In this article, we will look at some of the dividend stock picks from Morgan Stanley’s quant screen and how they have performed in the fourth quarter. If you want to read about similar stocks, you can go to 5 Best Dividend Stocks to Buy According to Morgan Stanley’s Quant Screen.
Morgan Stanley has been raising alarms about an “earnings recession” throughout 2022. We did a piece on Morgan Stanley’s dividend stock picks back in September. At the time of that writing, Morgan Stanley’s base case was the S&P 500 plunging to 3,400 by the end of 2022 and the major bank’s bear case was the S&P 500 ending the year at 3,000. We are now at the end of the year and, as of December 28, the S&P 500 sits well-above 3,800 points. However, the CIO of Morgan Stanley, Mike Wilson, maintains his relatively pessimistic outlook on the markets heading into 2023.
“It’s a Stock Picking Game”
On December 15, Mike Wilson appeared in an interview on CNBC, where he discussed his outlook for the markets going into 2023. Mike Wilson noted that the Federal Reserve and inflation are old news and the markets have already priced that in. However, a slowdown in growth is not yet priced in by the markets which is ultimately going “to determine the winners”. Here are some comments from the CIO of Morgan Stanley, Mike Wilson:
“In October, the downtick in CPI was a surprise. We got a big rally off of that because rates came in. But to think you are going to get another rally on that news, I think that is a bit naive because you already had it… CPI has peaked, inflation has peaked, we are pretty confident that it is going to come down pretty hard next year, and the real question is, what does that mean about growth. And that is the second part of our bear market story that we have been talking about for almost twelve months now, that the growth slowdown is not yet priced. And that’s what’s going to determine the winners, like it’s a stock picking game. There are going to be some companies that are going to deliver on that, but at the index level, we are pretty pessimistic that we can support these prices given our outlook on earnings next year…”
Mike Wilson noted that Morgan Stanley is looking for a 15% to 20% earnings miss, well below or roughly 16% below Wall Street consensus, however the “good news” is that a majority of investors are on board. Mike Wilson said:
“people assume earnings are going to come down, but it’s the magnitude of that decline and how fast that’s going to come down, we think that’s where the surprise is. The negative operating levels that we see, from falling inflation by the way, is what’s going to hurt margins, and that’s irrespective of whether we have an economic recession.”
Mike Wilson said that “some companies are already in an earnings recession” and that “every quarter has been disappointing”, however, “we haven’t gotten any guidance on 2023, because companies have no reason to talk about 2023 until we get there”. When companies disclose their fourth quarter earnings, Mike Wilson expects that time to “create the final plunge on multiples that can give us a real buying opportunity”. Mike Wilson finally noted that:
“The bear market has been driven by Fed policy, higher rates, concerns about inflation, multiples have contracted. So we got relief on that, and that’s why we rallied. But that’s a trade because ultimately, stocks will care about the earnings decline as much as they care about the Fed pausing or even continuing for another couple of months.”
According to Mike Wilson, “it’s a stock picking game” and when companies report their fourth-quarter 2022 earnings, investors can get “a real buying opportunity”. This article will review some of the best dividend stocks that were picked by Morgan Stanley’s quant screen at the end of the third quarter of 2022 and discuss their performance since the end of September, and potential upside/downside going into 2023. Morgan Stanley’s analysts prioritized dividend stocks with favourable risk-reward ratios, based on their research, and used various metrics including upside and downside price targets, forecasted dividend yields, bull/bear spread, and 1-year volatility to narrow down their selection. Some of the best dividend stocks to buy according to Morgan Stanley include Comcast Corporation (NASDAQ:CMCSA), AbbVie Inc. (NYSE:ABBV), and Philip Morris International Inc. (NYSE:PM).
Photo by NeONBRAND on Unsplash
Our Methodology
We included the stocks that we mentioned in the 10 Best Dividend Stocks to Buy According to Morgan Stanley’s Quant Screen. The stocks we selected had the highest total expected returns, according to Morgan Stanley’s analysts, and the highest dividend yields at that time. Along with each stock, we have mentioned its present dividend yield and Q4 2022 performance, as of December 28. We have also included analyst ratings and the hedge fund sentiment for each stock. We have ranked these stocks according to their Q4 2022 performance.
