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If you're an income investor looking for the best stocks to buy, Linn Energy (NASDAQ:LINE) may be one of those dividend paying stocks you should take a long look at.

Linn Energy's high dividend yield of over 11% is second only to Martin Midstream Partners in the Independent Oil & Gas group, an industry filled with dividend stocks.

However, when you look at Linn Energy's valuation figures compared to the rest of the indie gas and oil stocks, they appear to be undervalued:

Comparison Linn Energy vs. Indy Oil & Gas Industry
LINN INDUSTRY AVG.
Dividend Yield 11.2% 2.32%
P/E 1.55 12.95
P/Book 1.07 2.72
P/Sales 1.22 1.95
P/Free Cash Flow/share 1.47 7.93
ROE (TTM) 94.67 13.10
ROA (TTM) 36.89 5.37
ROI (TTM) 83.02 7.37
Dividend Growth Rate * 44% 18.94% (5 yrs.)


* (LINE's dividend growth rate is only measured over 3+ years, since their Q1 2006 IPO).

Linn's debt leverage ratio comparisons are also solid:

  • 2.45% Quick Ratio, vs. the industry's .95%.
  • .62 Long Term Debt/Equity is below Industry Median of .72, but higher than industry .46 average

They increased their dividend distribution coverage to 1.21 in Q2, (bringing their dividend payout ratio to 81%), and also brought down their lease operating expenses to $1.67, as compared to their mid-point guidance.

In the company's Aug. 6th earnings release, Michael C. Linn, Chairman and CEO, stated, "The Company improved its financial strength through our renegotiated credit facility, bond and equity offerings and repositioned hedge book. Additionally, we recently announced two asset acquisitions in the Permian Basin, and we are excited about the potential to grow this into a core area for the Company. With the steps we have taken thus far, we believe that the Company is poised to continue to deliver positive results and to grow through additional acquisition opportunities.

The Company also announced that it had entered into two definitive purchase agreements to acquire certain oil and natural gas properties located in the Permian Basin in West Texas and New Mexico for a combined contract price of $118 million, and anticipates that both acquisitions will close before October 1, 2009, and will be financed with borrowings under LINN Energy's existing credit facility. These properties are expected to have proved reserves of more than 12 million barrels of oil equivalent, which are approximately 86 percent oil and more than 58 percent proved developed. These assets are currently producing approximately 1,350 barrels of oil equivalent per day, resulting in a reserve life index of more than 24 years. The combined acquisitions offer approximately 180 proved infill development and low-risk optimization projects that the Company anticipates will create future growth opportunities. The acquisitions have not been incorporated into guidance as of yet.


Like many other stocks, LINE has run up considerably from its 52-week low, ($10.81), and recently hit a new high of $23.00, before declining slightly to today's $22.47 opening price. If you're looking for solid high dividend stocks, maybe you should add LINE to your best stocks watch list, and buy on the dips. Another strategy would be to sell puts against it, if you're feeling skeptical about the upcoming autumnal period, which is often a choppy one for stocks. The Jan. 2010 $20.00 put is currently bid at $1.00.

Disclosure: Author is long shares of LINE and short puts.

Source: Linn Energy: High Dividend, Low Valuation