Mohamed El-Erian says stagflation is coming;  Here are 2 ‘Strong Buy’ Dividend Stocks to Protect Your Portfolio

Mohamed El-Erian says stagflation is coming; Here are 2 ‘Strong Buy’ Dividend Stocks to Protect Your Portfolio

The 70s are coming back in a big way, and while that’s not so bad in fashion or music, it’s safe to say that no one really wants that ’70s economy back. That was the decade of stagnation, a bold combination of high inflation, rising unemployment, and stagnant job growth. Economists had long thought that combination was impossible, but the economic mismanagement of the Carter Administration proved them wrong.

At least one senior economist, Mohamed El-Erian of Allianz, sees a period of stagflation on the way, in the form of a global economic crash that few nations will escape unscathed. As El-Erian sees it, inflation is too high, and the Fed’s interest rate hikes are not enough to curb it; the hikes are more likely to derail growth and put pressure on the workforce. The result: near-term rising prices, rising unemployment, and slow to non-existent GDP growth, or in other words, stagnation.

“Lower US growth and late #Fed forced to raise 75 basis points for third time in a row are consistent with global stagflationary trends. I would not be surprised to see more growth revisions,” El-Erian wrote.

It’s a situation that calls for investors to make defensive moves, with an emphasis on securing an income stream that will provide some protection from inflation. In the world of equities, that’s a recipe for dividend stocks.

We used the TipRanks platform to find a pair of dividend payers with Strong Buy ratings from the Street, and reliable dividends with a history of consistent payouts. And even better for defensive investors, both stocks outperformed the overall markets this year, registering positive share gains when the broader markets declined.

Merck & Co., Inc. (MRK)

Let’s start with Merck, the well-known pharmaceutical company. This company is one of the giants of the Big Pharma world, with a market cap of $218 billion and more than $50 billion in annual revenue, of which approximately $22 billion came from the US market and $13 billion from European markets. Merck aims to make itself the world’s largest research-oriented biopharmaceutical company and has an extensive clinical trial program, with 83 programs undergoing Phase II studies and another 30 in Phase III.

Merck’s most recognizable products on the market today include Gardasil, an HPV vaccine used to protect women from cervical cancers, and Remicade, a biological antibody-based anti-inflammatory drug used in the treatment of autoimmune disorders such as with Crohn’s disease and rheumatoid arthritis. Historically, Merck created the MMR (measles, mumps, rubella) vaccine that became standard for newborn babies.

Big Pharma firms may have a controversial reputation, but as Merck’s history shows, our medical system has a real need for them. And Merck is riding that need for solid financial results. In the company’s recent report for 2Q22, the top line came in at $14.6 billion, up 28% year over year. That number included 36% y/y growth in Gardasil sales, to $1.7 billion, and 26% y/y growth in sales of the anti-cancer drug Keytruda, which earned $5.3 billion. On earnings, non-GAAP EPS rose 42% from the year-ago quarter, reaching $1.87 per share.

That last one is an important metric, as earnings per share helps ensure dividend affordability. Merck pays out 69 cents per common share – so EPS fully covers the payout – which equates to $2.76 on an annualized basis. At that rate, the dividend yields 3.2%. Merck has a 12-year history of maintaining reliable payouts and increasing the dividend more slowly.

With this in mind, it’s not surprising that the company’s shares are up 16% this year, which is significantly better than the overall markets.

All this impressed Berenberg analyst Luisa Hector, who recently upgraded her position on MRK shares and wrote about the company: “For investors looking for a low-risk value option in the pharmaceutical sector, we believe that Merck & Co offers many attractions: medium term. growth just ahead of the sector average, limited patent expiry burden, low exposure to US price reform, margin expansion and no litigation overruns. Sales growth is heavily dependent on Keytruda and Gardasil, but we think competitive threats are limited…. We would support the return of Keytruda’s cash flow in the form of dividends and buybacks. Merck & Co is our favorite value name in big pharma.”

Hector bumped her rating on this stock from Neutral to Buy, and her $100 price target indicates she believes in a 15% upside potential. (To view Hector’s track record, Click here)

It’s clear from the consensus rating, Strong Buy based on 10 Bases and 3 Holds, that Wall Street generally agrees with the bullish views on this big-name biopharmaceutical firm. The shares are priced at $86.64 and their average price of $100.75 suggests an upside of ~16%. (See MRK stock forecast on TipRanks)

American Electric Power Company (AEP)

Let’s change gears on the second stock, and move from biopharma to public utilities. American Electric Power is one of the largest electricity providers in the US, with more than 40,000 miles of transmission lines supporting more than 26,000 megawatts of generating capacity – a number that includes 7,100 megawatts of capacity from renewable sources, and 5.5 million customer over 11 people. states. AEP, with its large footprint in a vital economic niche, is a great example of a defensive stock, and indeed, utility companies have long had a reputation for being ‘recession proof’.

A look at AEP’s financial results shows that the company is doing well so far this year, even as registered GDP declines in the first and second quarters. AEP generated $4.6 billion in revenue, with non-GAAP operating earnings of $617.7 million. Although the top line was flat y/y, earnings were up over 28%. Non-GAAP EPS came in at $1.20, just a shade higher than the year-ago result of $1.18.

In addition to sound results, AEP reiterated its guidance for the full year 2022, and expects non-GAAP earnings in the range of $4.87 to $5.07 per share. The company expects a long-term growth rate of 6% to 7% in the future.

In one key performance metric, AEP shares are up 16% this year, which is having a big impact on the overall markets.

Once again, we are looking at a company whose earnings fully cover the common share dividend. The final declaration set the payout at 78 cents per share, and was paid out on September 9. Annualize the current dividend to $3.12 and yield 3.1%. The real key to this dividend, however, is its true reliability. AEP regrettably has paid a cash dividend in every fiscal quarter since 1910, making this latest payout the company’s 449th consecutive quarterly payout. Few public companies can match that level of long-term dividend reliability.

Among the bulls is Morgan Stanley analyst David Arcaro, who sees AEP as the way forward among utility stocks.

“Utilities have outperformed the S&P by 20% this year. We think the space will continue to hold its value on a relative basis and may do slightly better in the event of a weakening economic backdrop or an outright recession given that the utility group after earnings peak and after the recession begins. Valuations have increased but we don’t see a clear case that the group is overpriced yet — valuations relative to the S&P 500, historical levels, and bonds are all below previous 10-year highs, so no upside economic there, we think. space is still reasonably valued due to its defensive characteristics. In the event of a recession, we expect low risk names to do better and prefer AEP,” explained Arcaro.

To that end, Arcaro rates AEP Overweight (ie Buy), along with a price target of $118 to suggest an 18% year gain. (To view Arcaro’s track record, Click here)

In total, AEP has picked 8 analyst reviews in recent weeks, including 6 Buys over 2 Holds, for a Strong Buy consensus rating from the Street. (See AEP stock forecast on TipRanks)

For great ideas on trading stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unifies all of TipRanks’ equity insights.

Denial: The views expressed in this article are solely those of the analysts in question. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

Leave a Reply

Your email address will not be published.