TEPPCO: A Safer Income Investment Than GE

by Louis Basenese

We’ve endured three consecutive weeks of losses for the S&P 500 (.INX). Never fun. But if you’re an income investor, ala Charles Dickens, the worst of times is creating the best of times…

Dividend yields now rest close to 15-year highs. Plus, the premiums from writing covered calls (the only safe options strategy) are significantly higher thanks to the extreme market volatility.

As far as I’m concerned, that’s an attractive one-two income-earning punch we shouldn’t ignore.

So how do we play it?

Not with the usual suspects…

Income Investors: GE Is A Dog at Any Price

There’s something about an adolescent stock price on General Electric (NYSE: GE) that turns most income investors rabid. Much like they were last summer for Bank of America (NYSE: BAC). But I continue to get in arguments with friends and colleagues about this.

I don’t care if GE trades below $20 per share, $15 per share, even $10 per share. It’s a terrible stock to own right now.

I know in some circles, such an utterance is blasphemous. Before you conclude the same, at least hear me out.

First things first:

• Simple businesses make money.
• Investors can understand simple businesses.
• And therefore, stocks of simple businesses tend to perform best (consult Warren Buffett’s track record should you disagree).

But - you guessed it - GE doesn’t pass the simple test.

Its business is all over the place. Last quarter, it logged sales in the following segments: water, security, railroads, oil and gas, media and entertainment, lighting, health care, consumer lending, commercial lending, energy, electrical distribution, consumer electronics, aviation and finally (drum roll) appliances.

Try coming up with an elevator pitch for Jeff Immelt for that mess. Jack of all trades, master of none, perhaps?

To be fair, GE does provide exposure to compelling sectors and trends - like energy and infrastructure, water, and green technologies. But it only accounts for a small portion of the revenue pie. And meaningful growth in these segments will always be overshadowed by declines elsewhere.

Case in point, in the fourth quarter, GE’s energy business increased profits by 27%. A home-run by any measure. Too bad the rest of the team struck out - weakness in other segments caused GE’s overall profit to drop 44%.

Bottom line, even after a 60% stock decline in the last year, GE is still a $137 billion behemoth. Moving that earnings needle, and in turn the stock price, requires over a dozen business segments to be firing on all cylinders, simultaneously. That’s not happening. Not now or anytime in the near future.

But How Can We Turn Down a 9% Dividend Yield?

After considering the above, most GE defenders shove their security blanket - the hefty dividend yield - in my face, saying, “At least I get paid 9% to wait for the stock to turn around.”

True.

But it could take years for the underlying businesses to turn around. Moreover, as Bank of America proved, no dividend is immune to a cut. Last summer CEO Ken Lewis said it was safe. Then in October, he ended the streak of 30 years of increases. And he cut it.

The same fate appears likely for Dow Chemical (NYSE: DOW). Last month CEO Andrew Liveris declared a dividend cut wouldn’t happen on his watch. Fast forward to this week, and he concedes a cut is now possible. Keep in mind, Dow Chemical’s dividend has never been cut since it was first instituted in 1912.

By now, Yogi Berra should come to mind, “It’s like déjà-vu, all over again,” because GE’s Immelt continues to deny the possibility of a dividend cut. He also wants to maintain the company’s coveted AAA rating. Yet, if current conditions persist, and management is desperate for cash, trust me, the dividend will get the ax.

For Income Investors - A Better Alternative Income Investment to GE

It wouldn’t be fair for me to bash GE as an income investment and not offer up a better alternative. So here it is - TEPPCO Partners (NYSE: TPP).

It’s one of the oldest publicly traded energy master limited partnerships (MLPs), with over 12,500 miles of pipeline. (For a thorough overview of MLPs, I recommend this MLP primer.) And it currently yields 11%.

Here are the five main reasons I believe the dividend is safe -

• Its business is simple. It gets paid to transport fossil fuels, based on total volumes, not the price of the underlying commodity. While the price of crude might be off significantly, I guarantee you worldwide demand, and the volumes to be transported, is not. Such a simple business makes it easy to spot breakdowns, and in turn, recognize when the dividend is truly in jeopardy.

• The revenue stream is highly reliable. We’re addicted to oil. And no matter how green the world gets, we’ll still consume plenty of it. That means the registers will keep ringing for TEPPCO, and there will always be cash in the till to pay out dividends.

• Management believes in conservative growth. Overdosing on debt to fund expansion is a recipe for disaster. If borrowing costs increase (like now), more cash needs to be set aside to make interest payments. If they jump too high, too fast, something has to give. And most times, it’s the dividend. Thankfully, TEPPCO believes in conservatism. For the past five years, it’s financed 75% of its growth through asset sales and equity contributions. In other words, interest payments won’t threaten the dividend one bit.

