In this article, we will discuss the 10 dividend paying stocks to buy according to Morgan Stanley’s quant screen. If you want to explore similar stocks, you can also take a look at 5 Best Dividend Stocks to Buy According to Morgan Stanley’s Quant Screen.
Morgan Stanley’s Base Case: S&P Falling to $3,400 by Year End.
Chief US equity strategist and chief investment officer at Morgan Stanley, Mike Wilson, expects earnings to contract by 3% and the S&P 500 to fall to 3,400 by the end of 2022 in the event that the U.S. does not enter into a recession. In his bear case, Mike Wilson expects the S&P 500 to go as low as 3000 if the U.S. enters into a recession.
In a turbulent market environment, such as the one we are in right now, where inflation is not being tamed and central banks are more hawkish than ever, Mike Wilson thinks that investors “should be looking for individual stocks”. On September 21, Mike Wilson appeared on Bloomberg Surveillance to discuss his outlook on the markets moving ahead and how investors should be positioned in such an environment. Mike Wilson explained how every investor has their own risk tolerance and at Morgan Stanley, he and his team are “staying defensively oriented”. Mike Wilson also explained what he likes in the current market environment.
Here are some comments from the CIO of Morgan Stanley:
“The managed care stocks have been terrific- these are growth stocks and they are not priced as growth stocks… Healthcare in general, I would argue, is an area of the market where you have pent-up demand from the pandemic as opposed to payback in demand for technology spending and consumer goods. And for whatever reason, it still trades very cheaply… We’ve had a lot of exposure, be it in pharma, managed care, or some of the cheaper areas of healthcare, and I think that continues to work. Other areas would be integrated energy companies where they’re more defensively oriented and not so dependent on the price deck. They pay a great dividend and you get some commodity exposure as a hedge against inflation staying sticky or hot…”
Morgan Stanley analysts ran a quantitative screen to determine dividend stocks that had the best risk-reward ratio according to analyst research. Morgan Stanley’s CFA, Nicholas Lentini, explained that to determine the best risk-reward dividend paying stocks to buy right now, the test compared the upside and downside of each stock to its price targets, forecasted dividend yields, bull/bear spread, and 1-year volatility. Some of the best dividend stocks to own according to Morgan Stanley’s quantitative screen include Energy Transfer L.P. (NYSE:ET), Philip Morris International Inc. (NYSE:PM), and LyondellBasell Industries N.V. (NYSE:LYB).
Photo by Nathan Dumlao on Unsplash
Our Methodology
We reviewed Morgan Stanley’s quantitative screen’s results. Along with each stock, Morgan Stanley analysts also mentioned the total expected return according to their quant test. We narrowed down our selection to stocks that had the highest dividend yields, highest free cash flows, and the highest forecasted returns. Along with each stock, we mentioned the hedge fund sentiment, analyst ratings, dividend yield, and their forecasted returns according to Morgan Stanley. We ranked our picks in increasing order of their dividend yield.
10. Air Products & Chemicals, Inc. (NYSE:APD)
Dividend Yield as of September 27: 2.73%
Total Expected Return: 30%
Number of Hedge Fund Holders: 33
Air Products & Chemicals, Inc. (NYSE:APD) operates in the industrial gases industry and provides atmospheric gases, process & specialty gases, equipment, and services worldwide. The company has been growing its dividends for the past 40 years and has a 5-year dividend CAGR of 11.5% and an annual payout ratio of 62.2%. Morgan Stanley analysts see a 30% upside to Air Products & Chemicals, Inc. (NYSE:APD) from current levels.
On July 15, Air Products & Chemicals, Inc. (NYSE:APD) declared a quarterly cash dividend of $1.62 per share. The dividend is payable on November 14 to shareholders of record at the close of business on October 3. As of September 27, the stock is offering a forward dividend yield of 2.73% which the company backs with free cash flows of $284 million.
