I’m going to use today’s (July 18) rather surprising upward move in US stocks-despite a big upswing in market nervousness yesterday-to sell Pfizer (PFE) out of my Dividend Income portfolio http://jubakam.com/portfolios/jubak-dividend-income/. (The Standard & Poor’s 500 index was up 0.96% as of 3:00 PM New York time.)
After the failure of the big drug company’s efforts to buy AstraZeneca (AZN), Pfizer seems a cash cow without a strategy. Not that the attempt to buy AstraZeneca was birilliantly creative-the deal would have let Pfizer move its tax-jurisdiction to the United Kingdom from the United States for huge savings. But it wouldn’t have done much if anything to fix the combination of ineffective research and expiring patent protections (Celebrex, the company’s $2.9 billion (in 2013 sales) arthritis blockbuster, is scheduled to go off patent in 2015) that are projected to slow sales growth to a crawl. Morningstar projects Pfizer’s sales growth at 1% a year over the next decade; share buybacks will raise earnings per share growth to 3% a year. In its year-by-year earnings per share projections, Credit Suisse calls for earnings per share to grow to $2.24 in 2014 from $2.22 in 2013, and then to $2.30 in 2015, and $2.61 in 2016.
Even with a 3.4% current dividend yield, those projected growth figures don’t add up to much in the way of upside capital appreciation.
If all I was looking for at the moment was safety, however, I’d consider hanging onto Pfizer.
But the combination of rising nervousness-the VIX volatility index climbed by 32% yesterday-and a rise in geopolitical tensions argue that I’d like to have a little cash on hand in case events in the Ukraine or in Gaze over the next few days result in a drop that might give me a buying opportunity in a dividend stock with a higher yield and better prospects for capital gains.
I would also probably hang onto Pfizer if I didn’t have a good replacement up my sleeve-but I do (and I’ll tell you what it is next week) and so it’s time to sell with a small 0.63% loss in share price (made up for by that near 3.5% dividend) since I added these shares to the Dividend Income portfolio back on February 6, 2014.
The stock goes ex-dividend on July 30 in case that income in hand (as opposed to capital locked up in the share price) is important enough to lead you to think about putting off a sale. (Share prices do tend to drop after the payout to match the dividend payout. Otherwise, if you think about it, dividends would create value for investors out of what is actually a distribution of cash that lowers the balance in a company’s treasury and raises it in shareholder wallets).
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.
On May 21, I sold TECO Energy (TE) out of my Dividend portfolio http://jubakam.com/portfolios/jubak-dividend-income/. Today, May 23, I’m adding Hi-Crush Partners (HCLP) to that portfolio. This master limited partnership yields 4.27%. My target price for the units, which sold at $49.25 at 3:00 PM New York time on May 23, is $52 a unit.
It looks like Hi-Crush sells sand. And, indeed, it does, to the glass industry, to the construction sector, and, most importantly for recent growth, to the natural gas industry for use in fracturing (fracking) shale to release gas and oil. Sector-wide shipments of sand for fracking jumped to 20.9 million tons in 2012 from 4.9 million tons in 2007, according to market researcher Freedonia Group. Freedonia projects that demand will double again to 52.1 million tons by 2022.
Certainly if you don’t have the sand mines—especially the sand mines in the Midwest that produce the hard, round sand that the oil and gas industry most prize—you’ve got nothing to sell.
But the real profits come these days from logistics—from getting the sand from mines, onto trains, and then transporting it and storing it near the shale operations that use it. A ton of sand that sells for $50 at the mine goes for $130 at the drilling area, US Silica Holdings (SLCA) CEO Bryan Shinn told Bloomberg. Adding mine capacity isn’t enough—it’s the investments in infrastructure that are driving revenue and earnings growth at companies such as Hi-Crush and its competitors.
Hi-Crush has sand reserves that Credit Suisse estimates at 30 years of supply. Its big mines at Wyeville and Augusta, Wisconsin, produce Northern White fracking sand at what Credit Suisse calculates is the lowest production cost in its industry.
