Markets are up in recent sessions, and year-to-date losses have moderated somewhat. The NASDAQ, which has taken the hardest hits this year, is back above 12,200, although still down 22% this year. The S&P 500 has managed to climb back out of the bear market, is above 4,100 now, and its year-to-date loss stands at 14%. Neither index has really tested its June low again in the last two months, and recent trends are upwards.
Writing for JPMorgan, global investment strategist Elyse Ausenbaugh gives a good summary of current conditions: “The Fed is still talking tough on inflation, bond yields remain at or near cycle highs, and the world’s other major economies continue to face profound risks… That said, having had some time to process the risks we’re facing, investors in aggregate don’t seem to have the same sense of ‘impending doom’ that they did a few months back.”
While the sense of doom ‘n gloom may be receding, Ausenbaugh is not recommending a whole-hearted bullish attitude on the part of investors. The strategist comes down solidly in favor of defensive equities for now, saying, “As stewards of capital, that prompts us to continue to focus on more defensive tilts over the next year in the core portfolios we manage.”
JPM’s stock analysts are following the lead of the firm’s strategist, picking out defensive stocks that will add a layer of protection for investors’ portfolios. Their approved defense: high-yield dividend payers, a traditional play, but one that has proven effective over the years. Let's take a closer look.
We’ll start with one of the best-known ‘dividend champs’ in the stock market, AT&T. This company needs little introduction; it is one of the oldest names in telecommunications, and its blue logo is one of the world’s most recognizable trademarks. AT&T has changed over the years, as telegraph and telephone technology has changed; the modern company is a provider of landline telephone services in the US, broadband internet through both fiber-optic and wireless networks, and has made large investments in the North American 5G rollout.
AT&T saw $168.9 billion in total revenues last year. This year, however, its first half result of $67.7 billion is down significantly from the $88 billion recorded in 1H21. The company’s most recent quarterly report, for 2Q22, showed the lowest top line in several years, at $29.6 billion, although earnings remained fairly stable – the diluted EPS of 65 cents was in the middle of the range (57 cents to 77 cents) of the last two years’ quarterly results. The company’s cash flow took a hit in the quarter; free cash flow fell year-over-year from $5.2 billion to $1.4 billion.
On a positive note, the company added over 800,000 postpaid phone accounts, and 300,000 net fiber customers, making 2Q22 one of the company’s best for customer additions. Management attributed the negative cash results to higher corporate expenses related to 5G and to an increase in the number of customers late on bill payments.
Through all of this, AT&T has kept up its quarterly dividend payments. The company has an enviable history of reliability; while it has made adjustments to the dividend to ensure payment, the company has never missed a quarterly payment since it started paying out common share dividends in 1984. The current payment was declared at the end of June and paid out on August 1, at 27.75 cents per share. That annualizes to $1.11 and gives a yield of 6.5%. The yield is more than triple the average found among S&P listed firms, and is high enough to provide a degree of insulation against inflation.
JPMorgan's Phillip Cusick covers T, and he sees the stock as a sound defensive choice in today’s environment.
“Mobility continues to benefit from strong postpaid phone adds and ARPU is growing. Price increases and the return of roaming revenue should benefit service revenue growth in 2H22, helping offset the loss of 3G shutdown and CAF-II revenue. Margins should be up y/y in 2H22 from service revenue growth, cost savings and steady promotional spending... AT&T remains a very defensive business and should have limited downside,” Cusick opined.
To this end, Cusick rates AT&T shares an Overweight (i.e. Buy), seeing them poised to continue outperforming the overall market, and sets a $23 price target to suggest a 12-month gain of 32%. (To watch Cusick’s track record, click here)
Overall, AT&T shares have a Moderate Buy rating from the analyst consensus. This is based on 17 recent reviews, which break down to 9 Buys and 8 Holds. The stock is selling for $17.38 and its average target of $22.59 implies a 30% gain for the coming year. (See AT&T stock forecast on TipRanks)
As AT&T could demonstrate, successful branding is necessity in modern business. Omnicom Group lives in that world, providing branding, marketing, and corporate communications strategies for upwards of 5,000 enterprise clients in over 70 countries around the world. The firm’s services include advertising, media planning and buying, direct and promotional marketing, digital and interactive marketing, and public relations. Omnicom saw well over $14 billion in revenue last year, with an income of $2.2 billion.
With two quarters of 2022 behind us, it would seem that Omnicom is on track to match last year’s performance. 1H22 revenues matched last year’s first half at $7 billion, as did diluted EPS, at $3.07. The company recorded these results, described as ‘strong’ by management, despite the known headwinds that have hit the economy this year.
Omnicom declared its most recent dividend payment in July of this year, at 70 cents per common share. The payment will be made on October 12. It’s annualized rate, of $2.80, gives a yield of 4%. Omnicom has kept its payment reliable since 1989, never missing a scheduled payment.
In his review of this stock, JPMorgan's David Karnovsky writes, “The results in the quarter serve as another data point supporting our view that agencies are operating in a structurally stronger market post-pandemic, and that this should help blunt some of the economic softness potentially ahead... We see the current share price as a good entry point for the longer-term investor as we expect the company to continue to eventually return to a consistent mid- to high-single-digit earnings growth profile, while a healthy dividend provides downside support.”
This is an upbeat stance, and it’s accompanies by an equally upbeat Overweight (i.e. Buy) rating. Karnovsky’s price target of $86 implies a one-year upside potential of 20%. (To watch Karnovsky’s track record, click here)
What does the rest of the Street think? Looking at the consensus breakdown, opinions from other analysts are more spread out. 5 Buys, 4 Holds and 1 Sell add up to a Moderate Buy consensus. In addition, the $80.43 average price target indicates 12% upside potential from the current trading price of $71.53. (See Omnicom stock forecast at 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.