10 Best Dividend Stocks to Buy According to Morgan Stanley’s Quant Screen: In Retrospect
10. Energy Transfer L.P. (NYSE:ET)
Dividend Yield as of December 28: 8.91%
Quarterly Performance as of December 28: 5.04%
Total Expected Return: 34%
Number of Hedge Fund Holders: 33
Energy Transfer L.P. (NYSE:ET) is a leading provider of energy services. The company’s assets include natural gas pipelines, natural gas liquids pipelines, storage terminals, and related infrastructure. As of December 28, Energy Transfer L.P. (NYSE:ET) has gained in the fourth quarter of 2022 and is offering a dividend yield of 5.04%. Morgan Stanley analysts see a further upside of over 25% for the stock and the stock is placed among the best dividend stocks to buy according to Morgan Stanley’s quant screen.
This December, Citi analyst Spiro Dounis took coverage of Energy Transfer L.P. (NYSE:ET) with a Buy rating and a $16 price target. The analyst noted that the midstream sector has “arguably never been better prepared for macro headwinds”.
At the close of Q3 2022, 33 hedge funds were bullish on Energy Transfer L.P. (NYSE:ET) and held collective positions worth $614.6 million in the company. Of those, Abrams Capital Management was the leading investor and disclosed a position worth $242.8 million in the company.
9. Vistra Corp. (NYSE:VST)
Dividend Yield as of December 28: 3.23%
Quarterly Performance as of December 28: 6.10%
Total Expected Return: 35%
Number of Hedge Fund Holders: 46
Vistra Corp. (NYSE:VST) is a leading energy and services company in the United States. It is headquartered in Irving, Texas. The company owns and operates a diversified portfolio of energy assets, including nuclear, coal, natural gas, and solar power plants. At the close of the third quarter of 2022, 46 hedge funds held stakes in Vistra Corp. (NYSE:VST) worth $1.59 billion.
As of August 23, Morgan Stanley analyst Stephen Byrd has a $33 price target and Overweight rating on Vistra Corp. (NYSE:VST).
On October 31, Vistra Corp. (NYSE:VST) declared a quarterly cash dividend of $0.193 per common share, up 4.9% increase from the company’s prior dividend of $0.184. The dividend is payable on December 29, to stockholders of record on December 19.
As of December 28, Vistra Corp. (NYSE:VST) has returned 6.10% to investors in the fourth quarter of 2022 and is yielding 3.23%. Morgan Stanley’s analysts expect the stock to return an additional 29% from current levels. Vistra Corp. (NYSE:VST) is one of the best dividend stocks to buy according to Morgan Stanley.
As of September 30, Howard Marks’ Oaktree Capital Management is the largest shareholder in Vistra Corp. (NYSE:VST) and has disclosed a position worth $533.3 million.
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)
Some of the best-performing dividend stocks to buy according to Morgan Stanley’s quant screen include Comcast Corporation (NASDAQ:CMCSA), AbbVie Inc. (NYSE:ABBV), and Philip Morris International Inc. (NYSE:PM).
8. LyondellBasell Industries N.V. (NYSE:LYB)
Dividend Yield as of December 28: 5.80%
Quarterly Performance as of December 28: 8.74%
Total Expected Return: 41%
Number of Hedge Fund Holders: 38
LyondellBasell Industries N.V. (NYSE:LYB) is a leading global producer of chemicals, plastics, and refining products. The company is a leader in the production chemicals which are used to make a wide range of products, including packaging materials, automotive components, and construction materials. LyondellBasell Industries N.V. (NYSE:LYB) is among the best dividend stocks to buy according to Morgan Stanley and, as of December 28, is offering a forward dividend yield of 5.80%.
On December 15, Citi analyst P.J. Juvekar raised his price target on LyondellBasell Industries N.V. (NYSE:LYB) to $92 from $80 and maintained a Neutral rating on the shares.