Wall Street sees upside to Air Products & Chemicals, Inc. (NYSE:APD). On August 8, Barclays analyst Michael Leithead raised his price target on Air Products & Chemicals, Inc. (NYSE:APD) to $295 from $275 and maintained an Equal Weight rating on the shares. This August, BMO Capital analyst John McNulty raised his price target on Air Products & Chemicals, Inc. (NYSE:APD) to $321 from $283 and upgraded the stock to a buy-side Outperform from Market Perform.
Insider Monkey spotted Air Products & Chemicals, Inc. (NYSE:APD) on 33 investment portfolios at the close of Q2 2022. The total stakes of these hedge funds amounted to $375 million. As of June 30, Millennium Management is the largest shareholder in Air Products & Chemicals, Inc. (NYSE:APD) with stakes worth $119.8 million.
Here is what Madison Funds specifically said about Air Products and Chemicals, Inc. (NYSE:APD) in its second-quarter 2022 investor letter:
“This quarter we are highlighting Air Products and Chemicals, Inc. (NYSE:APD) as a relative yield example in the Materials sector. APD is a leading global industrial gas supply company and is the largest supplier of hydrogen and helium in the world. It has a sustainable competitive advantage due to long-term customer relationships and contracts, high customer switching costs, and the missioncritical nature of its products. Industrial gases are a relatively small fraction of customers’ overall costs but are crucial to ensure uninterrupted production.
Our thesis on APD is that it appears well-positioned for consistent double-digit growth due to a large multi-year capital allocation plan, and the need for accelerating capital expenditures by its customers. It has a $25 billion backlog driven by traditional gas investments along with new growth opportunities like gasification, green hydrogen, and carbon capture. APD’s gasification technologies help improve energy efficiency and independence, which is a key focus for its customers. The company also has a strong management team with a record of expanding margins and exemplary capital allocation.
The fund purchased APD in June 2022 at $260. At the time of purchase, APD had a dividend yield of 2.6% and a relative dividend yield of 1.6x the S&P 500, which was near the high end of its historical range. The chart below shows the long-term dividend yield and relative dividend yield of the stock. The company has an A-rated balance sheet by Standard & Poor’s and is a Dividend Aristocrat that has raised its annual dividend 40 years in a row. Over the past five years, APD has increased its dividend an average of 11.5% per year. We expect similar dividend increases in the future which would help grow income and protect against the impact of inflation…” (Click here to read full text)
9. Vistra Corp. (NYSE:VST)
Dividend Yield as of September 27: 3.01%
Total Expected Return: 35%
Number of Hedge Fund Holders: 42
Vistra Corp. (NYSE:VST) is an integrated retail electricity and power generation company based in the United States. On July 28, Vistra Corp. (NYSE:VST) increased its quarterly cash dividend by 4% to $0.184 per share from $0.177 per share. The dividend is payable on September 30 to shareholders of record on September 21. As of September 27, the stock is offering a forward dividend yield of 3.01%.
On August 5, Vistra Corp. (NYSE:VST) reported that it had successfully executed its share repurchase program and as of August 2, had bought back stock worth $1.6 billion of its $2 billion authorization. The board of directors announced an additional $1.25 billion share repurchase program, bringing its current authorization to $1.65 billion. The company expects to complete its share repurchase program by end of 2023.
As of September 27, Vistra Corp. (NYSE:VST) has gained 31% over the past twelve months and Morgan Stanley analysts expect the stock to gain an additional 35% over the next couple of months. On August 23, Morgan Stanley analyst Stephen Byrd raised his price target on Vistra Corp. (NYSE:VST) to $33 from $32 and reiterated a buy-side Overweight on the shares.
Insider Monkey identified 42 hedge funds that held stakes in Vistra Corp. (NYSE:VST) at the end of the second quarter of 2022. The total value of these stakes amounted to $1.59 billion. This is compared to 40 positions in the previous quarter with stakes worth $1.63 billion. As of June 30, Oaktree Capital Management is the most prominent investor in Vistra Corp. (NYSE:VST) and has stakes worth $580 million in the company. The investment covers 6.74% of Howard Marks’ 13F portfolio.
