'We think they'll achieve record EBITDA': Stevens on Verizon

[00:00:00]It's time now for hot picks, and today we are looking at three dividend-paying stocks. And here to walk us through his top options is Josh Stevens, chief investment officer at Crestalta Investment Management. It's great to have you join us.

[00:00:12]>> Thanks for having me.

[00:00:13]>> So, do you think right now investors are paying more attention to dividend-paying stocks, or should they be?

[00:00:20]>> I think it's more of the should they be kind of question and answer that.

[00:00:25]If we look at the way the markets have positioned and what's happened recently, obviously the focus is on AI.

[00:00:32]And well, it should be as it should you know, play a material role in the global economy going forward over the next few years.

[00:00:40]But we think there's quite a bit of room for dividend-paying stocks. It offers quite a bit of balance to a portfolio, and for a lot of passive indexers out there you know, that have a lot of exposure to AI, dividend-paying stocks can create a counterbalance and a counterweight if something goes wrong with the AI trade.

[00:00:59]>> So, before we Yeah, sorry, continue.

[00:01:02]>> No, no.

[00:01:03]>> Okay, before we get into your hot picks then, I wanted to ask like Crestalta's approach to dividend-paying stocks, because I think it can be tricky sometimes for investors to be able to tell whether a dividend yield is actually sustainable.

[00:01:15]>> Yeah, so at Crestalta we're really trying to build portfolios that offer considerable balance and ballast to an overall equity allocation.

[00:01:26]We tend to be high conviction in in what we do, and we're looking at employing a rather unique dividend framework that looks at a combination of dividend-paying stocks, which you can think of as bond proxies, so companies that generally do well in rough market environments. very consistent dividend payments, and relatively high bond bond-like dividend yields.

[00:01:55]Dividend growth stocks that uh, provide high returns on capital, total shareholder return pictures are usually really strong and and earnings growth is is actually pretty strong as well.

[00:02:06]Uh, those tend to be the ballast of most of our portfolios. And then uh, the third category is dividend value uh, where we look for companies that are a little bit out of favor, might have some unique things going on and are uh, unduly depressed in terms of their overall multiples and uh, relatively cheap. Uh, but we think that they'll recover over time. So, three different uh, categories of of dividends and I thought I'd bring one stock from each category for you today.

[00:02:34]>> Okay, great. So, let's get into it then.

[00:02:35]Verizon is your first pick. Um, a dividend yield of about just over 6%.

[00:02:40]So, which category does Verizon fit into and why do you like this one?

[00:02:44]>> Uh, this is one of our dividend payer stocks. Uh, certainly a bond proxy.

[00:02:48]Um, yes, the dividend's over 6%. They've had consistent increases in the dividend for last 20 years and we think that's uh, likely to continue. Uh, they're in the process of a turnaround uh, that began with the prior CEO and now in a new CEO has been in the role for about 8 months.

[00:03:05]Uh, we think that continues and it's starting to bear fruit.

[00:03:08]Um, you know, the turnaround is really looking at improving margins uh, and driving top line subscriber growth.

[00:03:15]Uh, and we think that they're going to be successful with that. Already this year they've raised earnings per share guidance.

[00:03:22]Uh, we think they'll achieve record EBITDA and free cash flow uh, has also moved up uh, and that is roughly two times the dividend payment.

[00:03:31]So, uh, we think the dividend is safe uh, and likely to grow over time. Uh, it's a good defensive play uh, and provides um, you know, that sort of bond-like uh, uh, coupon return in an overall portfolio mix.

[00:03:46]>> Hm. Huntington Bank Shares is your next pick, a dividend of about 3.6%. You say you expect that to grow though. Tell us more.

[00:03:54]>> Yeah, this is a dividend value option.

[00:03:56]So uh Huntington is engaged in a number of different acquisitions uh over the last uh you know, 12 months or so.

[00:04:04]Uh it bought Cadence and Veritex uh community banks uh that allowed it to expand its geographic exposure uh from largely the Midwest down into Texas and the Sunbelt.

[00:04:17]Uh and additionally it bought a couple of units from Janney Montgomery Scott uh to expand its capital markets division uh Huntington Securities and Capstone.

[00:04:27]Uh we think that the market is uh you know, sort of uh put the stock in sort of a holding pattern uh and if you look at it it's traded more or less sideways for uh 12 to 15 months as it engaged in the acquisitions. Uh but as we sort of look at those acquisitions being digested by digested by the company uh and begin to see them bear fruit uh with improved returns on capital, uh we'd expect the stock uh and its multiple to move up uh and that dividends would begin to grow again uh and that uh share buybacks would also improve. So uh a stock that we think uh is trading at around you know, 1.6, 1.7 times tangible book value should move up to uh two times tangible book as uh uh the acquisitions that it's made over the last year, 12 to 15 months or so uh begin to bear fruit in terms of the overall fundamentals of the company.

[00:05:21]>> Hm. All right, your last one is Cactus Incorporated. Tell us more about this one.

[00:05:26]>> So this one's uh a little bit unusual in in the sense that it's a dividend growth stock in the energy sector.

[00:05:33]Uh Cactus operates in a couple different divisions um pressure control and spoolable technologies. Uh they recently entered into a JV with Baker Hughes uh that adds some complementary businesses and expands its uh overseas revenue base.

[00:05:47]Uh so prior to the uh the JV it had largely been a US domestic company with some exposure actually in the in Canada for its revenue but this JV really broadens and diversifies its revenue base globally.

[00:06:06]And we think the approach of the management over the long term has been really one of capital discipline that's shown up in how it's been able to grow earnings over time.

[00:06:19]The balance sheet remains extremely strong.

[00:06:24]It's trading at a relatively cheap multiple, very high free cash flows.

[00:06:30]The focus that management places on return on investment invested capital is extremely high.

[00:06:37]And that combination of factors I think leads us to think that the dividend will grow over time along with earnings. And that will see opportunistic share buybacks as well. And the fundamental picture for for Cactus is just strong over the next few years regardless of how volatile oil prices are likely to be.

[00:06:58]>> Okay, we'll have to leave it there. Josh Stevens, Chief Investment Officer at Crestalta Investment Management. Really appreciate your time. Thanks for joining us.