Seeking Alpha
Research analyst, dividend growth investing, portfolio strategy
Profile| Send Message| ()  

A strong stock market makes the rich happy and the less than rich hopeful. A strong real estate market makes the middle class happy and the rich ecstatic.

- Karim Rahemtulla, Financial Editor and Investment Analyst.

In this article I want to look at the stock market as a "market of stocks", and zero in on two companies with generous yields and outstanding businesses that can support these yields.

The first is CVR Refining (CVRR), which was spun off from CVR Energy (CVI). CVI used to own 80% of the shares of CVRR, and both companies have lucrative operations at an auspicious time in history.

CVRR owns and operates the Coffeyville crude oil refinery located approximately 100 miles northeast of Cushing, Oklahoma. Its Wynnewood crude oil refinery is located approximately 65 miles south of Oklahoma City, Oklahoma.

The company also owns and operates approximately 350 miles of feeder and trunk oil pipelines; 125 crude oil transports; 6.0 million barrels of owned and leased crude oil storage capacity storage tanks and a network of crude oil gathering tank farms. It also makes money from its 145,000 barrels-per-day pipeline system that transports crude oil from its Broome Station tank farm to its Coffeyville crude oil refinery.

You should be as impressed as I was when I visited its very informative website. The website answers many questions most investors should be asking and the company defines itself eloquently.

The following paragraphs describes CVRR succinctly.

CVR Refining is a growth-oriented, independent downstream energy company with crude oil refining, gathering and refined petroleum product marketing operations located in the Midwest.

Our company is focused on increasing profitability through growth opportunities while remaining committed to unit-holder value and safe and environmentally conscientious operations.

On May 20th, the company announced that it had closed its public offering of 12,000,000 common units representing limited partner interests ("Common Units") at the public offering price of $30.75 per Common Unit. Of special interest to me was the language used by the company to explain the purpose of this follow-on offering.

CVR Refining Holdings now directly or indirectly owns 108,000,000 Common Units, representing an approximate 73% limited partner interest in CVR Refining. In addition, American Entertainment Properties Corp., an affiliate of Icahn Enterprises, L.P., signed an agreement to purchase 2,000,000 Common Units from an affiliate of CVR Refining Holdings in a concurrent privately negotiated transaction at a price per Common Unit equal to the price per Common Unit paid by the public in this offering.

The transaction was expected to close on or around May 23, 2013. Icahn Enterprises is now the majority stockholder of CVR Energy, Inc.

CVR Refining used the net proceeds from the offering to redeem 12,000,000 Common Units from CVR Refining Holdings, LLC ("CVR Refining Holdings"). As a result, the offering did not change the number of Common Units outstanding, but it gave CVRR more autonomy.

It also helped CVRR increase its distributable cash to unit-holders. As one analyst recently pointed out,

CVR's cash flow more than doubled in the first quarter [2013] to $310 million from $143 million a year earlier. Earnings vaulted to $275 million from a loss of $37.4 million last year.

No wonder the company has announced that it's able to pay between $5.50 and $6.50 per unit in 2013. Even if we take the lower number that implies that if we buy the shares at around $30 our yield-to-price is an exceptional 18.3%!

The 6-month chart below shows how well CVRR has performed since being spun off. I expect the stock to trade up above $36 once it begins to pay its distributions to unit holders.

Chart forCVR Refining, LP

If you want to keep from being too exposed to the energy sector for income and growth, you may be interested in a mortgage REIT. The one I'm referring to is aiming more and more towards non-agency residential and commercial mortgage backed securities (RMBS and CMBS).

Western Asset Mortgage Capital Corp. (WMC) just celebrated its first anniversary as a publicly-traded company. Yet this company has the benefits of experience behind it. It is externally managed by the pros at Western Asset Management Company, a global leader in diversified fixed-income management since 1971.

The WMC investment strategy that drives its outstanding quarterly payouts is described on its no-nonsense website. The company claims to "...rely on our Manager's expertise in asset allocation and identifying attractive assets within our investment strategy."

Although its core investment strategy is focused on Agency RMBS, its Manager's expertise in related investment instruments such as non-Agency RMBS, CMBS and ABS provides management with both (1) valuable investment insights concerning its RMBS investment selection and strategy and (2) it gives WMC flexibility to invest in assets other than Agency RMBS opportunistically as market conditions warrant.

As of March 31, 2013 WMC had approximately $459.4 billion in assets under management. This number included $58.3 billion in total mortgage exposure, of which $39.2 billion was invested in Agency RMBS, $8.8 billion in non-agency RMBS, $1.3 billion in CMBS, and $8.8 billion in ABS.

Asset-backed securities (ABS) often carry some form of credit enhancement, such as bond insurance, to make them attractive to investors. Its a part of the company's strategy to maintain an unusually high dividend payout which as of May 15, 2013 is annualized at almost 19%!