Here is what Legacy Ridge Capital Partners had to say about Vistra Corp. (NYSE:VST) in its second-quarter 2022 investor letter:
“We had a hard time deciding which company we should discuss in this letter. By just about every metric, all our holdings are cheap from both a relative and absolute perspective – especially compared to the performance of commodity prices and the recent pullback in the overall complex of energy stocks. For the first six months of 2022, oil was up 41%, natural gas up 45%, natural gas liquids up 34%, and the futures curve for electricity (in the two biggest deregulated power markets) is up ~30%, but our holdings were only up a measly ~1% by mid-year! The point is all our positions are investment stories worth telling.
However, Vistra Corp stands out among the names we own. First, the market environment has improved materially over a multi-year basis, which will enhance VST’s ability to mint cash and at the same time underscores the longevity of VST’s asset base. Second, VST’s market value has remained flat, despite shrinking the share count by nearly 15% since adopting a transformational capital allocation strategy. The combination of those two factors results in ~50% more value in a VST share today than just six months ago.
The bottom line is that the discount to intrinsic value of VST’s equity has become more attractive than ever. To better understand the two broader points, as well as our heightened conviction, it’s worth providing a brief history of the IPPs and summarizing the original VST investment thesis…” (Click here to see the full text)
8. Comcast Corporation (NASDAQ:CMCSA)
Dividend Yield as of September 27: 3.39%
Total Expected Return: 39%
Number of Hedge Fund Holders: 75
On September 14, Comcast Corporation (NASDAQ:CMCSA) announced that the company’s board of directors has increased its share repurchase program authorization to $20 billion, as of September 13. As of September 14, the company has repurchased roughly $9 billion worth of Class A common shares year-to-date. Morgan Stanley analysts expect Comcast Corporation (NASDAQ:CMCSA) to gain 39% in the coming months.
On July 28, Comcast Corporation (NASDAQ: CMCSA) declared a quarterly common stock cash dividend of $0.27 per share. The dividend is payable on October 26 to investors of record on October 5. Comcast Corporation (NASDAQ: CMCSA) appears to be trading cheaply relative to earnings. As of September 27, Comcast Corporation (NASDAQ:CMCSA) is trading at a PE multiple of 10x and is offering a forward dividend yield of 3.39%, which the company supports with free cash flows of $14.9 billion.
On July 29, Morgan Stanley analyst Benjamin Swinburne revised his price target on Comcast Corporation (NASDAQ:CMCSA) to $50 from $55 and maintained a buy-side Overweight rating on the shares. Swinburne expects Comcast Corporation (NASDAQ:CMCSA) to grow its EPS by 5% to 10% over time as the company benefits from pricing power in broadband, a diversified asset portfolio, and stock buybacks.
At the close of Q2 2022, 75 hedge funds were long Comcast Corporation (NASDAQ:CMCSA) and held stakes worth $5.39 billion in the company. As of June 30, First Eagle Investment Management owns more than 30 million shares of Comcast Corporation (NASDAQ:CMCSA) and is the top shareholder in the company.
In addition to Comcast Corporation (NASDAQ:CMCSA), other dividends stocks that Morgan Stanley analysts see material upside to include Energy Transfer L.P. (NYSE:ET), Philip Morris International Inc. (NYSE:PM), and LyondellBasell Industries N.V. (NYSE:LYB).
7. FirstEnergy Corp. (NYSE:FE)
Dividend Yield as of September 27: 3.90%
Total Expected Return: 36%
Number of Hedge Fund Holders: 42
FirstEnergy Corp. (NYSE:FE) is a leading American utility company. The company operates through two segments: Regulated Distribution and Regulated Transmission. Shares of FirstEnergy Corp. (NYSE:FE) have gained 6.8% over the past twelve months, as of September 27. Morgan Stanley analysts expect a further 36% upside from current levels. On September 16, Morgan Stanley analyst Stephen Byrd reiterated a buy-side Overweight rating and his $53 price target on FirstEnergy Corp. (NYSE:FE).
