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Darren McCammon
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Darren owns ProActive Financial LLC. He manages private family and individual accounts as well as the yield focused, 50+ Portfolio. He has a Bachelors in Economics, an MBA and a Certificate in Financial Planning. Darren is most proud of having successfully managed income producing portfolio's... More
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  • CPLP: A 13.1% Dividend Covered At 1.1x; Good Enough

    Like 4% dividend from EPD, a 5% dividend from PAA or 6% dividend from KMP? You might love a 13% distribution from CPLP.

    Capital Product Partners (NASDAQ:CPLP) owns and leases out ships: product tankers, oil tankers, container ships, and a dry bulk carrier. The partnership is a C-Corp. for tax purposes (U.S. investors receive the standard 1099 form and not a K-1 form). The recent fall in oil prices has caused investors to indiscriminately sell oil sector stocks. CPLP has fallen approximately 30% in price over the last 3 months despite having relatively stable revenues. This has created a opportunity to capture a fairly hefty distribution.

    (click to enlarge)

    As you can see in the above picture CPLP has staggered it's charter renewal times, helping to stabilize revenue. The weighted average charter duration is 8.7 years, thus there overall revenue is unlikely to ever suddenly drop off a cliff.

    Focusing in a little bit on specific segments, product tankers are CPLP's largest segment. Three of these product tankers re-chartered in mid September for another year at essentially the same day rates.

     PreviousCurrentChange
    Alkaviades$14,250$14,125-$125
    Avax$14,700$14,750+$50
    Agisiliaos$14,250$14,250$0

    Two of their product tankers, the Aryton II and Aristotelis, appear to be currently leased $1k and $3k above market respectively; however, they do not come up for re-charter for another year. Five of their product tankers appear to be chartered well below market ($6-8k) but unfortunately the first of these doesn't come up for re-charter for another two years. The remaining 10 product tankers appear to be chartered at about current prices. While there may be significant variation in the quality and therefore day rates of these product tankers that I am not aware of, overall it seems clear the product tanker segment end of the business is doing just fine.

    Checking the crude carriers, one of it's ice class Suezmax crude tankers, Miltiadis MII, should re-charter very soon. It is currently chartered at $23,185. The graph from Teekay tankers below leads me to believe the new charter rate could be as much as $10k higher than the existing rate.

    (click to enlarge)

    Another three tankers-- the Amore Mio, Aias & Amoureux -- are coming up for re-charter in the next three months.

    (click to enlarge)

    The Aias and Amourex, are leased by CPLP's management company, Capital Maritime & Trading Corp. (CMTC), and will likely extend at the agreed upon $28k. The last, the Amore, I also assume will re-charter at some rate above it's current day rate based on the Teekay data. Overall it appears the crude tanker lease segment may actually improve over the next few months.

    Last, the container ship and dry bulk carriers. The dry bulk carrier and 4 of the 6 container ships are on extended leases at favorable rates. The remaining two, the Archimidis and Agamemnon, could be redelivered by Maersk in a little less than a year.

    (click to enlarge)

    Maersk has the right to extend these leases for $31.5k and $30.5k respectively. However, given that current day rates are more in the $24k range, I would assume about a $10k drop for each. The container ship and dry bulk segments of CPLP will likely see a drop in revenue.

    Overall, I estimate CPLP will not see a significant drop in their revenue, with product tanker rates flat and crude tanker gains partially offsetting container ship losses. The reality is ship lease rates depend primarily on supply and demand of those ships, not energy prices. CPLP was able to cover their distribution at 1.1x last quarter. As nothing much has changed with CPLP's business, I suspect they will be able to cover the distribution this quarter and for at least the near term foreseeable future. Fear of a drop in CPLP's distribution is unwarranted.

    Additionally, I did want to mention that management has significant incentives to increase the distribution per share via incentive distribution rights. The current distribution is 23.25¢. Management gets 2% of that distribution. However, when that distribution rises management gets a significant accelerator on the extra earnings. Here was the last proposed IDR.

