In any financial magazine, website, discussion thread, or golf foursome at any given time on any given day, if three high dividend yield ideas are being discussed, it’s almost a sure thing that one of those ideas will be some sort of pipeline/energy MLP (master limited partnership). Armed with cash yielding zero and the buzz generated by the above referenced “reliable” sources, investors have bid the energy MLP names up over the last year. As we slide into the end of the year and look for gain and loss candidates, it might behoove one to nominate a few MLP names as gain takers. From our vantage point, there are a couple of signs that tell us this may be so.
1. Packaged MLP investment products – this year we’ve seen launches of quite a few ETFs, ETNs (exchange traded notes), and UITs (unit trusts) to name a few. When there’s a big enough buzz about certain sectors, financial product manufacturers see this as demand and will crank out whatever’s necessary to satisfy that demand.
2. The big investment firms begin publishing a monthly or weekly guide. Earlier this year, I noticed that Credit Suisse equity research began putting out a monthly MLP guide. I noticed this because my business partner and I have been following the pipeline/energy MLPs for the last 5 years. What took ‘em so long? Were they a bad idea a year ago?
3. Cramer is still screaming about them, positively, at the top of his lungs – we’re being a bit tongue in cheek here. We’re not hating Jim by any means. Overall, he does a good job and has built a great franchise by trying to make an oftentimes dull product, financial media, wildly entertaining. Still, the fact MLP names are in regular rotation on the Cramerica Top 40 are indicative to us that some of the prices may be a bit long in the tooth.
4. The efficient yet irrational market punishes and rewards for the wrong reasons. From September 2008 to March of 2009, the world was convinced that the end was nigh. As the global economy ground to a near halt, energy prices tumbled due to lack of demand. Energy MLPs followed suit. Inversely, when energy prices skyrocketed from 2005 to 2007, the same names enjoyed the climb. The ironic thing to us is that while we accept that there is a perceived correlation between the MLP prices and energy prices, there’s really no organic connection. The pipelines are in the railroad business. Whether natural gas is at $3 or $30, it’s got to be moved from Tulsa to Tacoma regardless. Rationally, the price of the commodity is irrelevant. To the transporters, it’s all about the volume. Try telling that to the market.
Is it OK to hang on to some of the energy MLPs? Sure, if the fundamentals of the businesses are still sound. But if you’re looking for a place to raise cash and take advantage of what may be a fleeting 15% cap gains rate, look at some of the names you may be holding. Three that stick out to us are Kinder Morgan Energy, LP (KMP), Linn Energy, LLC (LINE), and Oneok Partners, LP (OKS). All have booked handsome 25% or so gains year to date, not including income, and, although it’s not the best metric to use, the P/Es seem a bit rich. LINE is a portly 82.71 times trailing. If you’re looking to take some profits, this may be a good place to start. You’d hate to run out of gas only to be trampled by a thundering herd.
Well, now that we’ve checked the oil, let’s meet this week’s three lil’ piggies.
Deep South Value
Bancorpsouth, Inc. (BXS)
Recent Price: $13.39
Current Yield: 6.55%
Few southeastern regional banks have held up admirably throughout the financial crisis. BXS appears to be one of those. A $13.4 billion institution headquartered in Tupelo, MS, BXS boasts a 318 office footprint through Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Missouri and Florida. The stock trades at 1.14 times tangible book which is refreshing as many larger banks’ shares trade at single digit prices and at a much higher premium to book. One reason BXS has rolled with the punches might be the higher quality of their loan portfolio and that they’ve set aside adequate loan loss provisions. As a result, a capital raise is unlikely. The company traces its roots back to 1876 and has paid a dividend since 1945.
There are many. The most glaring is earnings deterioration. Q3 2010 profits were down a painful 48% primarily due to weak (translation: non-existent) loan demand. Also, while the dividend is still intact (the board recently declared BXS’ regular quarterly dividend of 22 cents), there has been chatter of a cut in order to avoid a capital raise. And while things are better for the sector than they were two years ago, climbing out of this ditch is going to be a long, un-fun process. BXS may look like a decent value, but as long as the economy and the banking sector continue to limp along at best, the shares will probably remain value priced.
Cheap Is Beautiful...
CCA Industries, Inc. (CAW)
Recent Price: $4.71
Current Yield: 5.94%
Scars? Hair removal? Bikini bumps (see “hair removal”)? As long as humans are vain and groom excessively, there’s got to be some opportunity in those areas. CAW gives one that opportunity. The company manufactures (under contract) and distributes health and beauty aids that include brand names such as Scar Zone, Bikini Zone, Hair Off (self explanatory), Nutra Nail and other products that make us pretty. Their wares are distributed in over 40,000 stores nationally with 36% of net sales generated by Wal-Mart (WMT). Internally, the numbers are equally attractive. The company has increased R and D spending by 17% this year. The balance sheet holds over $10 million in cash, which says a lot since CAW’s market cap is only $27 million, a 65% dividend payout ratio and very little debt. At 1.12 times tangible book, CAW shares may be looking good.
Let’s face it, CAW’s brands, while viable, aren’t exactly household names which makes it tough when going toe to toe with the likes of Revlon, P and G, and L’oreal. Also, revenues were down 18% year over year for Q3 2010. Throw in manufacturing problems that boosted the cost of goods sold and CAW has a couple of hurdles it needs to overcome. And while the company has paid a cash dividend for 26 consecutive quarters, the dividend has only been paid since 2003. Still a newbie there.
Keeping Track of a Mess...
CoreLogic, Inc. (CLGX)
Recent Price: $17.80
Current Yield: 4.94%
No one really ever thought about who kept the volumes and volumes of information associated with mortgage and property records until the last two years when a 30 megaton nuclear warhead hit the residential real estate industry. Originally spun off from title insurer First American (FAF), CLGX ‘s information assets cover 98.7% of U.S. residential real estate property records, 80% of all domestic mortgage applications, 97% of non-agency mortgage backed securities, and more. Needless to say, they pretty much own that space. They’ve got over $900 million in cash on the books which isn’t bad for a $2 billion market cap company. There’s not a whole lot of debt and the dividend payout ratio is a reasonable 42%. While the sector is ugly and will remain so for quite a while, business will still occur and 12x’s is cheap for the category killer.
I’m sure you all listen to the news, read the paper, internet, etc. The whole mortgage process, from application to servicing, to, unfortunately, foreclosure, is uglier than a 200 car pile-up during rush hour in Los Angeles on the 405. When the investigations start, and they will soon, CLGX is at ground zero. Multiple investigations by multiple states attorneys general can’t be good for business. Looks like an overhang of Wile E. Coyote proportions. Revenue growth is anemic enough as it is, especially coming off of a 68% slide over the last two years. This one is NOT for the weak constituted. Holding CLGX means being prepared for the swings and fully understanding what “deep value” and “contrarian” truly mean. If you don’t fall in that column, don’t dabble. Amateur hour can be expensive.