Factoids

Yield + cagr at a low rrr
Factoids
Yield + CAGR at a low RRR
Contributor since: 2013
craps - Even bad companies can (and do) have high insider ownership. This is not one of the stats I follow. Plus - 'institutional ownership' appears to me to be a more important metric that management ownership - because institutional investors would be significantly more prone to use a good risk assessment in their investment decisions.
If you are able to quote some studies on the topic - please share. I do not have any stats quoting historical data on 'institutional ownership' and forward price returns.
AZWarrior - Comparing Debt/EBITDA between MLPs and REITs is comparing apples to oranges. REITs have much higher Debt/EBITDA ratios. Since I own equities in both, I should know why - but I do not. (1) REITs do have much better earnings visibility - and that should be a big reason. (2) Historically, there are probably lower oscillation in REIT earnings compared to MLPs. (3) REITs own what are usually appreciating assets. I do not expect that to be the case with the 'above ground' assets for MLPs. And that would make a difference. (4) I do not track ROEs - but they could differ substantially - and that could cause the difference. (5) This could be caused by differences in the maintenance cap ex to depreciation ratios {info I found by web searching and finding a Moody's document} (6) It may be that better metrics are just 'what the bond market demands' based on what causes one asset type to look lest risky.
The O bonds maturing in 2026 sell at a yield of 3.445%
The MMP bonds maturing in 2025 sell at a yield of 4.851%
Both are BBB+ rated by S&P
I verified that you are right about the 5.1x for O. My Q4-15 number for MMP is 2.85x.
I lack any suspicion that the high debt/EBITDA ratios for REITs is a signal of a REIT bubble.
Robin Heiderscheit - Thanks for the information - or meta information (or information about how to find information). I used the search tool to look for "PIK" - I needed to also look for "payment-in-kind".
Calendar Q4-14 PIK was $1.403 million while Q4-15 PIK was (as you wrote) $4.512 million - which gives the picture that PIK income is (wildly) rising. Fiscal year 2015 PIK was $13.870 million - or an average of $3.468 million per quarter - which gives the picture that PIK income is strongly rising. I wanted to get an idea as to whether the Ram Energy and Linc Energy PIK was being accrued - and the data supports the idea that it is. While the Ram Energy loan has only been lightly marked down - one of the Linc loans has been marked down 75%.
This information on PIK income causes me to believe that I was insufficiently negative about the risk in PNNT.
Nicholas Marshi - Thanks for your comments. I did not find total PIK income for this quarter in the 10-Q - and that is a metric I want to know. Thus I can not verify that PNNT has 'heavy reliance on PIK income'. I counted nine (including Ram Energy) out of the 62 loans having a PIK component.
If PNNT had a habit of being overly liberal in accruing PIK interest in the past - it should have shown up in a falling NAV 'in prior years'. Given that PNNT has not had a NAV problem 'in prior years' -- I will presume their innocence in the here and now. (Still - this pessimist hates presuming anything.)
If you can shine more light on this issue - please do so.
Sinkerman - I see the 53 cents in spillover income as being part of the current NAV. If PNNT uses those funds (which - to the best of my knowledge - are not in a lock-box that separates them from other investments), then NAV is depleted. I believe PNNT needs to have a dividend payments that is slightly below their run rate NII/share per quarter. I am not expecting a bounce back in NII.
Robin Heiderscheit - Thanks for your comment. I submitted a correction on the percentage of energy loans after you pointed out that I missed a category. I did not find that much in 'mining' or 'commodities'. In my simplistic BDC math, 10% of assets is the equivalent of 20% of NAV due to leverage. Thus I am in agreement with your numbers.
If you were including some of the loans in "Chemicals, Plastics & Rubber", "Building Materials" and "Environmental Services" to get to 20% of ASSETS (and not NAV) - then we are not yet on the same page. I am presenting the numbers as PNNT categorized their numbers in the 10-Q.
see http://seekingalpha.co...
for my last public posting of the 'historical earnings projection accuracy' numbers for this sector.
And yes - 'commodity volatility' is probably the reason for the earnings volatility.
whmitch - I own shares in CL, GIS, HRL, HSY, INGR, PEP, PG, SJM - and that information is already included at the end of my original message.
