Baker Hughes Is A High-Yield Play On Electrification

Key Points

• Baker Hughes had a solid quarter and gave positive guidance. 
• Business is driven by demand for natural gas and LNG services; key to the transition to electrification. 
• The stock pays 2.6% in yield and the distribution could grow in the coming year. 

As odd as it may sound, Baker Hughes NASDAQ: BKR is a high-yield play on electrification. The company is an oilfield services provider, a company you’d think would be put out of business by the shift toward electrification. Still, that shift is driving an oilfield super-cycle that is underpinning results. The shift to electrification relies on natural gas and LNG as transition fuels for power generation and destination vehicles.

That has oilfield operators improving their nat gas and LNG capabilities, and that’s Baker Hughes's business. If you’re looking for a high-yield play on electrification, Baker Hughes is a stock you might be interested in because it outperformed consensus and guided an optimistic market higher. 

“We continue to believe that the current environment remains unique, with a spending cycle that is more durable and less sensitive to commodity price swings, relative to prior cycles. Another notable characteristic of this cycle is the continued shift towards the development of natural gas and LNG.

As the world increasingly recognizes natural gas's crucial role in the energy transition, serving as both a transition and destination fuel, the case for a multi-decade growth opportunity in gas is steadily improving as both a transition and destination fuel.”

Baker Hughes Gushes Highes On Solid Results 

Baker Hughes had a strong quarter with revenue of $5.7 billion, growing 18% compared to last year. The revenue also beat the Marketbeat.com consensus by 320 basis points on strength in the core business. Oilfield Services and Equipment revenue increased by 19% and is expected to accelerate due to a 25% increase in orders.

The Industrial & Energy Technology segment put in a strong 18% growth, but orders in that segment fell by 1%, which is the only bad news. The North American segment was strongest on a regional basis, with a gain of 20%, while the International trailed with 18% growth. 

The top-line strength helped leverage the margin along with operational efficiencies. This led to a 47% increase in operating income and adjusted earnings that nearly doubled compared to last year. The $0.28 adjusted earnings also beat the consensus, resulting in strong full-year guidance. The company is expecting revenue and earnings in a range that tops the Marketbeat.com consensus at its midpoint. This is enough to get the analysts to update their targets and attract new money to the market. 

The analysts’ sentiment has been steady over the last year if nothing else. Marketbeat is tracking 18 analysts with a consensus of Moderate Buy and a price target of $35.30, and both have been steady for the last year, fluctuations aside. The critical point is that the price target is about 18% above the price action, putting the market at a new high. The 1st new report following the Q1 release is from UBS Group, initiated at Neutral. 

Baker Hughes Has Yield For Investors 

Baker Hughes pays an attractive dividend worth 2.6% in yield. The payout is only 50% of the earnings outlook, and next year's earnings are expected to grow. Based on the natural gas and LNG outlook, the market will likely support Baker Hughes's business for many years. The balance sheet is healthy, and the free cash flow is ample, so there are no red flags. Baker Hughes hasn’t made regular distribution increases, so the odds are low that another will come soon, but it has only ever increased the payment since the mid-1990s. 

The chart is bullish and shows growing support for this stock. The test of support in March 2023 bounced from a higher level than in 2022, and now the market is moving higher again. The caveat is that resistance at recent highs is capping gains. If the market can get above that level, a move up to $32.50 is likely.