When there is so much uncertainty about inflation, interest rates and the economy, it's not the worst idea to invest in reliable, stable infrastructure.
That's why the Market Matters team is about to pounce on APA Group (ASX: APA).
"APA is [a] classic defensive stock with regulated earnings linked to critical energy infrastructure," read its memo to clients.
The utilities stock is currently paying out a dividend yield of 5.37% per annum.
Of course, the market has already been rather fond of such infrastructure-related assets over the past year or so.
But the APA share price still seems to be cheap, sinking 13.4% over the past 12 months.
"APA is trading ~25% below its 12-month high with weak momentum," said the Market Matters analysts.
"We suspect the current lack of interest is for a few reasons."
Image source: Getty Images
Back to the future
Stocks like APA had already risen immensely during the zero-interest rate era that only ended a year ago.
"When interest rates (and bond yields) were at rock bottom, fixed income was very unattractive… meaning that investors were forced into equities," read the memo.
"'Bond-like' equities such as APA benefitted the most and their share prices rallied strongly."
With rates now higher and arguably in a more "normal" range, fixed income is back in favour.
"This reduces the appeal of stocks like APA, which should theoretically trade back to more normal pricing metrics."
The Market Matters team calculates the fair value for APA Group shares based on its dividend yield above 10-year bonds.
Market consensus is a forecast of 58.5 cents dividend for the 2024 financial year.
"Using FY24 assumptions, that puts APA on a yield of 5.82% (unfranked) versus the 3.65% 10-year yield — a spread of 2.17%," read the memo.
"[This] is still below its historical premium of ~2.8%, but well above the ~1% premium where it recently traded."
Given all this, the team is very close to buying APA Group shares now.
"We intend to buy APA Group on a move below $10."
APA shares closed Wednesday at $10.07.
The Motley Fool's Tristan Harrison is also a fan of the dividend stock.
"A large majority of the ASX 300 share's revenue is indexed to inflation, so APA is seeing revenue growth thanks to stronger inflation while boosting earnings and cash flow," he said last week.
"It has used the growing profit to pay a distribution which has increased every year for almost 20 years."
