GeoMet Preferred shares' (GMETP) dividend record date is on December 17th. GMETP pays a 12.5% dividend, paid out quarterly, and because of the current share price, its current yield is 16.67%. In a previous article, I discussed the merits of GMETP and compared it to two other high yielding equities, Magnum Hunter Preferred (MHR) and Linn Energy (LINE).
At the time of that article, GeoMet Preferred traded at a 25% current yield, or $5/share. It has since traded up to a 16.67% yield, but still seems mispriced, and I have not yet sold any of my position. Several factors have driven my decision to not sell the position. First, a 16.67% yield is very attractive and seems mispriced. Second, GMETP is inflation-linked due to the conversion feature. With the expectation of further quantitative easing, GMETP and other inflation linked securities could see significant price appreciation. And third, the conversion feature gives upside exposure to natural gas prices, which seem positioned to rebound in the next 12-18 months.
Natural gas prices have fallen off recently and are in the midst of a 5 year bear market, due to shale gas oversupply. However, the rig count has fallen sharply, and lower current prices further disincentivize additional gas-oriented drilling. If no wells were drilled, natural gas production would drop 25-30%, and there is only marginal oversupply versus demand.
Obviously, some wells will continue to be drilled, but the 25-30% base decline rate is a high hurdle for the industry to overcome. If normal weather patterns or additional demand for natural gas ensue, prices could rise to the marginal cost of production, which is likely $5/mcf or higher. At $5/mcf, GMETP (GMET.PK) could appreciate dramatically.
In summary - GMETP is about to go ex-dividend, it pays a substantial dividend, compares favorably to other high dividend paying stocks, and unlike most yield and interest instruments, it has potential to appreciate substantially and would actually benefit from an inflationary environment.
Disclosure: I am long GMET.PK.