LinnCo: 10% Yield And Solid Growth Rate Hard To Resist

Aug.29.14 | About: LinnCo, LLC (LNCO)

Summary

After holding Linn Energy off and on over the past year and a half, I bought my first shares in LinnCo recently.

This entity has a nice earnings trajectory and also pays an almost 10% distribution yield paid monthly.

Why I think these shares provide a solid income opportunity with attractive valuations in what I consider a slightly overvalued market.

I have made quite a bit of money over the past 12-18 months trading in and out of high yielding upstream energy partnership Linn Energy (LINE). This was especially true after a couple of negative articles in Barron's last year alleging "accounting irregularities" knocked the stock down to the low $20s. This held up a pending merger with Berry Petroleum that was eventually blessed by the Federal Trade Commission.

I have been more of a trader of these shares since that significant and profitable opportunity. I have tended to buy since then on any decent dip, wait for a bounce and then sell just out of the money covered calls; collecting a better than a 9% distribution yield in monthly installments. My core stake in Linn Energy was recently called from me as the options I sold against the position expired in the money.

Rather than waiting for the next dip to redeploy these funds back into Linn Energy, I have decided to instead start accumulating shares of LinnCo (NASDAQ:LNCO). I just like this entity's combination of growth and income a bit better as both partnerships sell for just over $31 a share.

Company Overview:

LinnCo came public in 2012 and its only asset is its ownership in Linn Energy. LinnCo allows E&P C-corp. acquisitions in a tax-efficient structure and provides a large, liquid entity with tremendous access to capital. Unlike E&P plays that are getting their production from fast growing emerging shale regions that require significant upfront costs; Linn concentrates on stable mature fields.

The company also uses hedges commodity prices significantly. 100% of projected natural gas production is fully hedged through 2017. 100% of oil production is fully hedged this year and 50% to 60% of this production is hedged in 2015 and 2016. The company via these two entities also is a serial acquirer accounting for ~50% of the $30 billion in acquisitions upstream master limited partnerships have made since 2008. In short, it is the gorilla in this space.

Growth & Valuation:

After posting significant losses in 2013, this entity is on track to post between $1.40 to $1.50 in profit per unit in 2014 with the consensus calling for over $2.50 in earnings for FY2015. The shares are not expensive at ~12 times next year's estimated earnings.

Summary:

The shares yield an almost 10 percent distribution yield (9.8%) and make payments monthly. This is a bit better than Linn Energy (9.4%). Insiders own over $200 million in this entity and have not sold a share since the entity came public almost two years ago. The median price target by the six analysts that cover the entity is $36 a share.

I think the payout yield alone is worth owning the shares as I think the stock market will be hard pressed to achieve those returns given how much equities have rallied over the past five years and with the Federal Reserve finally ending a series of massive quantitative easing programs in October. Any capital appreciation on the top of LinnCo's high yield is just gravy. ACCUMULATE

Note: This type of entities have some complex tax structures and rules. Here is a link that can help understand the complexities of these entities.

Disclosure: The author is long LNCO.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.