1 'Strong Buy' Energy Dividend Stock With 17% Upside Potential

Investors looking for a compelling energy dividend stock with solid upside potential may want to turn their attention to Baker Hughes (BKR). Recently, Wells Fargo upgraded the stock, adding to the momentum behind its bullish outlook. BKR has earned a consensus “Strong Buy” rating from analysts, who see as much as a 17% upside, on average, based on its mean price target. Beyond its growth potential, Baker Hughes offers an attractive dividend yield of over 2%, making it a solid option for income-focused investors as well.

In this article, we’ll dive deeper into Baker Hughes’ fundamentals, dissecting its financials, valuation, dividend history, growth outlook, and sentiment in the options market. 

About Baker Hughes Stock

Founded in 2016 and headquartered in Texas, Baker Hughes Company (BKR) offers oilfield products, services, and digital solutions. The company ranks as one of the world’s largest oilfield service providers. BKR provides a broad range of services, such as drilling, well intervention, decommissioning, surface pressure control, onshore composite piping, reservoir technical services, and integrated well services. Its market cap currently stands at$37.15 billion.

The company is well-prepared for the future of energy, demonstrating strength and resilience in its gas technology and LNG portfolios within the Industrial & Energy Technology Segment. These technologies are developed to address the increasing global demand for natural gas (NGX24), and to deliver oilfield services and equipment, as more precise drilling and completion (D&C) programs concentrate on improving the production lifecycle of oil wells.

Baker Hughes stock has gainedabout 9.7% on a year-to-date basis, slightly outperforming the Energy Select Sector SPDR Fund ETF’s (XLE)8.5% gain over the same time frame.

Wells Fargo Gets More Bullish on Baker Hughes Stock

On Sept. 24, Wells Fargo upgraded Baker Hughes to “Overweight” from “Equal Weight” and raised the stock's price target to $42 from $40, as part of a broader research note on Energy Services. 

The firm increased the multiple for the Industrial & Energy Technology (IET) segment, citing improved prospects and valuation opportunities for this diversified segment, which helps counterbalance the lower multiple assigned to the Oilfield Services & Equipment (OFSE) segment, Wells Fargo’s Roger Read told investors in a research note. 

Notably, Read upgraded Baker Hughes to account for the company’s diversified business model and its progress in improving margin and cash flow performance.

Recent News for BKR Stock

On Sept. 12, Baker Hughes introduced CarbonEdge, powered by Cordant, the first end-to-end, risk-based digital solution for carbon capture, utilization, and storage (CCUS) operations. This innovative tool provides comprehensive support for regulatory reporting and operational risk management. CarbonEdge includes an intuitive, integrated dashboard that delivers accurate, real-time data and alerts regarding carbon dioxide flows across CCUS infrastructure - covering carbon capture, compression, pipeline transportation, and subsurface storage. This seamless integration throughout the entire CCUS project lifecycle enables customers to identify and manage risks, make more informed decisions, enhance operational efficiency, and simplify regulatory reporting.

“CCUS technology solutions are essential for driving decarbonization of the energy and industrial sectors on our path to solving climate change,” said Baker Hughes Chairman and CEO Lorenzo Simonelli.  

On Sept. 3, Baker Hughes announced several leadership team changes, effective as of Oct. 1, aimed at continuing the successful implementation of its strategy and driving long-term growth. Amerino Gatti has been named executive vice president (EVP) of Oilfield Services & Equipment (OFSE). Also, Maria Claudia Borras, EVP of OFSE since 2022, has been appointed as chief growth & experience officer. Furthermore, Muzzamil Khider Ahmed, who has served as SVP and chief people officer since 2023, has been promoted to the executive leadership team in the role of chief people & culture officer.

How Did Baker Hughes Perform in Q2?

On July 25, Baker Hughes posted better-than-expected Q2 results, fueled by heightened demand for its drilling services and equipment in international markets. Its total revenue grew 13% year-over-year to $7.14 billion, surpassing Wall Street’s expectations by $300 million. Revenue growth was driven by increased volumes in both the IET and OFSE segments. The OFSE unit saw a 3.5% year-over-year increase in revenues, reaching $4.01 billion, while the IET segment experienced a 28% rise to $3.13 billion. 