On September 19, FirstEnergy Corp. (NYSE:FE) declared a quarterly cash dividend of $0.39 per share of the company’s common stock. The dividend is payable on December 1 to shareholders of record at the close of business on November 7. As of September 27, FirstEnergy Corp. (NYSE:FE) is offering a forward dividend yield of 3.90% which the company supports with free cash flows of $381 million.
At the end of the second quarter of 2022, 42 hedge funds disclosed ownership of stakes in FirstEnergy Corp. (NYSE:FE). These funds held collective stakes of $1.78 billion in the company. As of June 30, Icahn Capital LP is the top shareholder in FirstEnergy Corp. (NYSE:FE) with stakes worth $728 million. The investment covers 3.49% of Carl Icahn’s 13F portfolio.
6. AbbVie Inc. (NYSE:ABBV)
Dividend Yield as of September 27: 3.94%
Total Expected Return: 42%
Number of Hedge Fund Holders: 71
AbbVie Inc. (NYSE:ABBV) is an industry-leading biotechnology company that discovers, develops, manufactures, and sells pharmaceuticals worldwide. On September 21, JPMorgan analyst Chris Schott reiterated that AbbVie Inc. (NYSE:ABBV) continues to remain one of his favorite large-cap ideas. Schott reiterated his $180 price target and buy-side Overweight rating on the stock.
This July, Morgan Stanley analyst Terence Flynn raised his price target on AbbVie Inc. (NYSE:ABBV) to $191 from $188 and maintained an Overweight rating on the shares. Flynn sees revenue from biopharma to remain robust in an economic slowdown. As of September 27, AbbVie Inc. (NYSE:ABBV) has surged 31.3% over the past twelve months and Morgan Stanley analysts see a further 42% upside to the stock.
On September 9, AbbVie Inc. (NYSE:ABBV) announced that its board of directors has declared a quarterly cash dividend of $1.41 per common share. The dividend is payable on November 15 to investors of record on October 14. AbbVie Inc. (NYSE:ABBV) has been growing its dividends for more than 25 years. As of September 27, AbbVie Inc. (NYSE:ABBV) is offering a forward dividend yield of 3.94% and has free cash flows of $22.2 billion.
At the close of Q2 2022, 71 hedge funds were eager on AbbVie Inc. (NYSE:ABBV) and held stakes worth $2.88 billion in the company. Of those, Arrowstreet Capital was the most prominent shareholder in the company with stakes worth $654 million.
Here is what ClearBridge Investments had to say about AbbVie Inc. (NYSE:ABBV) in its second-quarter 2022 investor letter:
“We added to our health care exposure in the quarter with the purchases of Straumann Holding (OTCPK:SAUHF), a Swiss manufacturer of medical instruments, implants and related supplies for dental procedures, in the secular bucket and U.S. pharmaceutical maker AbbVie Inc. (NYSE:ABBV) in the structural bucket. Straumann is the global market leader in dental implants with 29% overall share, a meaningful position within premium implants and smaller share in value implants. The company is also involved in clear aligners through a series of acquisitions as well as peripheral capital equipment around those businesses.
Growth will come from increasing share in both value implants and clear aligners through expansion in emerging markets on top of market growth in its premium implant business. AbbVie is undergoing a transition in anticipation of loss of exclusivity for its blockbuster Humira in the next several years with several commercial therapeutics, led by Skyrizi for psoriasis and Rinvoq for rheumatoid arthritis.”
AbbVie Inc. (NYSE:ABBV) is among the highest yielding dividend stocks to buy according to Morgan Stanley’s quant screen. Similar stocks with strong dividend yields and high upside include Energy Transfer L.P. (NYSE:ET), Philip Morris International Inc. (NYSE:PM), and LyondellBasell Industries N.V. (NYSE:LYB).
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Disclosure. None. 10 Best Dividend Stocks to Buy According to Morgan Stanley’s Quant Screen. is originally published on Insider Monkey.
