It was a rough year in the stock market during 2022, but we think equities are likely to bounce in 2023 and we have identified 3 dividend stocks that you might want to consider in the new year. These two stocks stand to benefit not only from price appreciation but from dividend payouts. Depending on your needs, you can either take the cash dividend or re-invest as part of a DRIP plan that allows shareholders to automatically reinvest cash dividends into additional shares of the company on the dividend payment date.
Pan American Silver (PAAS) – Pan American Silver owns and operates silver and gold mines located in Mexico, Peru, Canada, Argentina, and Bolivia. They also own the Escobal mine in Guatemala that is currently not operating. Pan American provides enhanced exposure to silver through a large base of silver reserves and resources, as well as major catalysts to grow silver production.
Mining stocks took a hit in 2022 with gold and silver prices dropping throughout most of the year and costs rising. But prices have bounced in recent months and we believe that precious metals may have bottomed in September-October of 2022. We think gold could climb 20% or more in 2023 and that silver will outperform by a factor of 2 or more, with gains of 50% or greater by the end of next year. Keep in mind that even with a 50% move back above $30, silver would still be far from the all-time nominal high of around $50 per ounce. The fundamentals look strong with demand growing faster than supply, COMEX inventories are down sharply and central banks are buying aggressively.
Central banks bought 31 tonnes of gold in October, bringing global gold reserves to the highest level since 1974. As a group, central banks bought more gold in the third quarter of 2022 than ever before – a record 399 tonnes! The Silver Institute is showing that global demand for silver is projected to rise 16% this year, to 1.21 billion ounces. Supply is also projected to rise, but not by nearly enough. In fact, the gap is expected to be the largest silver deficit in decades. Silver supply has gone from a 69-million-ounce surplus in 2020 to a 194-million-ounce deficit, a total shift of 263 million ounces in just 24 months!
This all bodes well for gold and silver over the next few years and we expect leveraged gains for undervalued mining stocks like Pan American Silver.
Q3 numbers were not great, with revenue of $338.9M, down 26.4% Y/Y, and an adjusted loss of a penny per share. Most of this was due to lower prices for metals, but they also experienced a small drop in production. This really reflects the industry-wide challenge of softening precious metal prices combined with inflationary cost pressures. But we expect both of those elements to improve in 2023, with much higher metal prices and declining overall costs as inflation eases.
Pan American Silver produced 4.5 million ounces of silver and 128.8 thousand ounces of gold, which equates to around 70% of revenue from gold and 30% from silver.
But we are looking to the future and very bullish on the recently announced acquisition of Yamana Gold. This is a very good deal for PAAS in our view as they will remain debt free after it’s done and have more scale and synergies in Latin America. The deal is expected to close during Q1 of 2023 and will have massive benefits for PAAS including an increase in annual silver production of ~9.5Moz (+63%) and an increase in annual gold production of ~550koz (+104%). With PAAS already operating several mines in South America, they should realize significant synergies and cost savings, as well as increasing geographic diversification (Brazil and Chile).
There is also huge upside if they can get Escobal back into production. It is one of the world’s largest primary silver deposits with reserves of 264 Moz. The mine had 3 consecutive years of production at 20 Moz Ag/year at AISC consistently below US$10/oz Ag prior to 2017. Mine operations have been suspended pending the completion of an ILO 169 consultation by the Guatemalan government.
The share price is down from $40 in late 2020 to just $16 today. It is down 31% in 2022 alone. But we think the bottom is likely in around $14/share. Notice the highlighted bottoming pattern in the chart, which coincides with key moving averages. We think PAAS can offer leverage of 2x to 3x the move of precious metals over the next year or two, implying an easy double in the share price.
APA Corporation (APA) – APA Corporation explores for, develops, and produces oil and gas properties. It has operations in the United States, Egypt, and the United Kingdom, as well as exploration activities offshore Suriname and the Dominican Republic. The company also operates gathering, processing, and transmission assets in West Texas and holds ownership in four Permian-to-Gulf Coast pipelines. APA Corporation was founded in 1954 and is based in Houston, Texas.
The company is well diversified geographically and in terms of its commodity mix. This helps to reduce overall risk for investors.
The energy sector was a top performer in 2022 and we expect another strong year in 2023. Oil and natural gas prices are likely to remain elevated in 2023 with the ongoing war in Ukraine, increasing demand from a cold-than-normal winter globally, and China starting to re-open markets. And while inflation appears to have slowed in recent months, it remains high globally as governments continue with reckless deficit spending. The latest example is the $1.7 Trillion budget that the US Senate just passed, despite recently hitting $31 trillion in debt with a debt-to-GDP ratio of 124%. Lastly, central banks are likely to freeze rate hikes at some point in the new year, which should weaken the US dollar.
APA reported Q3 revenue of $2.9B (+40% Y/Y) beating expectations by $540 million. Non-GAAP EPS was $1.97, beating expectations by $0.19. That is a huge beat on the top line and a solid beat on the bottom line in the latest quarter. APA announced a doubling of the quarterly dividend to an annualized rate of $1.00 per share. They are not only benefiting from higher energy prices, but also from increasing production. The company expects fourth-quarter adjusted production to be in the range of 328,000 to 332,000 BOE per day, up more than 5% from the third quarter.
The company has $3 billion of free cash flow in 2022 and is committed to return 60% (~$1.8 billion) of it to shareholders through share repurchases and dividends.
The dividend yield for APA is currently 2.2%. Last week the company declared a $0.25/share quarterly dividend that is payable on Feb. 22 for shareholders of record Jan. 23; ex-div Jan. 20. So, investors still have a few weeks to buy APA and still receive the next quarterly dividend. Energy companies are entering the new year in a strong position. They are less levered, more disciplined, and super focused on returning cash to shareholders. APA is one of the best in our view and with the stock priced around 5x next year’s free cash flow, the risk-reward is attractive.
The APA chart shows the solid uptrend that has been in place for a few years. We expect this trend of higher highs and higher lows to continue into 2023 and believe that APA is headed higher in the near term after a short pullback. Shares are up 68% in 2022. We don’t expect this level of gain again in 2023, but would not be surprised to see APA climb another 20% to 30% higher. The current dividend yield is 2.2%.
Smart investors buy when everyone else is panic selling and sentiment is deeply negative. While we think there could be some more economic weakness in the first half of 2023, markets are forward-looking and much of this downside is already priced into stocks. We think stocks will bottom and rally several months before the Federal Reserve formally announces an end to rate hikes. So the time to be buying beaten-down stocks at deep discounts is ahead of such news.
Over the next week, we will be constructing our top dividend stock picks for our Income Insights portfolio. We will also be announcing our top mining stock picks for 2023 in our Gold Stock Bull portfolio. If you would like to receive our monthly newsletters, top picks in each sector, and trade alerts, you can subscribe to our research reports here: https://nicoyaresearch.com/premium-services/