• Insiders keep buying. Insiders know best and Dan Duncan, the CEO of the general partner that controls TEPPCO, plunked down $7 million last September, at much higher prices. If the dividend was in jeopardy, he certainly wouldn’t be buying.

• Credit is not a concern. In these distressed markets, we can’t overlook this factor. If a business relies heavily on credit, and is having trouble getting it, look out. No worries for TEPPCO, though. It’s sitting on $600 million in liquidity, enough to fund almost all of its proposed capital expenditures for 2009.

Truth be told, I recommended TEPPCO to subscribers a month ago when it traded around $18. Now we’re up 48%. And we haven’t even received our first dividend payment yet.

Even after such an impressive move, though, I estimate at least another 36% upside remains.

Here’s why:

• The company sports strong fundamentals: earnings, distributions and its operations are all growing.
• It owns prime assets. Namely, the only pipeline transporting liquefied petroleum gases from the Texas Gulf Coast to the Northeast and the sixth-largest U.S. inland barge operations.

Both make it a prime acquisition candidate.

And history dictates MLPs should only average a 7.83% yield, based on the Alerian MLP Index. To bring its yield back inline with the historical mean, TEPPCO’s stock needs to rally another 36%.

Add it all up and it’s a no brainer. If you want high and reliable income, with the potential for capital appreciation, too, forget GE and buy TEPPCO. Or at the very least, ensure any high dividend-paying stocks you’re considering boast the five qualities above.

Comments

[Brad Castro:]

I admit, I considered GE myself, but with nearly half a trillion in leverage (GE, not me), I just couldn't pull the trigger. If GE's credit rating ever gets downgraded, look out below. A 9% dividend yield isn't much compensation. I agree that an MLP with a similar dividend, in the end, is a much safer choice.

And, btw - writing covered calls is not "the only safe options strategy."

Jan 31 09:11 AM

[auto44:]

Brad, I loved the humor(GE not me) you gave me a laugh. I gave you a plus. Thanks

Jan 31 10:47 AM

[Richard Col...:]

It's too late to buy TEPPCO for the dividend as the distribution is payable Feb. 6th to unitholders of record on Jan. 30th. and the option is out of the question as the spread for April 2009 expiration month is bid is .15 and offer is .45
On the other side of the coin Buffet, the richest man in America recently bought a large percentage of GE. That would make me feel a lot safer if I was going to buy one or the other.

Dan Kowkabany

Jan 31 11:20 AM

[Stoex:]

In regards to the Buffett "stick with me" syndrome..
didn't he buy preferred shares? So any common dividend change isn't going to impact WB's income.

Immelt's dividend committment is about as good as what shareholders got from BAC and soon DOW.

Should GE's dividend be substantially cut, I believe institutional holders who have yield constraints will punt the puppy out.

This article did a good job offering alternative dividend investing and with some very common sense point (ie, volume movement vs actual commodity price movement).

Jan 31 11:50 AM

[waldipup:]

I like Teppco per the analysis -

Wont touch it with a ten foot pole right now.

If it drops back to test previous lows , I'm in.

Jan 31 12:15 PM

[GimliJan:]

Thank you!
For writing a clear concise evaluation of two companies and why you should or should not invest in them. I happen to own a little of GE and TPP. I bought TPP at $18.92 on 12/8. Bought GE at $16.05 on 11/14. I am a new investor who's investment strategy is to buy and hold quality companies (preferably that pay dividends) in a Roth IRA Online Trading Account. The account is setup to automatically re-invest all dividends.
I am interested in leaning more about preferred shares, how to purchase them, the guarantee on the dividend payout if the common share payout is cancelled, etc.
I also want to learn how to take utilize companies Direct Stock Purchase Plan to add to my portfolio and save the commission fees.
Any information anyone can provide me would be appreciated. I am obviously a new investor and read as many of these articles and the very knowledgeable posts that accompany them

Jan 31 03:28 PM

[E Nuff Sed:]

AIG was a "simple" business - Insurance.
GE is a complex business. So is JNJ and PG. (Multiple Division, broad product lines).
GE's problem is the finance business (its an anchor around is neck).
Other parts of the business are solid though in the wrong part of the business cycle.
The problem is no one want to own a leveraged business in a de-leveraging world (except Buffet - with his investments in GE and GS).

Jan 31 09:19 PM

[Richard Col...:]

E Nuff Sed

I agree with you 100%. I don't own any GE yet, but I like a strong company in a beat down sector.
I don't care for preferred stock as common stock is the most profitable and if a company goes under then having priority with what's left over doesn't mean much to me. (even bonds are practically worthless)

I like the idea that GE re: covered options has only a .02 spread

Dan Kowkabany

Jan 31 10:04 PM

[Bijou:]

Given the economic slowdown, idled factories, etc., isn't the article's statement incorrect that "While the price of crude might be off significantly, I guarantee you worldwide demand, and the volumes to be transported, is not." If the price of oil (and OPEC's supply reduction) is currently reflecting expected reduction in factory output, due to inventory oversupply, there should be a concurrent reduction in oil usage, and therefore reduction in pipeline volume.