    (click to enlarge)

    The previous IDR was less generous with management only accelerating to 15% on distribution amounts over 43.13¢. I was unable to clarify whether the new IDR plan was ratified or not. Regardless, for good or bad, management has significant incentive to increase the distribution if possible.

    Last I wanted to point out CPLP is a Marshall Islands limited partnership. As such it is not subject to the double taxation of a normal corporation but also does not have to issue a K-1. Instead it issues the normal 1099. In 2013 53% of the distribution was classified as a dividend and 47% as non-dividend on the 1099. Assuming the same split in a regular taxable account for an investor in the 20% tax bracket, CPLP's current 11.2% dividend is roughly equivalent to a normal stock paying 13.1%. I am not a tax professional so I may have gotten something wrong on this last part. Regardless, 11% dividend or 13% dividend, either is good enough for me.

    Disclosure: The author is long CPLP.

    Additional disclosure: I am long CPLP and have added to CPLP positions in the 50+ Portfolio and private accounts which I manage. You should therefore assume I am biased. Moreover, I don't know who you are much less your particular situation; so how can I recommend this equity or for that matter any investment to you? Do your own due diligence.

    Oct 14 5:04 PM | Link | 5 Comments
  • YMBC Portfolio -3rd Quarter Review

    Readers were introduced to the YMBC (You Must Be Crazy) High Yield Portfolio at the beginning of the year: (http://seekingalpha.com/instablog/379412-darren-mccammon/2860573-a-high-yield-portfolio-using-ubs-2x-etns).

    Later, a risk analysis of the portfolio was published: (seekingalpha.com/instablog/379412-darren...).

    This is the 3rd quarter update.

    (click to enlarge)

    The YMBC (You Must Be Crazy) Portfolio was -6.5% in Q3 vs. the S&P 500 at +0.6%. It also saw significantly more volatility than the S&P (see graph). However, I think this was probably not due to the 2x leverage or a lack of diversification in YMBC, but rather a lack of diversification in the S&P 500. The fact is the S&P 500 is dominated by domestic large cap stocks. These are exactly the type of stocks which performed the best in Q3. If instead we compare YMBC to the Russell 2000

    (click to enlarge)

    we see much more similar up a down movements. YMBC was -6.5% vs. -7.7% for the Russell 2000 in Q3. Year to date YMBC has outperformed the Russell +13.6% vs. -6.7% and the S&P 500 +13.6% vs. +5.3%. As YMBC contains a wider variety of capitalizations, the Russell may be a more accurate benchmark; but I'll probably stick with the S&P 500 since this is what most people consider "the market".

    During the quarter two transactions took place. The first was the normal re-investment of dividends. Per policy, all dividends were re-invested into the worst performing component of the portfolio, BDCL. The second transaction was a sell of all CEFL shares.

    My excuse for selling CEFL was that PHK and PTY, two bond funds in CEFL which trade at significant premiums to NAV, had just lost there star manager, Bill Gross. CEFs in my opinion, shouldn't trade at premiums even if there manager is the "King of Bonds". When the star manager leaves, well, it is past time to get out. In my opinion, considering it's 42% premium, anyone still long PHK at this point needs there head examined. Additionally, considering that discount to NAV is supposed to be one of CEFLs prime criteria, I really don't understand how PHK and PTY were included in the ETN in the first place. I would love an explanation by someone in the know more detailed than the obvious, "it had high yield". Regardless, UBS needs to re-examine it's criteria for inclusion and I need to be a little more careful with my assumptions. So, I sold CEFL for a logical reason; but I must admit, I also welcomed an excuse to raise some cash.

