Yield Perspective - Amazon And Geomet Preferred

Includes: AMZN, UNG
by: Josh Young

The stock market is a remarkable place. Some stocks trade at extremely high price-to-earnings multiples, anticipating huge future revenue growth and margin expansion. Others trade at low multiples, anticipating declining revenue and margins. And still others trade on their yield, or the percent dividend that they pay to investors.

Monday Amazon (NASDAQ:AMZN) traded up to a new 52-week high, almost touching $275 per share. According to Yahoo Finance, Amazon's PE is over 3000, and it does not pay a dividend. Obviously, investors in Amazon are betting on future growth and the company's ability to substantially improve its profit margins, which are close to 0 (Yahoo shows Amazon's profit margins at 0.07%).

One way to think about a PE multiple is in terms of "yield math." If a company has a PE multiple of 20, that implies that for every dollar value of stock, the company is earning 5 cents. If it were paying out 100% of its earnings, a company with a PE of 20 could theoretically pay up to a 5% dividend yield. And a company with a PE of 40 could theoretically pay up to a 2.5% dividend yield. By this math, Amazon would only be able to pay a dividend of up to 0.003%.

Amazon is a large, well known company with a highly liquid stock. Investors are familiar with its brand and products, and the company has successfully grown at a rapid pace. Perhaps this explains the high multiple and low implied yield that Amazon trades at.

It is hard to imagine a more different investment from Amazon stock than Geomet Preferred (GMETP). Geomet is a small, obscure company with an illiquid Preferred stock. The company has experienced essentially no revenue growth in the two and a half years that the preferred has been public. And Geomet Preferred is trading at $7, less than half of the $15 per share it traded at in March of 2011.

Where Geomet Preferred gets interesting is its yield - it is currently trading for a 17.9% dividend yield. Geomet has paid this dividend quarterly, and in conversations with management, the CEO has indicated that the company intends to continue to do so into the future. This high yield compensates for many of the perceived downsides of Geomet Preferred, including that it is illiquid and much smaller than huge companies like Amazon.

The other interesting aspect of Geomet Preferred is how it is tied to natural gas prices. Geomet has its natural gas prices hedged for the next 18-24 months, but has exposure to the long-term price of natural gas. The current natural gas glut has resulted in low natural gas prices, which in turn has led to substantially less drilling for natural gas. Simple economics and logic indicate that less drilling should lead to less production in the future, which should lead to a higher price for natural gas (NYSEARCA:UNG).

Geomet benefits from this by realizing its "locked in" prices from its hedges over the next two years, and then profiting from the potential uplift in natural gas prices from the anticipated higher price after that. And Geomet Preferred is convertible, so it has the potential to capture some of the upside potential to Geomet from this anticipated natural gas price move.

In summary, two of the numerous options to investors in the stock market are AMZN and GMETP. AMZN has an implied yield of 0.003%, and GMETP pays an actual yield of 17.9%. AMZN appears to be a bet on improving margins of a high growth technology business, and GMETP to be a bet on current yield and the potential for higher natural gas prices in the future. AMZN is obviously a much more liquid stock than GMETP, but AMZN's high valuation compared with GMETP's high yield makes the comparison interesting.

Important caveat - Geomet is a small company, and investors in it incur additional risks compared with larger companies, including stock liquidity, company solvency and higher cost of capital.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long GMETP