We’re in the midst of a general bullish trend, with strong year-to-date gains, but last week saw a brake on that rally, with a losing week across the main indexes.
Call it a warning sign. While sentiment remains solid, the headwinds are gathering. The Federal Reserve held interest rates steady in its June meeting, after more than a year of hikes to combat inflation, but inflation, while down to 4% annualized, is still double the target rate. Conventional wisdom says that the Fed isn’t done hiking – even if that means increasing the risk of a recession. We’re already seeing the effects of tighter credit on the real estate markets and consumer spending.
In short, now may be the time to take advantage of the buying mood and get into defensive stocks, particularly the dividend stocks. Their steady income stream, and potential for yields as high as 10%, offer protection against both inflation and economic swoons, key points in their popularity with investors.
But how to find the best dividend payers? That requires a deeper look into the data. We’ve used the TipRanks Smart Score, a sophisticated data-parsing algorithm, to do just that. The Smart Score measures every stock against 8 factors all known to correlate with outperformance, and gives them a score on a scale of 1 to 10. And when the ‘Perfect 10s’ are also paying out high dividend yields, that’s a stock that deserves a closer look.
So, here are two dividend payers, one yielding as high as 10%, that have both scored Perfect 10s from the Smart Score. We’ll look at recent comments from the Street’s analysts, too, to add some color and detail.
Franklin BSP Realty Trust (FBRT)
We’ll start with a real estate investment trust (REIT), Franklin BSP Realty. REITs are well known as dividend champs; these companies operate by buying, owning, managing, and leasing real properties of all kinds, as well as mortgage related securities – and tax regulations require that they return a certain proportion of profits directly to shareholders. Dividends make a convenient mode of compliance, and the result, for investors, frequently comes to a reliable, and high-yielding, passive income stream.
Franklin BSP Realty has a portfolio that mainly focuses on commercial real estate debt. The company both acquires and originates these debts, and provides both management and underwriting services. Franklin has built its business on a wide range of loans, from $10 million up to $250 million, and lends up to 80% of the property value. The company will facilitate mortgages on commercial properties of any type, in the US.
In the last reported quarter, 1Q23, Franklin’s total income came to $62.77 million, a solid result that was up from $55.1 million in the prior-year quarter and beat the estimates by $8.76 million. The firm’s bottom line result, a non-GAAP EPS of 44 cents, was 7 cents better than had been anticipated, and was far better than the 99-cent EPS loss reported one year earlier. Franklin ended Q1 with an impressive $1 billion in total liquidity, which included $230 million in cash.
Franklin has been paying out quarterly dividends since the end of 2021, and the current payment, of 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 July 10 payout; the $1.42 annualized rate gives a robust yield of 10.5%.
Franklin’s Perfect 10 Smart Score is based mainly on 3 solid metrics: 100% positive blogger sentiment, a 306,200-share increase in hedge fund holdings last quarter, and insider buys totaling more than $36,800 over the last 3 months. In addition, the company’s simple moving average – the ratio of the 20 day average to the 200 day average – is positive.
For Sarah Barcomb, covering this stock from BTIG, the key point here is Franklin’s low exposure to problematic loans and its ability to cover the dividend. She writes of the stock, “We think FBRT should endure less pain relative to CMEIT peers that have 25% Office exposure on average (vs. FBRT’s 6%). Interest rate cap expirations will trigger some difficult conversations. That said, we expect Multifamily sponsors to commit to the assets in most cases given strong rent growth and Agency-supported liquidity.”
“We believe the strong dividend coverage, progress on asset management, and meaningfully smaller ‘problem loan’ exposure relative to peers should enable FBRT to continue acquiring higher-yield loans with favorable basis while preserving liquidity,” Barcomb went on to add.
These comments back up Barcomb’s Buy rating on the shares, while her $15 price target indicates potential for 11% share appreciation over the next 12 months. (To watch Barcomb’s track record, click here)
The 5 recent analyst reviews on FBRT break down 4 to 1 in favor the Buys over the Holds, and add up to a Strong Buy consensus rating from the analysts. The stock’s average target price is $15.38, suggesting a gain of 13.5% on the one-year horizon. (See FBRT stock analysis)
Bank of N.T. Butterfield & Son (NTB)
Next up, the Bermuda-based Butterfield Bank, officially the Bank of N.T. Butterfield & Son. This is a smaller banking company, with a market cap of $1.33 billion, and it strives to be the leader in independent, offshore banks. Butterfield’s operations are located in Bermuda, the Cayman Islands, the Bahamas, the Channel Islands, Singapore, and Switzerland. The bank’s services include wealth management and specialized financing, and it also provides residential mortgage loans in the UK.
Butterfield is an old company, dating back to Nathaniel T. Butterfield’s founding of Bermuda’s first bank in 1858. Prior to that, the Butterfield family was involved in the international trade based out of Bermuda, through a mercantile business established in 1784. Butterfield Bank has leveraged that long experience in international financial matters to provide the combination of skilled and discreet banking in demand by its customer base.
Looking at the revenue and earnings growth, we find that Butterfield has had a good year. The company reported $147.5 million at the top line for 1Q23, up 15.5% year-over-year and beating the forecast by $1.14 million. On the bottom-line, the company delivered $1.24 in earnings per diluted share, 8 cents per share ahead of expectations and up 39% from the 89 cent EPS reported in the prior-year quarter.
The company finished Q1 with $8.3 billion in liquid assets, including cash, bank deposits, reverse repurchase agreements, and other assets of equivalent liquidity. This represented just over 60% of the bank’s total assets, giving Butterfield a highly liquid position.
Butterfield pays out a regular dividend, and declared a payment of 44 cents per common share for 1Q23. This was paid out at May 22; at this rate, the dividend annualizes to $1.76 per common share, and gives a strong yield of 6.7%. The company has kept up a reliable dividend payment, at 44 cents per share, since February of 2019.
On the Smart Score, we find that NTB’s Perfect 10 is based primarily on three metrics. These include the trailing 12 month return on equity, which came in at 26%; the financial blogger sentiment, which was 100% positive, compared to a 67% average for the sector; and the hedge fund activity, which showed an increase of 232,200 shares last quarter.
Butterfield’s solid cash position and strong balance sheet caught the attention of Raymond James’ David Feaster. Even considering the most recent quarter’s negative aspects, the 5-star analyst sees plenty to like here. He writes, “While deposit outflows were above forecast, management has been anticipating this and positioned its balance sheet with enough liquidity to fund these quickly. Importantly, the bank still maintains significant liquidity (cash = 9.8% of assets) and the outflows were primarily isolated to the Channel Islands, which is one of its highest cost jurisdictions and were a function of normal commercial activity. Looking forward, we expect deposit balances to stabilize, which combined with decelerating funding cost increases and continued asset repricing supports NIM stabilization and potential expansion going forward.”
“All in,” Feaster summed up, “given its strong fee income contribution, its risk low-risk density balance sheet, and its solid profitability profile combined with its discounted P/E valuation and attractive/well-covered dividend, we continue to view the risk/reward favorably.”
To this end, Feaster rates Butterfield as Outperform (Buy), while his price target, of $32, implies a one-year upside potential of 20%. (To watch 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 Strong Buy consensus rating. The shares are trading for $26.58, and the average price target of $35.75 suggests they will gain 34% in the year ahead. (See NTB stock analysis)
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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.