ADM has very poor 'historical earnings projection accuracy' - and while the bond rating is good - the yield on those bonds tends to be high - which means the market does not view the payments on those bonds to be as safe as the payments from the average consumer staple component. Dividend growth has been great. The yield is very good - but stocks with poor projection accuracy merit having higher yields (and lower P/Es).
ADM does not have the attributes that make it a 'buy and hold' because the earnings projections are so unstable. It looks like a 'buy the MAJOR dips' and try to capture some capital gains kind of stock. That is not a strategy I practice - so it is not a stock for me (or one I would suggest for other retired folks like me).
I have published my 'total returns since 2010' spreadsheet a few times - and the returns since 2010 for ADM is the lowest in this coverage universe.
All that being said - the current P/E for ADM is too dang low. This looks like one of the dips one should buy. But one needs a target P/E at which one will sell (14?) before one takes what currently looks like a smart gamble on ADM. Keep in mind that the person calling ADM a smart gamble is one who does not gamble.
davidma11 wrote that "EPD is best in class".
Not in this environment. (1) I would argue that the MLPs with the best credit metrics win - and that puts MMP and SEP ahead of EPD. (2) The MLPs who are able to self-fund growth without accessing the equity markets is an attribute that would make them superior in this environment. EPD scores well on that attribute, but it is not the best in class - MMP is. And (3) one would also need to say that the refinery logistic MLPs are in a separate class.
During the task of getting the DCF calculations from the brokerage analysts, I believe I ran across at least one brokerage calling EPD "best in class". Whose opinion should you borrow - mine or theirs?
It has been my experience that one should never borrow opinions - but form your own opinions based on the numbers. The numbers tell me that EPD is very good - but not "the best in class".
BartAtTheRanch - I publish about four BDC earnings release updates per quarter on BDCs. In about half, I provide a forward NII projection spreadsheet. I want to show that common sense and simple math can duplicate that analyst consensus projections. It does most of the time - but not all of the time.
The NII/Dividend ratio is the key metric component is assessing dividend safety along with the potential for dividend growth. When a BDC has a higher cash/NAV ratio - I presume greater portfolio growth - which also produces higher NII/share growth. It strongly appears that the analysts are doing the same presumption.
On February 4th we will get the PFLT earnings release - and we can start to make those calculations. I strongly suspect that this will be an opportune time for the BDC to have undeployed capital.
rmaring478 - I just added data to the original message to assist with this answer. The 'spread' data along with the historical Price/NAV data suggests to me that we are already in a significant market correction.
The longer term data posted at Investor Village tells us that BDCs with falling NAV sell at lower Price/NAVs. That is logical. Well . . . data used to compare one BDC to another can also be used for intertemporal comparisons. We are in a period of falling NAVs - so we should be in a period where the sector average Price/NAVs should be lower than normal.
There is a popular and scientifically untrue story that, if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death.
It is my perception that we are in the metaphorical boiling water (or an average market correction) right now. (The BDC sector is not old enough to have 40 years worth of data to verify that this perception is correct.) The last market correction was of such magnitude that it potentially warps our definition of what an average correction looks like.
Now here is the bad news - this data leads to two polar opposite conclusions. (1) We are in a period of falling fundamentals - and it is terrible to be over weight a sector with falling fundamentals. Many BDCs will be worth less this time next year because their NAVs along with their NIIs/share have fallen. (2) We are in a period of low valuations, and if one wants to "buy low and sell high", it is best to be buying in periods such as this one.
What is my advice? 'Right size' your BDC allocation (don't sell - then run and hide - but also don't be over weighted) - and buy quality.
I should add one more comment on BKCC - it is relatively heavy in energy loans - and it has yet to be punished for having that attribute. Maybe the extremely good NAV performance is overshadowing that negative attribute. And until we get the Q4 numbers - I will stick with that theory.
I am hesitant to saying anything good about BDCs right now. I believe your "wall of worry" needs to be high - and growing. My positive short review of BKCC (in the prior comment) may have been "irrationally complacent". And this in no time to be complacent about energy loan exposure.
Docx2 - Wait for the Q4-15 numbers for BKCC before making a purchase. BKCC has a long history of loading Q4 up with one time fees and fees that should be - but are not - hitting other quarters. BKCC looks great when looking at Q1 through Q3 of 2015. The numbers may be 'too good to be true'. Thus I am expecting some unpleasantness in the Q4 numbers.
