One of the core holdings in the income part of my portfolio, Linn Energy (NASDAQ:LINE) has been very active lately as it strategically adds to its portfolio of income producing assets. It has followed up with its $1.2B purchase of gas producing properties in Kansas from BP Plc. (NYSE:BP) last year with a $1B purchase of 12,500 acres of NG producing assets in Wyoming from BP. The company's management is executing on a well-thought out plan to increase its cash flow and distributions to its shareholders and showing why it is a great long term holding for income orientated investors that also want some growth.
Key Highlights from the acquisition:
- It will finance the acquisition with proceeds from a $1B IPO so credit quality will remain the same.
- The property already has 750 producing wells and 730B cubic feet of reserves which Linn believes will eventually expand to $1.2T cubic feet of reserves. In addition, 23% of the reserves are natural gas liquids which are a much more valuable commodity.
- Most importantly, the acquisition is expected to add immediately to Linn's distributable cash flow per stock unit.
4 reasons LINE provides solid value for income investors at $36 a share:
- LINE provides a robust 8.2% yield and grown its payout by 4% annually over the past five year. I would look for this payout pace to pick up in the medium term based on these new acquisitions.
- The 11 analysts that cover the stock have a median price target of $44 a share. In addition, Credit Suisse reiterated its "outperform" rating after this latest purchase.
- LINE is selling in near the bottom of its five year valuation range based on P/S and P/B.
- The stock looks like it has good technical support at this price level (see chart).
Disclosure: I am long LINE.