TBC - Passive Income: Two High Yields To Sleep Well At Night And One To Avoid

2023-03-11 09:00:00 ET

Summary

• The market is in turmoil due to concerns that rates will stay higher for longer and major cracks beginning to form in the banking sector.
• As is often the case during market sell-offs, many high quality low risk businesses get thrown out with the bathwater.
• We share two high yields that can help investors sleep well at night as well as one to avoid.

Amid worries of sustained higher interest rates and significant challenges emerging in the banking industry, the stock market is in a state of turmoil. As is customary during market declines, numerous low-risk, high-quality businesses are unfairly affected. This article presents two investments with high yields that can enable investors rest easy during these uncertain times as well as one that investors may want to steer clear of.

#1. Enterprise Products Partners ( EPD )

EPD has a strong and diverse portfolio, with a well-run midstream network that reaches major shale basins and ethylene crackers in the U.S., as well as exported facilities on the Gulf Coast and a high-quality petrochemical business. The company has been able to grow its distribution per unit for 24 consecutive years due to its consistent cash flow stream.

EPD had a strong Q4 with EBITDA growing 11.1% YoY, and management expects EBITDA to remain flat or slightly increase in 2023. The company's leverage ratio is now below 3.0x due to continued EBITDA growth and debt reduction. Enterprise plans to use its free cash flow for growth investments, acquisitions, low leverage, and funding distributions and unit buybacks.

The company's balance sheet continues to strengthen as it reduces debt, and management plans to pursue a more conservative financial posture with a new leverage target of 2.75x - 3.25x. Management explained their reasoning for this new more conservative balance sheet posturing on their Q4 earnings call :

To support our financial goals to responsibly grow the partnership and provide our limited partners with a growing and resilient stream of cash distributions over the long term, we believe we have entered into a new era in which it is wise to have a stronger balance sheet than historical norms in the energy industry. We are seeing our customers in the E&P, refining and petrochemical sectors do likewise. As a result, we are lowering our target leverage ratio from 3.5 times to 3.0 times, plus or minus a quarter of a turn. That is a range from 2.75 times to 3.25 times. And as we've noted earlier, our leverage for 2022 we ended at 2.9 times. So we're in good shape with regard to this new target.

With the strongest balance sheet in the midstream sector, a 7.6% distribution yield that is very well covered by stable cash flows, and expected mid-single digit annualized distribution growth for the foreseeable future, EPD is probably the safest and arguably the most attractive high yield equity opportunity in the market today.

#2. Blackstone ( BX )

BX is a leading alternative asset management company with nearly a trillion dollars in assets under management, offering a range of investment platforms, including real estate, private equity, hedge fund solutions, credit, and insurance. The company's economies of scale, proprietary database, and vast business network provide it with a competitive edge in underwriting deals, access to superior deal flow, and a lower cost of capital. This has fueled its rapid growth and made it a popular choice for clients seeking diverse alternative asset investment opportunities.

BX has a significant portion, 37.8%, of its assets under management in perpetual capital. This, along with the company's immense scale, long track record as a proven performer, and access to immense amounts of capital through institutional partners, has contributed to its A+ credit rating.

According to Wall Street consensus analyst estimates, Blackstone's dividend compound annual growth rate is expected to be 11.1% through 2024. Despite potential choppiness in the company's dividend payout level due to the timing of carried interest realization, BX's earnings are relatively stable through market cycles, suggesting continued dividend growth over time.

Although BX's existing assets under management may decrease during severe economic downturns, the company is well-positioned to take advantage of opportunities provided by such conditions, ensuring its long-term well-being is not at risk due to a recession.

With a 5.2% trailing twelve month dividend yield and its strong growth outlook, BX is a compelling dividend growth stock that gives you a high current yield as well. Meanwhile, its vast empire of high quality businesses and assets along with its A+ credit rating should enable investors to sleep well at night.

High Yield Stock To Avoid: AT&T ( T )

T beat consensus estimates in its Q4 2022 and delivered positive guidance for 2023. Furthermore, the company gained 6.4 million wireless subscribers, exceeded analyst estimates for postpaid phone subscribers and added 280,000 fiber customers in Q4.

However, it is important to note that while the positive figures suggest the company's aggressive investments may be generating meaningful growth, we remain skeptical about its long-term growth prospects, due to some negatives in the report. Q4 revenue growth was only 0.7% YoY and missed consensus estimates by $70 million, indicating that the company still needs to prove its ability to reignite growth. The GAAP earnings-per-share number was -$3.20, reflecting continued weakness and declines in the company's underlying value due to massive write-offs. Moreover, the Consumer Wireline business had no YoY broadband subscriber growth, and total broadband and DSL connections were down 0.2 million YoY.

While management has guided for strong revenue growth in some of its businesses in 2023, the adjusted earnings guidance is less than impressive, with a midpoint of $2.40 per share. This is significantly below the consensus analyst estimate of $2.56 per share, and down 6.6% from the company's full-year adjusted earnings-per-share in 2022 and 29.4% from 2021.

On top of that, T's balance sheet - although gradually improving due to debt reduction - remains a significant concern and is consuming virtually all of the company's excess cash flow right now, particularly with interest rates on the rise. The company had to take a pre-tax write-down of $29.4 billion due to rising interest rates and asset impairment charges during Q4, which reflects poorly on the business' quality and it is hard to know exactly when the bleeding will stop.

Last, but not least, T is overvalued based on sporting an EV/EBITDA multiple that is higher than its historical average. Moreover, the dividend yield is lower than its 10-year average, which may make it less attractive to income investors, particularly as interest rates rise and the company's growth rate remains stagnant.

With little to get excited about from a growth or valuation perspective, a balance sheet that remains heavily saddled with debt in a rising interest rate environment, and a business that continues to struggle to generate attractive tangible returns on the massive amounts of capital that it is consuming, there is little to no reason to invest here right now. This is especially true when you see truly great businesses like the aforementioned EPD and BX (among many others) going on sale amidst the broader market sell-off.

Investor Takeaway

While companies like T have been value traps for years and appear poised to remain so, investors fortunately have plenty of other opportunities available to them in the current market environment. With great companies going on sale right now like EPD, BX, and many others that we are buying at High Yield Investor, it is a great time to be building a sleep well at night high yield portfolio to generate reliable and growing passive income for years to come.

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