Currently - the LTM NAV change is 6.92%. I would call BKCC a buy if the LTM NAV change (using the upcoming Q4 numbers) only falls to growth of around 4.5% (and that projects a pretty bad Q4).
There are two very good things about BKCC that should result in the market accepting a below average yield from it. (1) The dividend coverage is great. (2) It has a history of having positive "realized and unrealized portfolio gains" in most quarters - with the recent (Q2 and Q3 2015) disappointments being both small and atypical.
Pinot - PSEC is 19% in CLOs - and that asset class scares me. Keep you weighting in PSEC low - and having an exit plan.
Due to NMFC having a higher weighting in energy loans - I would want to hold it (if I held it) in a regular account so I could at least reap the benefits of some tax loss selling. I know the wisdom of having high yielding investments in a Roth - but this is one time where that correct rule of thumb may have an exception. Thus I would sell NMFC from a Roth and replace with much safer options like T or VZ.
ARCC sells at close to the same yield and a lower Price/NAV ratio compared to NMFC - while having only a 3% allocation to energy loans - compared to NMFC's 9%. I would consider making that switch.
Darnoc - Years of watching and gathering the data offer little clue to the degree that bad news for one BDC portends bad news for another. It tends to mean that - but the data is inconsistent.
I have the impression that there is inconsistency in taking mark to market markdowns - and that is why there is an inconsistency in NAV movements.
Both of the pre-announcements come from better than average BDCs. Look at the LTM NAV movements in the sector stats update. NMFC's NAV fall is slightly below sector average while TCPC's fall is half of sector average.
For TCPC - the Q4 fall will be approx (1 - 1476/1510) 2.25% - which is a 9% annualized run rate decline. For NMFC - the Q4 fall will be approx (1 - 1300/1373) 5.31% - which is a 21.24% annualized run rate decline. (I should note that I am not positive that annualizing the decline offers a meaningful perspective.)
This is one quarter where I am going to be more interested in the 'portfolio company debt/EBITDA' numbers (which too dang few BDCs provide) than the NAV change.
Let me use an analogy. Groucho Marx's said that he was not interested in being a participant of any club that would have him for a member. I have the impression that the debt market is not interested in buying any debt that any other investor is interested in selling. The mark to markets have the potential of being warped data.
If the EBITDAs of the portfolio companies are falling - then the debt/EBITDAs will be rising. And such debt will be worth less than before the fall. The debt/EBTIDA numbers have the potential to be more accurate indicators of upcoming problems that the change in the mark to market value of the loan. But . . . . we will only get that data from a few of the better BDCs.
To specifically answer your question - The announcements by NMFC and TCPC are strong indicators that the mark to market values of the BDC illiquid investments were dropping - and dropping at a faster pace than before 'during the fourth quarter' -- and things have (probably) become worse in the first three weeks of January.
Warning - This debt market assessment is coming from a 'smarter than average retail investor' - which may be akin to getting investment advice from a smarter than average dog.
UBS to Redeem Two Leveraged Exchange-Traded Notes
Redemptions for 2x Monthly Leveraged Long Exchange-Traded Access Securities and S&P MLP Index ETN
By
Leslie Josephs, Wall Street Journal
Jan. 20, 2016 6:38 p.m. ET
For some investors, a risky bet on energy backfired Wednesday. UBS Group AG said it would redeem shares of two of its niche investment products that are tied to energy companies, as a fall in energy-linked shares was steep enough to require UBS to announce a mandatory redemption. The move highlights the risk in leveraged exchange-traded notes, which expose investors to bigger gains—or losses—than the indexes they track.
A unit of UBS Group AG will redeem outstanding notes of two exchange-traded products linked to energy companies amid a sharp selloff in the sector. The two UBS products fell more than 20% Wednesday and are down more than 50% so far this year. UBS said in a release that on Feb. 1 it would pay investors an amount yet to be determined for outstanding notes.
The Yahoo Finance site - the place I normally get my news - still lacks any mention of this event.
There are strange (at least to me) call provisions (which sounds like to hand over a pro-rated portion of shares in all investments they own) on this leveraged ETN that can be caused by severe price falls. I should not own it - but I do. The distribution is not stable - and it is falling.
My ability to think clearly falls when volatility rises. MLPL is so volatile that is messes with my mind. You would need to be a better investor than I am (which some of you are) before I would suggest touching MLPL.
