Dividend stocks are one of the most popular areas to invest in. These stocks offer the benefits of income generation and potential capital appreciation if investors can identify the right opportunities. They are essential for investors looking to protect their assets but also are important for young investors looking for diversification. I chose Northern Tier because of the following scan criteria:
- 15% Annual Dividend Yield
- 2013 First Quarter Revenue Growth Of At Least 10%
- Net Income Growth Of At Least 10%
- Average Trading Volume Of At Least 500,000 Shares To Provide Investors Ample Liquidity
- 12 Month Share Appreciation Of At Least 26.5% To Match The S&P Depository Receipts (SPY)
Northern Tier Energy LP (NTI)
Northern Tier Energy is an independent downstream energy company with refining, retail, and pipeline operations that serves the PADD II region of the United States. The company operates its assets in two business segments: the refining business and the retail business.
Two of our screening qualifications were that the stock must trade at least 500,000 shares and shares must have appreciated at least 26.5% over the past 52 weeks. Well Northern Tier certainly meets both of those. The company trades over 1.4 million shares per day. Additionally, as the chart below shows, Northern Tier shares have appreciated by an astonishing 85% over the past 52 weeks.
So on the trading side, Northern Tier certainly has excelled. But what about the fundamentals? Well Northern Tier has been equally as impressive on that front as well. During the previous quarter, the company had declared a dividend payment of $1.27 per share, which translated to a 20% dividend yield This ranked Northern Tier as the top paying dividend stock in the universe. Many investors were skeptical. But after its recent earnings report (May 13, 2013), the company declared a cash distribution of $1.23 per share. Thus far in the company's history, Northern Tier has declared dividends of $1.48, $1.27, and $1.23. Based on the stock's current price of just over $25.38 per share, those amounts translate to dividend yields of 23.3%, 20.0%, and 19.4%. So clearly the stock meets our 15% annual dividend requirement but why has the stock been able to declare such large payouts? The answer can be seen by looking at their financials.
Northern Tier reported its first quarter earnings on May 13, 2013. The results were very strong and continued the company's trend of improving fundamentals despite the naysayers who were adamant that the company would disappoint during the first quarter. Well instead of disappointing, the company exceeded expectations. During the first quarter, Northern Tier generated revenue of $1.1 billion, an increase of 11.6% over the same period a year ago. The company also improved its adjusted EBITDA. For this period, that number came out to $156.6 million, an increase of more than $75 million from the same period a year ago. Additionally, the company was able to generate net income of $119.4 million. This is significantly better than the $193.6 million loss that the company suffered during the first quarter of 2012.
Since this is a refining play, it's also important to look at that segment specifically. The refining segment's operating income was $141.8 million for the first quarter compared to just $78.7 million for the first quarter 2012. Refining gross product margins were $25.81 per barrel of throughput for this period compared to just $17.71 per barrel a year ago. This increase is primarily due to favorable benchmark crack spreads as well as favorable crude oil price differentials versus the benchmark WTI crude oil prices in the 2013 first quarter compared to the 2012 first quarter. In addition to higher product margins per barrel, throughput and sales volumes increased compared to the same quarter of 2012. Total throughput was 85,365 barrels per day for the first quarter 2013 compared to 76,004 barrels per day for the prior year quarter. Sales volumes increased to 84,694 barrels per day for the first quarter 2013 from 77,923 barrels per day for the first quarter 2012.
At the beginning of this article, we had identified several criteria for picking Northern Tier as a viable candidate. The technical criteria were already discussed. The fundamental criteria were that the stock needs to have a 15% annual dividend yield, a first quarter revenue growth of at least 10%, and a net income increase of at least 10%. Clearly the dividend yield is met. Northern Tier declared their quarterly distribution during their first quarter report of $1.23 per share. And as mentioned in the fundamentals paragraph, the quarter over quarter revenue growth came in at 11.6%. The net income was actually better than our required 10% growth. The company went from a $193 million loss to a profit of $119 million.
Clearly Northern Tier has had some incredible success thus far. But a 19% dividend yield does not come without its fair share of risks. The major risk is the volatility in dividends and the lack of history paying them. As the company has only paid 2 dividends in their history, investors must understand that the payment could vary dramatically from quarter to quarter. We've already seen that the dividend was 21 cents lower the second time around and the future payments could be lower. As the company stated during their fourth quarter conference call, the amount of the distribution will depend on that quarter's operating profits. A second risk has to do with the fact that Northern Tier's refinery was closed due to planned downtime for most of April and the first week of May. Luckily, this type of downtime only occurs once every 5 years or so. Northern Tier has already guided its second quarter throughput of between 55,000 and 60,000 barrels per day. So what does this mean for investors? Well the second quarter earnings will be much smaller and the company will likely declare its lowest distribution. It is likely to be around $0.60 to $0.70 per share which would mean a dividend yield of 10.2%. Again, I only expect that to be the case for the second quarter and I expect the company to continue full steam ahead for the foreseeable future.
Despite the fact that projected yield is likely to fall to 10% in the second quarter, I think everything else the company is doing makes it an absolute must own investment. The company's share price has appreciated by over 85% over the past 52 weeks while maintaining a 19% dividend yield. Once we get past the second quarter, I expect this yield to return so investors may want to consider waiting until the second quarter distribution is declared to invest.