    BDCL is the current component with the poorest record YTD; if it was earlier in the year BDCL is where the cash would go. However, it is near end of year and an RMD (required minimum distribution) needs to be funded. Also, we are getting to the point where there may be a fair amount of tax loss selling occurring with BDCs, so I'll wait until the new year to make the buy. (Or maybe UBS will have thrown PHK out of CEFL by then; or maybe PHK will have come down to reality; or maybe that new LMLP, it looks kind of interesting; or....well you get the point. No guarantee's. I'll make the decision when I do.)

    The portfolio as of September 30th:

    Expected Annual Income: 11.3%

    Your comments, including criticism, are welcome.

    Disclosure: The author is long MORL, BDCL, SDYL, DVHL, EFF.

    Additional disclosure: I say right there in the name, if you follow this portfolio YOU MUST BE CRAZY! I don't know who you are much less your particular situation; so how can I recommend this portfolio or for that matter any investment to you? Don't follow a crazy person, do your own due diligence.

    Oct 09 5:46 PM | Link | 7 Comments
  • The Problem With Most DGI (Dividend Growth Investing) Articles

    The problem with most dividend growth articles is they have serious survivorship bias. In 1886 Pacific Mail Steamship company was a large, respected, highly successful member of the Dow Jones. Unless you happened to shop at Jacob Pharmacy in Atlanta, you had never heard of Coca Cola (NYSE:KO). In 1886, no one in their right mind would have chosen Coca Cola for a long term DGI investment over Pacific Mail. Pacific Mail Steamship went on to eventually fall on rough times, was purchased by American Pacific Lines, which in turn was formally closed down in 1949. Over the next 128 years, Coca Cola went on to be one of the most successful companies in existence.

    Let me repeat no on would have used Coca Cola for a DGI strategy over Pacific Mail Steamship at the time. Instead they would have chosen the well known solid choice and the DGI investment would been have worth $0 instead of tens of millions. Thus today's investor has no more idea that a branded sugar water provider will be successful over the next 100 years, than people in 1886 knew that the largest steamship company in the world would not be. For that reason most examples of DGI investing are false. They utilize KO, GE, IBM, JNJ, PG, MCD or some other highly successful, long lived and therefore reassuring name brand equity as there example.

    Invent a time machine and tell me what will be one of the most successful name brand companies over the NEXT 100 years, and yes, a DGI strategy utilizing it will work quite well. Baring that, most articles on DGI have such serious survivorship bias that they are not meaningful. They are promoting a buy, dividend re-invest and forget investment in a future Pacific Mail Steamship company.

    If instead the articles utilized something like the Dow to reinvest dividends into using a DGI strategy it would be more interesting. At least then there would be some method by which losers were eventually dumped (when they were dropped by the Dow). Utilizing a diversified portfolio of ETF's to reinvest dividends into, such as DVY, DIM, and even DVHL I could also buy a DGI strategy. Again you are not relying on current successful companies to remain successful but instead have a method to diversify and periodically re-jigger the portfolio. The necessary argument to DGI that overall the investments will increase in value would then be more acceptable.

    In my opinion a DGI strategy is best utilized via a diversified blend of dividend paying, mid-cap equities. One including not just domestic and foreign dividend paying stocks but also REITs, MLPs, BDCs, mREITs, etc. The added diversification dampens volatility and increases payout. The significant dividends encourage investors to stick to it, buy low and sell high. For those not wishing to spend the amount of time it takes to come up and monitor such a portfolio, ETFs, mutual funds or professional management can be utilized.

    I also want to at least mention that a strategy which transfers dividends regularly into a "cash account" can be a useful as a compliment to a DGI strategy. If a portion of the funds are re-invested once the market falls a predetermined amount, this barbell strategy can maintain an acceptable reward while further reducing risk as one ages.

    Disclosure: The author is long DVHL.

    Additional disclosure: I may go long or short any equity mentioned in this article at any time. I don't know who you are much less your particular situation; so how can a recommend any stock or for that matter any specific investment to you? Do your own due diligence before investing.

    Sep 19 6:42 PM | Link | 15 Comments
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