Morgan Stanley Pounds the Table on These 2 Reliable Dividend Stocks

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There are a multiple headwinds buffeting the markets right now, pushing stocks, bonds, and commodities in various directions. Between stubbornly high inflation, the war in Ukraine, the persistence of COVID, and even the developing instability in Chinese real estate, the possible shocks that can hit the market are enough to make any investor’s head spin. They are also a strong inducement to start taking a defensive stance on an investment portfolio.

At least, that’s the bottom line from Morgan Stanley’s chief investment officer and US equity strategist Mike Wilson. Looking at the markets, and drawing conclusions, Wilson comes down to a cautious take, saying, “We remain bearish on the S&P 500 index from a risk reward standpoint, particularly after the recent rally. Our year end base case target of 4400 is 4% below current levels. At the stock level, we continue to recommend investors look for stable cash flow generating companies in defensive sectors.”

This is a clear recipe for investors to follow, and will lead us quite naturally to two recent stock recommendations from Morgan Stanley’s analysts – for reliable dividend payers with attractive growth prospects. We ran both names through TipRanks’ database to see what other Wall Street’s analysts have to say about them.

Agree Realty Corporation (ADC)

We’ll start with a stock in one of the market’s perennial dividend champion leagues, REIT. These companies, real estate investment trusts, acquire, own, operate, and manage real properties of all sorts – residential, multi-family, commercial, retail, industrial – as well as investing in mortgages and mortgage-backed securities. Of interest here to defensive-minded investors, REITs are required by governmental regulators to return a high percentage of profits directly to shareholders – and dividends are a common mode of compliance. As a result, REITs are known for offering dividends that are both high-yield and highly reliable.

Metro Detroit-based Agree Realty focuses on owning, developing, and leasing commercial properties for major retailers. The company boasts over 1,400 properties in its portfolio, totaling 29 million square feet and leased out to such major names as Autozone, Costco, Aldi, Best Buy, Walmart, and Sherwin-Williams.

In its most recent reported quarter, 4Q21, Agree showed strength on several key metrics. The company’s top line revenue – derived primarily from property rents – came in at $91.4 million, for the eighth consecutive sequential increase. Year-over-year, the top line was up 28%. The company’s core funds from operations (FFO) was reported at 92 cents per share, while net income came out to 44 cents per share. These metrics grew by 10% and 5% y/y, respectively.

For a defensive investor, the key point to note in ADC was the dividend. ADC pays out its dividend monthly, at 22.7 cents per common share. This annualizes to $2.72 per common share, and yields 4%. While there are higher dividends out there, what makes Agree stand out is its reliability – this company has a kept up its payments, consistently, since it went public back in 1994.

Covering ADC for Morgan Stanley, analyst Ronald Kamdem opens his comments on the stock by pointing out the high quality of Agree’s tenants, an important differentiator for a REIT.

“Agree Realty Corporation has the highest quality portfolio among triple net REITs and a large runway for growth. ADC partners with industry-leading and growing retail tenants to provide them 1) growth capital through sale leasebacks and 2) development capabilities, where ADC builds new stores for the retailer. The growth opportunity and the defensive characteristics of the business remains underappreciated, we think. Indeed, during the post-COVID period, the multiple premium to peers has derated from +46% to +3%. Thus, we see a compelling entry point for this high cash flow, low capex, and defensive business,” Kamdem opined.

To this end, Kamdem initiated coverage on ADC shares with an Overweight (i.e. Buy) rating and $75 price target. The figure implies 12.5% upside from current levels. (To watch Kamdem’s track record, click here)

Morgan Stanley is hardly the only firm to rate this REIT highly; the stock has 11 recent reviews and they include 9 Buys that overbalance 2 Holds. The shares are priced at $66.66, with an average target of $75.86 indicating ~14% one-year upside potential. (See ADC stock forecast on TipRanks)

AT&T, Inc. (T)

The second dividend stock we’ll look at needs no introduction. AT&T is blessed with one of the world’s most recognizable corporate brands, and a long history in the essential telecom sector. In its modern incarnation, AT&T provides landline telephone services, broadband internet through fiber-optic and wireless networks, and is heavily involved in rolling out 5G in the US. AT&T boasts a market cap of $173 billion, and approximately $170 billion in annual revenues.

In recent months, AT&T made an interesting divestment move. The company acquired TimeWarner in 2018, but earlier this year announced that it is spinning off its interest in the acquisition (now called WarnerMedia) to shareholders, as part of a merger between WarnerMedia and Discovery Inc. This merger will create a new entertainment company, Warner Bros. Discovery, and AT&T shareholders will each receive 0.24 shares of the new company for every share of AT&T stock owned.

In conjunction with the stock spinoff, AT&T has also declared a stock dividend, to be payable in May. The dividend was set at 27.75 cents per common share, or $1.11 annualized, and yields 4.63%. The dividend is supported by AT&T’s substantial free cash flow, which was reported in 4Q21 as $8.7 billion, and for the full year of 2021 as $26.8 billion. Just as important is the reliability of the dividend; AT&T has demonstrated a long-term commitment to keeping up the payments, and has not missed a quarterly dividend since the payments were initiated 38 years ago in 1984.

Analyst Simon Flannery, covering this stock for Morgan Stanley, recently attended an AT&T investor day, and wrote of the event, “We were encouraged with the improved visibility into free cash flow generation and EBITDA growth over the next couple of years. AT&T is one of the best values in our coverage universe with a pro forma dividend yield of over [4%], a double digit free cash flow yield, and a pro forma P/E multiple of just 7x on newly issued guidance… We believe the stock could see incremental investor interest after the spin is complete.”

Based on the above, Flannery rates AT&T shares an Overweight (i.e. Buy), with a price target of $28 to suggest an upside of ~16% in the next 12 months. (To watch Flannery’s track record, click here)

All in all, the analyst consensus rating here is a Moderate Buy, based on 14 reviews which include 8 Buys, 5 Holds, and 1 Sell. The average price target of $29.69 implies an upside of ~23% from the $24.18 current trading price. (See AT&T stock forecast on TipRanks)

To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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.



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