The company’s adjusted net income soared 44% year-over-year to $568 million, equivalent to $0.57 per share, beating consensus estimates by $0.08. Notably, BKR’s orders rose 1% from the previous year to $7.5 billion, which included $3.5 billion in IET orders.

Baker Hughes’ adjusted EBITDA rose 25% year-over-year to $1.13 billion in the second quarter, driven by strong backlog conversion in both SSPS and IET, effective handling of aero-derivative supply chain constraints in Gas Tech Services, and the realization of efficiency gains and productivity improvements across the company. Adjusted EBITDA margin improved by almost 150 basis points year-over-year to 15.8%. BKR’s outstanding execution and continuous improvements in cost productivity enabled the company to surpass its EBITDA margin guidance once again.

The company has a healthy balance sheet, closing the quarter with $2.3 billion in cash, a net debt-to-EBITDA ratio of 0.9x, and liquidity of $5.3 billion.

Baker Hughes issued in-line Q3 revenue guidance, estimating revenues between $6.97 billion and $7.46 billion. At the same time, the company boosted its full-year revenue projection to $27.6 billion to $28.4 billion, up from the prior forecast of $26.5 billion to $28.5 billion. It also raised the midpoint of its FY24 adjusted EBITDA guidance by 5%, anticipating it to fall between $4.40 billion and $4.65 billion.

Baker Hughes is scheduled to release its Q3 results on Oct. 22, after the market closes. Analysts tracking the company forecast a 45.24% year-over-year rise in its quarterly profit to $0.61 per share. Notably, the company has exceeded earnings estimates in each of the past four quarters. Also, Wall Street anticipates an 8.89% year-over-year increase in BKR’s revenue, projecting it to reach $7.23 billion in Q3.

BKR Stock Valuation and Dividend Yield

Baker Hughes has a distinguished history of paying dividends, boasting a consistent record of 34 consecutive years. This significantly surpasses the sector median of 2.9 years. 

On Aug. 16, BKR paid a quarterly cash dividend of $0.21 per share to its shareholders, representing a 5% increase compared to the same quarter last year. The company’s annualized dividend of $0.84 per share results in a dividend yield of 2.29%, which is lower than the sector median of 4.33%. However, the company has a moderate payout ratio of 42.49%, suggesting there is potential for future dividend increases.

Plus, the company generated $348 million in cash flow from operating activities and $106 million in free cash flow during Q2. Lorenzo Simonelli, Chairman and CEO of Baker Hughes, stated that the company distributed $209 million in dividends and repurchased $166 million of shares in the second quarter, and continues to aim for returning 60% to 80% of free cash flow to shareholders.

In terms of valuation, the stock is priced at a discount compared to its own five-year average multiples, but trades at a premium relative to sector median levels. BKR stock currently trades at 16.30 times forward earnings, which is higher than the sector median of 11.50x, but lower than its own five-year average of 30.82x. Also, the company’s forward EV/EBITDA ratio is at 8.92x, which is above the sector median of 5.97x, but still below its own five-year average of 9.57x.

Options Market Sentiment on Baker Hughes Stock

Looking at the option chain for January 17, 2025, the $37.00 CALL option has a bid/ask spread of $2.55/$2.65, while the $37.00 PUT option displays a spread of $2.05/$2.15. Remember that this option strike is nearest to the current stock price. We can calculate the expected price movement by using the midpoint prices of these options:

2.10 (37.00 put) + 2.60 (37.00 call) = 4.70/37.22 = 12.6%

Using the long straddle strategy based on current prices, the options market suggests that BKR stock could see a price swing of about 13% by the January options expiration from the $37.00 strike price. That would place the stock in a trading range of about $32.38 to $42.06.

Notably, at the $37.00 strike price, there are roughly 10 times more open call options than open put options, with 1,308 open calls compared to 138 open puts. This indicates a strong bullish sentiment in the options market and suggests a high probability that the stock’s value will increase.

What Do Analysts Expect For BKR Stock?

Analysts have deemed Baker Hughes stock a “Strong Buy,” with an average price target of $43.47, implying an upside potential of about 17% from current levels. Among the 19 analysts providing recommendations for BKR stock, 17 rate it as a “Strong Buy,” one as a “Moderate Buy,” and one analyst assigns a “Hold” rating.

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On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.