I wanted confirmation from my broker that the dividend is fixed and cumulative - and if there is any chance of the preferred being called at $50 as opposed to being converted to KMI shares at an unknown price.
I still do not have the info I want to pull the trigger on a transaction I expected to close at the open of today's market.
Preferred came be flakey.
MAIN is vulnerable for two reasons. (1) It still sells well above NAV. (2) It's exposure to energy loans is relatively high. Until we get good news on those energy loans - the price is vulnerable to falling closer to NAV. Even if we get good news on those loans - the market is not going to believe it.
Hat - I have - in the past - made investment decisions based on hope. That never worked out well for me.
Hat - I hope you own BDCs with lighter energy investment allocations - that have stronger weightings in investments with lower yields - in BDCs that publish their 'portfolio company Debt/EBITDA' stats - that have records of superior 'earnings projection accuracy' - that have dividend/NI ratios under 90%. Only if you have done those things - then you have a logical basis for having hope.
I strongly suspect (but lack certainty) that the current BDC bearish market has been indiscriminate in the mauling. If you own weaker BDCs - you can take this opportunity to upgrade.
WHEN IN DOUBT - TAKE SOME HALF STEPS
The BDC baby bonds are also having a poor year - but not to the degree that the BDC equities are having. Sell (at least some of) your worst BDC and replace in with a BDC baby bond. You will improve the quality of your portfolio with that transaction. You should be purchasing the bond with great timing. You will harvest a tax loss. And you may avoid some forward losses.
There were not that many quality BDCs at the end of 2008. But a list would not include much more than ARCC, MAIN and PNNT. ARCC was up in price in 2009 by 96.68%; MAIN by 64.99%; and PNNT by 147.09%. The sector average gain was 51.68%.
Let's look at the two year record (using sector average) of 2008 and 2009 in terms of 'per $100 invested'. 2008 began with $100 and ended with $42.66 (after the loss of 57.34%). 2009 ended with (42.66 times 1.5168) $64.71. Dividend cuts were all over the map (100% to zero) - making an average cut - when results fail to be in a bell curve - a near meaningless number.
I seek to liberate investors from the chains of borrowed opinions by teaching metric awareness that leads to the formation of your own opinions. If one holds BDCs during 'the next big one' bear market - then you need to already be one of those liberated investors. The market will tell you that you messed up. Your brokerage statement will echo that message. Are you going to keep holding BDC XYZ just because the NII has not fallen that much - and the NAV is being mostly steady? Or will you cut and run - harvest your tax losses - and get on when you can still get 40 cents on the dollar, because there is no light at the end of the tunnel?
The current price to NAV for the sector is in the low 70s. That ratio ended 2008 at 47%. I believe you are better off finding the answer to your cut and run potential when the ratio is in the 70s - rather that find the answer when the ratio is in the 50s.
While I strive to pry loose multiple lessons from the numbers - I do have a number one and over-riding goal: "I seek to liberate investors from the chains of borrowed opinions by teaching metric awareness that leads to the formation of your own opinions."
In Seeking Alpha 'blog postings' - from which I do not generate any compensation - I share stats.
In Seeking Alpha 'articles' - from which I generate a penny per view plus $35 per article - I share 'swimming in the numbers' lessons.
I have produced 94 swimming lessons on Seeking Alpha. If you are failing to learning how to swim - perhaps you have under studied the content I produce. If you are using the borrowed opinions of others as your 'floaties' - you will probably (1) trade too often; (2) sell you winners way too soon; and (3) hold your losers way too long.
Pallasathena - That information already exists in the data that I have displayed. That is exactly the kind of information I want to know - and so I gather and display (or share) it.
The S&P is down 7.18% while this coverage universe is down 2.68%.
For 2015: The SPY or S&P 500 EFT is up -0.81% year to date. - and with unreinvested dividends is up 1.23% year to date. The KXI or Consumer Staples ETF is up 4.34% year to date - and with unreinvested dividends is up 6.63%.
For 2014: The SPY [S&P 500 EFT] is up 11.29% year to date. - and with unreinvested dividends is up 13.37% year to date. The KXI [Consumer Staples ETF] is up 3.98% year to date - and with unreinvested dividends is up 6.42%.
