Jim Cramer's Mad Money In-Depth, 3/5/08: Killinger Makes a Killing

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program,Wednesday March 5. Click on a stock ticker for more analysis.

Consolidated Edison (ED), San Juan Basin Royalty (SJT), Hugoton Royalty Trust (HGT), Permain Basin (PBT), BP Prudhoe Bay (BPT)

Cash is no longer king, since the Fed will continue to cut rates, said Cramer, who would opt instead for high-yielding stocks. Dividends are better than cash, because taxes on dividends are lower than on interest income, they have a higher yield than that for cash-based investments, and there is a more significant upside potential in dividends. Cramer has already talked up ED for its generous 5.7% yield, and added utilities are safe recession-proof plays. Cramer would look at U.S. energy trusts which own oil and gas wells but let other companies run them, and are tax exempt as long as they pay out a good dividend. If these stocks are held in an IRA or in a 401 (k), they are tax exempt until funds are withdrawn upon retirement. Cramer likes energy trusts SJT, HGT, PBT and BPT; the latter two provide double digit yields of 12.2% and 13.9% respectively. Although Cramer believes oil will reach $125, even with black gold at the $70 or $80 level, the companies historically yielded a solid 8%-9%.

Washington Mutual (WU) CEO Kerry Killinger

WaMu CEO Kerry Killinger’s 548% bonus proves that no sin goes unrewarded, given that he is “one of the worst CEO’s in the world” who brought WaMu “to the brink of insolvency,” said Cramer. In spite of presiding over huge credit losses, Killinger is getting this perk because of operating profit, non-interest expense, depositor fees and customer loyalty performance. Cramer says shareholders should protest this $4.1 million gift, and he placed the entire Board of WaMu on his Wall of Shame.

Mad Mail: Seagate (STX)

Cramer told a viewer to get out of STX if it rises at least $1 after IBM’s analyst meeting on Thursday, since now is not the time of year to invest in Tech.

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Comments

[dsrtwriter:]

Energy trusts look good with the dividend,but what is the downside?Does the share price deteriorate over time with the drawdown in the finite life of the oil/gas production?These trusts, as I understand it, do not engage in development of new sources, they are paying out all profits net of expense, so what is to keep the share price up over time?No point in getting a great dividend if the shares will be arithmetically lower (ie not related to market movement) in a year or so due to a lower resource value base for the trust.

Does anybody have an opinion on this?

2008 Mar 06 05:20 PM

[Mathmagican:]

Washington Mutual's symbol is WM not WU.

2008 Mar 06 09:46 PM

[Plantinseeds:]

Not true, Trusts do add properties to there assets for future reserves.
If they didn't then they would be short term investments.
I do not own any US energy trusts but I do own Canadain trusts.
The best one I own is PGH. I love that .22 cdn every month :)

2008 Mar 07 11:36 AM

[OneRichOne:]

I own both PBT and BPT as well as several Canadian trusts and American Trusts. I love the income.

2008 Mar 07 12:28 PM

[term:]

Excellent income investments; but not as simple as they might sound! For starters, US Trusts distribute royalties, not dividends, and they are taexed as ordinary income. They do provide a depreciation allowance, though that compensates for the taxes, but theis depreciation (over the life of one's holding) must be re-paid to the IRS if one sells the shares. Canadian trusts can make acquisitions, as noted, but they are highly volatile and the tax politics in Canada are making it difficult to know where they will be beyond a couple of years. jmho term

2008 Mar 07 02:41 PM

[term:]

The question of how the depleting resource might affect the US Trusts is a real key. The Trusts publish their "proven reserves" and are generally thought to be conservative. An investor should pay look for long-term reserves - I think it's about 12 years for SJT. However, they have to run out sometime and then the investment is worthless. An investment adviser friend of mine said the rate on SJT seems about right for a 20 year bond.
BTW I own SJT, PWE, HTE, PGH, and COSWF (which seems to just mint money) term

2008 Mar 07 02:48 PM

[Russell Ups...:]

Only Canadian energy trusts can continue to add assets and their distributions are considered qualified dividends rather than royalties and are taxed at a different rate. From Investorguide.com:

U.S or Canadian
There are a few key differences between Canadian energy trusts and U.S. royalty trusts. U.S.-based royalty trusts (which are legally precluded from making acquisitions financed by new debt and/or equity and, therefore, cannot as readily replace depleted reserves) are essentially blow-down investment vehicles. Canadian energy trusts are very different. In fact, Canadian energy trusts have managed, during certain extended periods, to actually increase per trust unit production, discounted cash flow value and distributions, in addition to maintaining reasonable monthly or quarterly distributions on the trust units. The ability to acquire assets and finance them with new equity, combined with a tax-efficient structure, leads to a financial vehicle that is radically different from its U.S. counterpart.

2008 Mar 13 04:14 AM

[Philip Obal:]

TELOZ is a nice US based Oil & Gas Trust --- on Wednesday it will announce it's quarterly dividend... watch this baby go... Growing dividend is very nice... US based.... 100% versus 85% for CanRoys

2008 Mar 24 04:30 PM

[BIGBRAIN:]

The depletion allowance, which lowers your tax on the dividends from the Oil and Gas Royalty Trusts, is NOT recaptured when you sell the shares as it is for a depreciation allowance. These things pay great, largely PERMANENTLY tax sheltered, income BUT they are depleting assets to hold so the reserve life is VIP to consider. The reserve life is listed in the annual report in the footnotes, and may require you to calculate OR a quick call to the company usually gets the current estimates.
\WWF

2008 Mar 29 06:43 PM