From there, oil and gas customers can take delivery on sand that is then loaded on trains connected to the Union Pacific main line or operators in the Utica and Marcellus shale formations of Ohio, Pennsylvania, and New York can order from 12 Hi-Crush owned terminals in those states. Those terminals, Hi-Crush says, are spaced so that customers need to travel less than 75 miles from well site to sand supply. Hi-Crush acquired those terminals when it bought the biggest distributor in the Northeast last year.
It’s wise to take all projections about the growth production of oil and natural gas from shale with a grain of sand, these days. The profitability of the boom is running behind the industry’s need for capital and it’s still unclear what the long-term production profile is for wells in many of these geologies. Some regions that look like big plays now are likely to turn out to be much less attractive because complex geologies reduce production or raise costs.
I think those are indeed problems to keep in mind, say, three to five years out, but right now the oil and gas industry’s need to increase production from its wells—and lower costs if that’s possible—in order to make the interest payments on the debt operators sold to fund the development of leases points to rising demand for sand. Operators have discovered that in many geologies they can increase oil and gas production by using more sand to fracture the shale. That’s good news for growth at Hi-Crush.
The Wall Street consensus forecasts that EBITDA (earnings before interest, taxes, depreciation, and amortization) will growth from an actual $2.08 per partnership unit in 2013 to $2.84 in 2014 to $3.49 in 2015. If those estimates are accurate, EBITDA, as a multiple of distributions to unit holders, will go from 1.22 in 2013 to 1.62 in 2014. That should be enough, analysts estimate, to enable distributions to unit holders to grow from $1.95 in 2013 to $2.31 in 2014 to $2.71 in 2015.
Hi-Crush has climbed strongly with the rest of the sand producers in the last year on enthusiasm over the oil and gas from shale boom. But it isn’t unreasonably expensive. The price to earnings ratio is 22.69 on trailing 12-month earnings, but strong growth pushes that multiple down to 16.2 on projected 2014 earnings. The PEG ratio (PE to growth rate) for Hi-Crush is just 0.74 so you’re getting a lot of (projected) growth for your current dollars.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Hi-Crush as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.
There’s increasing reason to believe that the Treasury market has stabilized on the fundamentals—until the next panic when the Federal Reserve again begins to talk as if a decision to taper off its program of buying $85 billion a month in Treasuries and mortgage-backed assets is just around the corner.
And if the Treasury market has stabilized, it means that the weakness in dividend stocks (calling it a sell off would be an overstatement) is at an end—for a while—too.
The latest piece of evidence comes from a Wall Street formula called the term premium, which measures the risk of holding long-term bonds by factoring in the market’s outlooks on inflation and economic growth.
If you assume that consumer inflation will continue for the rest of 2013 at something like the current low rate–the lowest rate since 2009; and if you assume that U.S. economic growth will stumble ahead for the rest of 2013 by something like 2% or so rather than “racing” ahead at 3%, then the current 10-year Treasury yield of 2.54% is about right.
The long-term reading on the term premium has been an average reading of 0.40% in the decade before the financial crisis in 2007. It’s now at 0.46%, according to Bloomberg. As recently as May 2013 the term premium was a negative 0.5%. The term premium has been in negative territory since October 2011 and turned positive only in June 2013.
What does all that mean? The term premium is the extra yield that investors require before they will buy a long-term bond instead of a series of short-term bonds. If, for example, the yield on a 10-year Treasury were 5.5% and holding a series of 1-year Treasury bills over the next 10 years would be expected to yield 5%, then the term premium would be 0.5 percentage points or 50 basis points.
In most periods you’d expect the term premium to be positive since investors would, normally, require extra yield to induce them to hold a longer-term bond. But under some circumstances the term premium would be negative. If, for example, investors wanted to lock in a long term yield instead of taking on the risk of rolling over shorter term bills—with the chance that interest rates might be lower on each subsequent roll over—then the term premium could well be negative. That is indeed why the term premium was negative in early 2013—bond buyers actually preferred locking up their money for the long term instead of taking the risk that short-term interest rates might fall for subsequent rollovers. It wasn’t necessarily that yields on 10-year Treasuries were so attractive in comparison to short-term yields. It’s just that they were preferable given the assumed unpredictability in short-term yields. Predictability is a valuable commodity for pension funds and insurance companies that want to match the timing of their cash outflows and the timing of their cash inflows.
