NGP Capital Resources Company (NGPC) is a business development company that invests primarily in oil and gas companies. It makes diversified investments through royalty interests, secured debt, senior debt, subordinate debt, convertible debt, and equity. NGP Capital collects interest payments, dividends, royalties and also makes gains on the sale of investments, which are then used to pay shareholders a very generous yield. Some of the companies it invests in are publicly traded. For example, it owns an "overriding royalty interest" in two of ATP Oil & Gas Corporation's (ATPG) Gulf of Mexico oilfields. While some might be concerned about the recent bankruptcy filing of ATP, those concerns are misplaced, since the royalties are treated as production payments in bankruptcy court, and therefore would continue. This shows how well protected NGP is with certain investments, and this is a result of being high-up on the capital structure.
While this company might not be a household name amongst dividend stock investors in the energy sector, it will easily beat many popular oil stocks in terms of yield. For example, on the lower end of the range, Exxon Mobil Corporation (XOM) yields about 2.6%, Chevron Corporation (CVX) is a bit higher at 3.2%, and as one of the highest-yielding oil sector stocks, ConocoPhillips (COP) yields 4.6%. NGP shares yield about three times as much as Exxon, and about 50% more than ConocoPhillips. Over time, that extra yield can really add up, and that is why it can payoff to consider stocks like NGP. For example, with a 2.6% yield it could take Exxon about three years to pay in dividends what NGP shareholders will earn in about a single year. Here are three reasons why the stock appears undervalued and worth buying, especially on dips:
1) The stock appears undervalued with a yield of nearly 8%, plus it is trading significantly below book value - which is $9.29 per share. Furthermore, it has paid dividends for 30 consecutive quarters, even during the height of the financial crisis. The combination of high-yield and stability makes this an ideal stock for income investors.
2) The company has a strong balance sheet with about $121 million in cash and around $81 million in debt. By not using excessive levels of leverage, the company is reducing risks for investors and this adds
to the stability and safety of the dividend.
3) This company is buying back shares. In May 2012, NGP Capital repurchased a total of 250,029 shares of common stock at an average price of $6.51 per share. These transaction totaled about $1.6 million, and it has the remaining authorization to repurchase up to an additional $8.4 million of common stock. Stock buybacks can be a sign that management believes the shares are undervalued. It can also lead to higher earnings per share, and more dividend increases since there could be fewer shares outstanding as the buybacks continue.
Here are some key points for NGPC:
- Current share price: $6.79
- The 52 week range is $5.75 to $8.14
- Earnings estimates for 2012: 62 cents per share
- Earnings estimates for 2013: 88 cents per share
- Annual dividend: 52 cents per share, which yields about 7.7%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.