WMC reported its first quarter 2013 results on May 15th. Core earnings for the first quarter were $22.6 million, or $0.93 per basic and diluted share (Non - GAAP measure). The company also reported a net book value of $19.42 per share as of March 31, 20132. That would be a reasonable share price at which careful investors might initiate a purchasing strategy.

FIRST QUARTER 2013 HIGHLIGHTS

  • Incurred a net loss of $28.5 million, or $1.18 per basic and diluted share

    -Net loss includes $54.8 million of net unrealized loss on RMBS
  • Generated core earnings of $22.6 million, or $0.93 per basic and diluted share (Non - GAAP measure)

  • Declared a $0.95 per share regular dividend for the quarter

  • $19.42 per share net book value as of March 31, 2013 (The net book value per share is adjusted for the $0.95 dividend declared on April 1, 2013.)

  • 3.04% weighted average portfolio yield on Agency RMBS, including IO securities accounted for as derivatives, and Non-Agency RMBS (including those Non-Agency securities accounted for as "linked transactions" under GAAP) (Non - GAAP measure)

  • 0.87% weighted average effective cost of financing on Agency RMBS, including swaps, and Non-Agency RMBS (including linked transactions) (Non - GAAP measure)

  • 2.17% weighted average net interest spread on Agency RMBS, including IO securities accounted for as derivatives, Non-Agency RMBS (including linked transactions), and swaps (Non - GAAP measure)

  • $4.4 billion investment portfolio fair value as of March 31, 2013

  • Constant prepayment rate on its Agency RMBS portfolio of 3.4% for the quarter

  • 8.7x leverage (including borrowings on linked-transactions) as of March 31, 2013 (Adjusted for the $0.95 dividend declared on April 1, 2013.)

The CEO of Western Asset Mortgage Capital Corporation, Gavin James made the following comments at its recent earnings conference call.

During the first quarter of 2013, asset prices in the Agency RMBS market were influenced by a belief that QE3 monetary policy would end sooner than expected, causing mortgage spreads to widen and pay-ups on call-protected securities to decline.

Mr. James also consoled and encouraged analysts and investors,

Given the composition of our portfolio, which reflects our belief that QE3 will continue for the foreseeable future, the moves in asset prices resulted in a decline in book value during the first quarter.

Mr. James added that

the market has since realized that it was premature in its view of a near-term reduction in QE3, which has resulted in a partial recovery of the book value lost during the first quarter, as spreads have narrowed and pay-ups on call-protected securities have increased since March 31, 2013.

Stephen Fulton, Chief Investment Officer of Western Asset Mortgage Capital Corporation, commented,

We believe we are well positioned to generate attractive risk-adjusted returns over an entire interest rate cycle. We may experience volatility in any one particular quarter during the cycle - as we did during the first quarter - but we expect our overall longer-term results to be very strong.

Since our IPO in May 2012, we have delivered an economic return of 15.5%* on an annualized basis", Mr. Fulton added, "and we are optimistic that over the entire interest rate cycle, we will be able to meet our goal of generating a consistent dividend for our shareholders while maintaining a stable book value. (Emphasis added)

*Economic return is annualized and is based on the original $20.00 per share IPO price, adjusted net book value of $19.42 as of March 31, 2013, and $3.30 of cumulative dividends.

If you're considering an investment in shares of WMC, I encourage you to read the entire earnings report to see the details for yourself. With the core competency of its management (Western Asset Management Company, an investment advisor registered with the SEC and a wholly-owned subsidiary of Legg Mason, Inc., (LM)) the confidence of its Chief Investment Officer is well-warranted.

WMC's top two institutional investors are Pine River Capital Management which as of March 31, 2013 owned 6.25% of the outstanding shares of WMC, and SAB Capital Management, LP which controls 4.95%. A list of the major individual, institutional and mutual funds invested in WMC can be found here.

A suggested investment approach to WMC would be to accumulate shares at a price close to the current adjusted net book value of $19.42. Then buy more if the shares fall below that level.

You'll be paid handsomely for holding the shares, and with the help of the Fed's bond-buying, ZIRP (zero interest rate policies) programs, it is possible that WMC will retest its 52-week high of $24.72 by the end of 2013 or in early 2014. The chart below illustrates share price history.

Chart forWestern Asset Mortgage Capital Corporation (<a href=

Like CVRR, the stability and sustenance of WMC's dividend payout and the potential growth of its share price is helped significantly by the advisors that these companies employ to direct investment and business decisions. Also, keep in mind that both companies are businesses that do well in today's economic environment.

CVRR is focused on oil refining, transportation and storage, where demand is high and growing. WMC is enjoying an unprecedented opportunity to prosper by piggy-backing on the Federal Reserve's generous monetary policies involving low interest rate financing of both residential and commercial properties.

It really pays to be in the right businesses at the right time, especially if you're a recipient of the board's determination to offer generous distributions and dividends. Do your own due diligence and calculate the potential total return (dividends, special distributions and share price appreciation) that both CVRR and WMC offer. I anticipate you'll be impressed and motivated.

Source: 2 Stocks With Outstanding Yields And Great Businesses