Here are 2 dividend stocks that Morgan Stanley likes

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The first half of 2022 was dominated by high inflation and the Federal Reserve’s shift to a tightening monetary policy in response. The second half will find the same factors still weighing on stocks – but they’ll be joined by pressure on earnings, according to Morgan Stanley equity strategist Mike Wilson.

“The indicators suggest there is margin pressure and risk to earnings growth. This view is supported by our leading earnings model, which predicts a sharp decline in EPS growth over the next several months. A key input to this model is the ISM manufacturing PMI, and the Fed’s leading regional surveys of manufacturing indicate a continued decline in the ISM PMI,” Wilson explained.

Wilson’s comments take on added meaning in the wake of last week’s Jackson Hole symposium, in which Federal Reserve Chairman Jerome Powell said categorically that inflation will get worse before it gets better — and that the Fed’s monetary tightening policy will cause further pain.

The upshot is that it’s time to play defense in your stock portfolio. Analysts at Morgan Stanley know this, and have highlighted the classic defensive stocks: dividend payers, with yields high enough to offer some protection against inflation. We’ve pulled the details on two of these Morgan Stanley picks from the TipRanks database. Here they are presented along with analyst commentary.

Simon Property Group (SPG)

We’ll start by reviewing a real estate investment trust, or REIT. These companies have long been leaders among high-yield dividend payers. Simon Property Group is a commercial REIT, focused on retail properties. Simon’s portfolio is heavily weighted toward malls, with 95 such properties. The company also has 29 premium stores and 33 international properties. In addition, Simon owns an 80% stake in the Taubman Group, which is itself a large-scale property owner on the international scene.

Simon’s quarterly revenue showed solid “post-COVID” gains in 1H21 as well. As of 3Q21, the company’s quarterly revenue averaged $1.3 billion. The current top line, from 2Q12, reached $1.28 billion. Net income was reported at $496.7 million for the quarter, with diluted EPS of $1.51 per share. Earnings were down from the previous quarter, when they were reported at $1.88 per share.

A key metric for evaluating a REIT is “funds from operations,” or FFO, as it is commonly used to fund the dividend. Simon’s 2Q12 FFO was reported as $1.09 billion or $2.91 per share. While that was down from $3.24 per diluted share the previous year, it was still more than enough to cover the dividend, which was announced on Aug. 1 for $1.75 per common share. The dividend is scheduled to be paid next September 30. At the current rate, the dividend is $7 per share on an annualized basis and yields a high 6.8%.

Morgan Stanley analyst Ronald Camden believes Simon is well-positioned for earnings in a tough environment, writing: “We have more confidence in our thesis that cash flow will be more resilient than expected after the close drag stores during COVID. We expect SPG to prove a long-term winner from the retail turnaround given its strong balance sheet (mid-50s debt to EBITDA) and ability to self-fund (re)development costs by generating FCF.”

“Three factors differentiate the SPG portfolio: 1) malls contributed only ~48% of total NOI and the rest of the portfolio is diversified into premium stores and other retail types, 2) after a 30-35% rationalization in the shopping landscape centers, we estimate only a ~5% hit to total NOI and 3) greater negotiating leverage with tenants after acquiring higher TCO malls that increase their ownership in the most dominant US malls from ~30 to ~50,” the analyst added.

To that end, Kamden gives the stock an Overweight (i.e., Buy) rating, and the $131 price target suggests ~27% upside over the next year. (To follow Kamden’s history, Click here)

Overall, this stock has earned a Moderate Buy rating from the Street, based on 13 recent analyst reviews breaking down into 5 Buys and 8 Holds. Shares are selling for $103.66 and the average target price of $121.85 shows room for ~18% upside this year. (See SPG stock prediction on TipRanks)

Blackstone Group (BX)

Now let’s move on and look at the Blackstone Group. This is an easily recognizable name in the financial world. Blackstone is one of the largest alternative investment firms in the world, with hands in multiple investment sectors, including $80 billion in hedge funds, $265 billion in credit and insurance, $276 billion in private equity and $320 billion in real estate. Blackstone operates globally and has a total of more than $941 billion under management.

That portfolio generated $7.5 billion in net accrued performance income for Blackstone in 2Q12, or $6.18 per share, up 11% from the prior quarter. The company also reported a 45% year-over-year gain in free related earnings, to $1 billion, and an impressive 86% year-over-year gain in distributable earnings, which reached $2 billion in the quarter.

The latter is important for yield-oriented investors as it funds the dividend. Blackstone paid its last common stock dividend on Aug. 8, at $1.27 per share – fully covered by $1.49 per share in distributable earnings – and repurchased 1.9 million shares during the second quarter. Overall, between second-quarter dividends and share repurchases, Blackstone returned about $1.9 billion to shareholders in the quarter. The $1.27 dividend annualizes to $5.08 per common share and yields a respectable 5.3%.

Analyst Michael Cyprys, in his coverage of Morgan Stanley, writes of Blackstone: “Prefer diversified, high-quality BX as a core holding in Alts for investors seeking exposure to the group… We see a franchise, brand with the best in category , unrivaled product capabilities/breadth and retail TAM expansion set to transform profit profile to 75% FREE by 2026e from current ~50%. We see BX as a long-term winner with the upcoming fundraising supercycle catalyst, while fee-related performance fees can withstand better than market fears.”

Putting his position into quantifiable numbers, Cyprys gives the stock a price target of $125, suggesting a 31% upside potential for one year, along with an Overweight (i.e. Buy) rating. (To follow the history of Cyprys, Click here)

Overall, with 8 recent Buy ratings on file and 4 Holds, Blackstone receives Moderate Buy from the analyst consensus. The stock is selling for $94.57 and the average target price of $124.27 implies ~31% upside for the next year. (See BX Stock Prediction on TipRanks)

To find good ideas for trading dividend stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.

Denial of responsibility: The views 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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