Morgan Stanley analysts expect LyondellBasell Industries N.V. (NYSE:LYB) to return 41% to investors over the next couple of months. The stock has gained 8.74% since the third quarter of 2022, as of December 28. LyondellBasell Industries N.V. (NYSE:LYB) is cash-rich and, according to the company’s balance sheet, the company has free cash flows of over $5 billion.
38 hedge funds were long LyondellBasell Industries N.V. (NYSE:LYB) at the end of Q3 2022. These hedge funds held collective stakes worth $825.7 million in the company. As of September 30, Eagle Capital Management is the dominant shareholder in the company and has stakes worth $313.8 million.
7. FirstEnergy Corp. (NYSE:FE)
Dividend Yield as of December 28: 3.71%
Quarterly Performance as of December 28: 8.79%
Total Expected Return: 36%
Number of Hedge Fund Holders: 41
FirstEnergy Corp. (NYSE:FE) is a diversified energy company based in Akron, Ohio. It is among the largest utilities in the United States and is engaged in the generation, transmission, and distribution of electricity. The company’s diverse portfolio of energy sources include nuclear, coal, natural gas, and renewable sources. FirstEnergy Corp. (NYSE:FE) is one of the best dividend stock picks from Morgan Stanley’s quant screen. As of December 28, the stock has gained 8.79% since September 30, 2022. Morgan Stanley analysts see a further upside of roughly 27% from current levels over the next couple of months.
On December 13, FirstEnergy Corp. (NYSE:FE) declared a quarter dividend of $0.39 per share of common stock. The dividend is payable on March 1 to investors of record at the close of business on February 7. As of December 28, FirstEnergy Corp. (NYSE:FE) is offering a forward dividend yield of 3.71%.
At the close of Q3 2022, 41 hedge funds were eager on FirstEnergy Corp. (NYSE:FE) and held stakes worth $1.66 billion in the company. Of those, Carl Icahn’s Icahn Capital LP was the top investor in the company and held a position worth $701.8 million.
6. Eastman Chemical Company (NYSE:EMN)
Dividend Yield as of December 28: 3.83%
Quarterly Performance as of December 28: 10.34%
Total Expected Return: 77%
Number of Hedge Fund Holders: 32
Eastman Chemical Company (NYSE:EMN) is an American multinational chemical company that produces a broad range of advanced materials, chemicals, and fibers for everyday purposes. The company is headquartered in Kingsport, Tennessee. The company is cash rich and returns cash to shareholders. According to the company’s balance sheet, Eastman Chemical Company (NYSE:EMN) has free cash flows of $285 million.
As of December 28, Eastman Chemical Company (NYSE:EMN) is offering a forward dividend yield of 3.83% and has gained 10.34% in the since the third quarter of 2022. Morgan Stanley analysts expect the stock to gain an additional 67% from current levels, over the next couple of months. Eastman Chemical Company (NYSE:EMN) is one of the top dividend stocks to buy according to Morgan Stanley’s quant screen.
On December 1, Eastman Chemical Company (NYSE:EMN) declared a quarterly cash dividend of $0.79 per share. The dividend is payable on January 6 to shareholders of record at the close of business on December 15.
On December 15, Citi analyst P.J. Juvekar raised his price target on Eastman Chemical Company (NYSE:EMN) to $90 from $75 and maintained a Neutral rating on the shares.
At the end of the third quarter of 2022, 32 hedge funds were long Eastman Chemical Company (NYSE:EMN) and disclosed positions worth $258.10 million. Of those, Millennium Management was the largest investor in the company and held a position worth $57.4 million.
In addition to Eastman Chemical Company (NYSE:EMN), other companies that are committed to returning cash to shareholders and are offering attractive dividend yields include Comcast Corporation (NASDAQ:CMCSA), AbbVie Inc. (NYSE:ABBV), and Philip Morris International Inc. (NYSE:PM).
Click to continue reading and see 5 Best Dividend Stocks to Buy According to Morgan Stanley.
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Disclosure: None. 10 Best Dividend Stocks to Buy According to Morgan Stanley’s Quant Screen: In Retrospect is originally published on Insider Monkey.