed a net cash of $6.5 billion, with a free cash flow of $4.1 billion.
IBM’s solid cash position helped support the dividend, which has a reliable payment history going back to 1913. Not many company’s can boast of a dividend history lasting more than a century. As for the current payment, IBM declared its Q3 common share dividend in August, for $1.65 per share. The dividend was paid out in September. At its current rate, the payment annualizes to $6.60 per common share and yields 5%. This is more than double the average dividend payout in the broader market.
Writing from Jefferies, analyst Kyle McNealy is impressed by IBM’s staying power – and its ability to withstand a market storm. McNealy says of the company: “In the face of multiple headwinds (i.e., FX, Russia, labor cost inflation), IBM has been able to offset some of the impact with outperformance in Consulting and Infrastructure. Further, they’re not seeing much slowdown from customers in response to the uncertain macro.”
“Given the attractive valuation at 8.4x EV/2023E EBITDA, we think the stock can perform well if the company executes consistently to plan even without outsized beat-and-raise quarters. We continue to see opportunity for the shares to re-rate higher as investors gain more confidence in management execution, the growth profile improves, and Software/Services become an increasing mix of the business,” McNealy added.
Going forward from these comments, McNealy gives IBM shares a Buy rating, and his $160 price target suggests an upside of 21% for the next 12 months. Based on the current dividend yield and the expected price appreciation, the stock has ~26% potential total return profile (To watch McNealy’s track record, click here)
Overall, IBM has a Moderate Buy rating from the analyst consensus, based on 8 reviews breaking down to 5 Buys, 2 Holds, and 1 Sell. Shares in IBM are selling for $132.69 and their $140.63 average price target implies a one-year gain of ~6%. (See IBM stock forecast on TipRanks)
Next up is one of the stock market’s all-time dividend champions, AT&T. This blue chip company is another of the market’s oldest, most recognizable names; it got started in telecommunications when telecommunications meant sending messages along the telegraph wires. Telegraphs gave way to telephones, and later to digital and wireless communications, and AT&T has adapted to the changing world over the decades. Today, the company is heavily invested in 5G, as well as traditional fiber-optic broadband networks, and remains a leading provider of landline telephone services.
It’s an impressive history for the $125 billion company. In its current incarnation, AT&T brings in annual revenues on the order of $168 billion or more, although quarterly top lines in both Q2 and Q3 this year were down from 2021. In Q2, the company brought in $29.6 billion; that rose slightly to $30 billion in Q3 – but that most recent quarterly total was down 24% year-over-year.
At the same time, T shares surged after the Q3 earnings release, despite the drop in overall revenues. The reason was a strong performance in wireless and fiber broadband customer gains, which exceeded expectations. Furthermore, the company’s EPS, at 68 cents, was up 3% y/y. And the $3.8 billion in free cash flow, while below the forecast, was more than enough for AT&T to keep up its common share dividend.
The current payment is 27.75 cents per share, which annualizes to $1.11, gives a yield of 6.3%. This is more than triple the average dividend found among S&P-listed firms. AT&T has a reputation for never missing payments, and its modern dividend history goes back to 1984.
Analyst Frank Louthan, from Raymond James, notes AT&T’s gains in subscriptions and earnings, and writes, “In a world where there are just two critical factors for AT&T’s stock performance (wireless subs and EPS growth) this was all it took… AT&T’s simpler story is starting to show up in the numbers. We continue to believe a more focused vision along a simpler line of business creates a solid scenario for share price appreciation, and a solid, total return.”
Louthan backs this view with a Strong Buy rating on the shares, and his $24 price target indicates potential for a 37% upside in the coming year. (To watch Louthan’s track record, click here)
Overall, this blue chip gets a Moderate Buy from the Street’s consensus, based on 13 analyst reviews, including 5 Buys and 8 Holds. AT&T has a trading price of $17.51 and an average target of $20.09, suggesting ~15% upside by the end of next year. (See AT&T stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.