The big reason that bond buyers have started to see 10-year Treasury bonds as fundamentally attractive again—aside from their big recent drop in price and rise in yields—is the absence of any signs of inflation. Look around the globe—can’t find it. Can’t even find a scenario that might produce it relatively soon. At current economic growth rates, the global economy is awash in capacity whether it’s capacity for manufactured goods or production capacity for commodities. With China’s economy slowing that global overcapacity doesn’t look likely to go away quickly. (The one exception to this pattern of modest inflation is, perhaps, food commodities but even there the potential for a record harvest this year has pushed down near-term prices.)
Real yield on the 10-year Treasury—that is the yield once you subtract current inflation—is 1.56 percentage points, the highest level since March 2011. As recently as November, real yields were negative.
This hasn’t been a great first half for Treasuries and other bonds. Treasuries, according to the Bank of America Merrill Lynch bond index, lost 2.48% in the first half of 2013, the biggest loss since 2009
But Wall Street now believes that bond prices have stabilized within a likely range for the 10-year Treasury of 2.4% to 2.8% for the rest of 2013. High levels of bond market volatility and the uncertainty over when the Fed might begin The Taper argue that bonds yields aren’t going back to former lows, however.
What does this mean to you? Read more
This is a tough one and I’d bet that many of you would disagree no matter what I decided.
The name in question is Magellan Midstream Partners (MMP), a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
This master limited partnership has been a very, very good addition to the portfolio. At the time of the initial buy, these units paid a 7.3% distribution. Since I added the units to the portfolio on December 6, 2005, they’ve gained 60.3% (to the close on June 7, 2013.)
And that’s the problem.
The partnership has increased distributions every year. From $1.45 in 2010 to $1.56 in 2011 to $1.78 in 2012, but the increases in distributions haven’t kept up with the increase—27.4% in 2011 and 30.6% in 2012, for example, in the price of the units.
Consequently, the yield on this holding has come down every year—from 6.55% in 2009 to 5.15% in 2010 to 4.52% in 2011 to 4.13% in 2012 to 3.9% right now.
Why is that an issue? Because that falling yield is a sign that dividend stocks have gotten too popular. Especially recently. Read more
Everybody is on the hunt for higher yields. With a 3-month Treasury bill yielding 0.03%, way less than the rate of inflation, and a 10-year Treasury yielding just 2.04%, barely more than inflation, who can blame them. And too many investors seem willing to add lots of risk in their hunt for yield—10 years is a long time to lock up your money in even something as safe as a Treasury note if interest rates or inflation go up. Buying a corporate junk bond might get you 5% or 6%, but these are the riskiest corporate debt out there. If the economy stumbles, junk bonds will tumble.
If you’re looking for higher yield and you don’t want to sacrifice safety, I think you’re best bet is to look for dividend stocks from solid companies. The payouts from a dividend stock go up over time—unlike the fixed payouts from a bond—giving you protection if interest rated rise. And if you pick a company with a solid and growing cash flow from its business, you’re taking on much less risk than you would with a junk bond.
Best of all, if you dig real hard you can find stocks paying dividends of 3%, 4%, 5%, and even, occasionally 6%.
In this market, of course, even with lower risk dividend-paying stocks you can’t just buy and forget. These days being a dividend investor means paying attention to when a stock gets over value and when it’s a buy on a stumble.
What follows is a list of 10 dividend—U.S.-traded stocks only on today’s this list–stocks that at this moment best combine payout and safety. I’ll be adding some of these to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ today. Some of these are already members of that portfolio. In that portfolio you can also find some non-U.S.-traded dividend stocks. Read more