Several articles have been written on a very interesting stock; Linn Co, LLC (NASDAQ:LNCO). I had looked at this when the initial public offering was made but did not pull the trigger. When another Seeking Alpha author (Todd Johnson) wrote about it, I took one more look at it and knew that we had to put it squarely in the center of the "Team Alpha" portfolio.
Our portfolio now consists of Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Blackrock Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America, Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), and General Dynamics (NYSE:GD).
The really intriguing thing about this stock is that it does absolutely nothing but OWN shares (units) in Linn Energy (NASDAQ:LINE), which is an MLP (master limited partnership), and are unique investments in and of themselves.
From Investopedia, here are the specific definitions of MLP's:
"A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture. ."
One of the most crucial criteria that must be met in order for a partnership to be legally classified as an MLP is that the partnership must derive most (~90%) of its cash flows from real estate, natural resources and commodities.
The advantage of an MLP is that it combines the tax benefits of a limited partnership (the partnership does not pay taxes from the profit - the money is only taxed when unitholders receive distributions) with the liquidity of a publicly traded company
That is a broad but specific overview of what MLP's are, and one of the issues that shareholders of LINE face is the K-1 that is issued by the MLP to the individual shareholders, which does cause some investors confusion, and additional tax forms. LNCO will issue the usual 1099 for dividends that most investors are comfortable with and can go directly on the front page of the IRS1040 form.
When LNCO went public, it issued about 30.25 million shares and raised roughly $1.15 billion which was then used to purchase shares (or units) of LINE.
In effect, the company has become a "pass through" (for lack of a better term) for dividends to be paid much more easily, for individual investors, as well as institutions/mutual funds. Ergo; the likelihood that LNCO will be bought by institutional investors more readily than LINE has been.
This is very good for our retirement portfolio.
Some Fast Facts
Linn Co, LLC.: Price: $39.00/share, Dividend Yield: 7.2%, No ESS Rating As Of Now
- Enterprise value of $1.3 billion.
- Over 70% of shares are held by institutions already.
- A direct link to Linn Energy. One of the most popular MLPs around.
- At a 7.2% dividend yield, it becomes a significant income producing equity for dividend seeking investors.
We have no way of knowing whether this stock will become a dividend winner yet, but the company has already announced their very first dividend of $.71/share, to shareholders of record on November 6th. It will be paid November 15th.
This article from Yahoo Finance, offers more details as well as a few links for further information on the new company itself. I urge you to check it out.
Cramer Loves LNCO
I usually do not quote Jim Cramer, but in this instance he nailed the entire description of LNCO to a tee. On October 16th, Cramer spoke in detail about Linn Co. on his CNBC Mad Money Show;
"This company's sole purpose is to own units in Linn Energy, an independent oil and gas producer."
"Linn Energy is a master limited partnership, and the rules about how MLPs are taxed, and more important, how their distributions are taxed, are very different from the rules regarding the taxation of ordinary dividends from regular companies," said Cramer.
"For example, if you own an MLP like Linn Energy in a tax-favored vehicle like an Individual Retirement Account or IRA, then you might end up paying taxes on Linn's distributions because of something called unrelated business taxable income or UBTI."
Pretty succinct I would say. Cramer completes his diatribe with this suggestion:
"Personally, I think you should buy some LinnCo for your IRA, because with that 7.2% yield, it's practically the perfect retirement stock, especially if those dividends can compound tax free for the rest of your working life."
A 7.2% dividend yield clinched it for me. We can add the stock into the Team Alpha portfolio while we sell our shares in Bank of America (NYSE:BAC), which is continuing to have one issue after another, and pays us nothing in dividends to wait all of the issues out.
We have made a very nice profit in BAC and I continue to believe that it is undervalued. That being said, there are so many new issues cropping up that I think it is prudent to sell our position and redeploy the cash into LNCO. We will also be using a chunk of cash reserves to open our position.
We will be taking these actions on Monday October 29th.
Additional disclosure: BAC will be sold, and LNCO will be purchased