Jan 31 11:23 PM

[Seeking Cla...:]

My question is this - how will Teppco be able to continue to pay dividends when their dividend has exceeded their net income? Net borrowings have increased at least the last four years and the there was an inflow of cash from the sale of stock.

Jan 31 11:27 PM

[andruomail:]

A good site for finding out if a company you like offers preferred shares is quantumonline.com -- search for the ticker symbol of its common stock and it will give a list of the preferreds (if any -- often these preferreds are only issued by banks and financials because it benefits their balance sheets best). You can find out the yearly dividend and follow links to the SEC filings which state the terms of the shares, which are slightly different each time. Usually the guarantee is that before a penny of dividend is paid on the common stock, or stock buybacks are done, preferred dividends have to be paid in full; and if the preferred dividend is stopped for a long enough time, you get some activists on their board of directors.

On Jan 31 03:28 PM GimliJan wrote:

> Thank you!
> For writing a clear concise evaluation of two companies and why you
> should or should not invest in them. I happen to own a little of
> GE and TPP. I bought TPP at $18.92 on 12/8. Bought GE at $16.05 on
> 11/14. I am a new investor who's investment strategy is to buy and
> hold quality companies (preferably that pay dividends) in a Roth
> IRA Online Trading Account. The account is setup to automatically
> re-invest all dividends.
> I am interested in leaning more about preferred shares, how to purchase
> them, the guarantee on the dividend payout if the common share payout
> is cancelled, etc.
> I also want to learn how to take utilize companies Direct Stock Purchase
> Plan to add to my portfolio and save the commission fees.
> Any information anyone can provide me would be appreciated. I am
> obviously a new investor and read as many of these articles and the
> very knowledgeable posts that accompany them

Feb 01 12:02 AM

[PeteK:]

GE owns CBS news, right ?
They don't know what the hell
they are doing. Same with DIS owns ABC news,
also don't know what the hell they are doing.

Feb 01 02:17 AM

[Richard Col...:]

Roy M. -
GE owns NBC.

Dan Kowkabany

Feb 01 10:28 AM

[mc2406:]

I've owned TEPPCO for years, and it IS a simple easy to understand business vehicle like most of the energy related MLPs and is a terrific alternative to money markets. If it drops to recent low levels, I'd buy more. The only problem I've had is the share dilution (and related price decreases) due to selling more units that has happened periodically, although this presumeably has the same effect as more borrowing would on overall company value.

Feb 01 12:54 PM

[PeteK:]

Richard Collins;
Thanks for the correction. Cramer was right, people don't know what the hell GE is doing. They go into hundreds of types of businesses and some of the them i.e. NBC so bias in politics that make some people dislike GE instead. Disney too, why they don't stay with pleasing the kids but wanted to go into stupid news that involves politics and bias. Maybe some CEO's are too damn old to know anything any more.

Feb 01 02:34 PM

[tj_colorado:]

Limited Partnerships have very different tax treatment so it is like comparing apples and oranges. Instead of 1099 statements with dividends, you receive K-1 statements. When you sell the LP, the "return of capital" must be subtracted from your basis. If you own too much LP in an IRA, you could get the IRA disqualified. The devil is in the details.

Feb 02 01:39 PM

[tj_colorado:]

The tax treatment of limited partnerships differs so greatly from a dividend paying stock like GE that it is like apples and oranges. You receive a K-1, not a 1099. The LP throws off return of capital that must be subtracted from your basis when you sell. If you have too much return of capital in an IRA, that IRA could get disqualified and cause much consternation. The devil is in the details.

Feb 02 01:45 PM

[skyraider:]

Be interested in a follow-up to this article now that the earnings are out. Comments on the link between the CFO resignation and the charge to earnings, etc. Still a good deal? At what price?

Feb 03 10:00 PM

[GimliJan:]

Thanks for answering my questions on preferred shares and the information on MLP's and IRA's. I somehow thought that since it was a Roth IRA the return of capital wasn't an issue as I pay the taxes upfront. I should only have to file the K-1 with my tax return. I will check with my tax accountant.
Thanks again for educating me! Keep it up!

Feb 10 10:51 AM

[sunbakd1:]

valid point made.


On Jan 31 11:27 PM Seeking Clarity wrote:

> My question is this - how will Teppco be able to continue to pay
> dividends when their dividend has exceeded their net income? Net
> borrowings have increased at least the last four years and the there
> was an inflow of cash from the sale of stock.

Mar 12 07:04 PM