For 2013: The SPY [S&P 500 EFT] is up 29.69% year to date. - and with unreinvested dividends is up 32.04% year to date. The KXI [Consumer Staples ETF] is up 17.04% year to date - and with unreinvested dividends is up 19.42%.
For 2012: The SPY [S&P 500 EFT] is up 13.47% year to date. - and with unreinvested dividends is up 15.13% year to date. The KXI [Consumer Staples ETF] is up 10.62% year to date - and with unreinvested dividends is up 12.08%.
For 2011: The SPY [S&P 500 EFT] is -0.2% year to date. My coverage universe had a return of 13.50%.
For 2010: The SPY [S&P 500 EFT] is 12.84% year to date. My coverage universe had a return of 19.63%.
Conclusion I draw from the data - consumer staples are much less of a roller coaster ride. Not shown in the data set provided - 'on average' you give up some dividend growth by having that smoother ride. But a higher dose of sweets (DPS - HSY - PEP) and protein (HRL - TSN) would results in sector out performing dividend growth.
SeriousCat - I would not make any new investments in any BDC with an energy allocation over 5%. I don't want the uncertainty.
At the same time, I own small weightings in two of the BDCs being hurt by their energy exposure (AINV and PNNT) - and I am not selling now because they appear on a price to NAV basis as being overly punished.
Given that those two opinions are not in alignment - one of those opinions is wrong. And if I were forced to choose, I would choose the second one (that AINV and PNNT are overly punished) as being the wrong one.
Armnestos - What do you do when the CAGR projection provided by the analyst does not agree with the 'omen' provided in the distribution/DCF ratio? You believe the ratio. WES has a distribution/DCF ratio that is significantly rising. Add to that, WES has a historical DCF projection accuracy rating that is getting worse. WES has the metric performance that currently justifies the higher yields.
HEP is a 'historical DCF projection accuracy' All-Star. The debt/EBITDA numbers are pretty close to average - which is not a good thing. It is not a large cap. HEP has a BB credit rating - sub investment grade. It stays out of the headlines and off of most folks radar. It is a moderate growth (or lower) MLP. The distribution/DCF ratio is above my sector average - which reinforces a 4% to 6% distribution growth expectation.
There has been zero change in the (Yahoo consensus) 2015 price target - and a rare increase in the 2015 DCF projection. It has the attributes we all wanted in 2015. HEP lacks having a price correction in 2015. I believe it is a logical expectation that the lack of a 2015 correction combined with a 5-ish distribution CAGR and a yield of 7.8% will cause HEP to moderately under perform going forward.
HEP is dull and boring while lacking the emotional comfort of having the investment grade label. Don't buy dull and boring when it is a hot commodity. At the same time, as one ages, one should want your weighting in dull and boring to grow. I also want my due diligence level to decline as I age. Thus I want the credit metrics that justify the investment grade label on my dull and boring components.
Remember how Kodak was once promoted as a Christmas gift with the 'open me first' label? It is my valuation perception that there is nothing 'open me first'-like in HEP.
I want to spend a minute defending Barclays from the charge "where you you 12 (or 18) months ago".
It is hard for those who write in 'nuance' to communicate to retail investors. The analysts were writing that almost all MLPs were risky for years. That info was contained in their RRR assessments (which are hard to find). If you needed good RRR (Required Rate of Return or 'risk') assessments and had access to multiple reports from a numerous assortment of brokerages - then you knew where to find them.
But what if you did not know that RRR assessments mattered? To the analyst - that is an overly stupid question. How could anyone who lived through 2008-2009 not know that RRR assessments mattered? Well, I lived through that period on the message boards. And I have witnessed via a majority of message board postings that most investors lived through 2008-2009 without learning a single thing. They were too busy earning a living and raising a family. Retail investors lack the time to harvest information from prior mistakes - they move from one mistake to another. That is the way it is - the way it was - and the way it probably will always be.
I attempt to use historical data to provide the quality test that allows retail investors to learn the lessons they need to know. I lack the skills to simplify that message. (In my eyes - the message is what it is - you get it or you don't.) What do I get for those efforts? I have actually lost Seeking Alpha followers since the beginning of the year.
In summation - retail investors need CliffsNotes to brokerage reports - but since you can not openly post passages from brokerage reports without getting sued, those notes do not exist.
I was early in writing about MLP risks - but I know such risk related articles were my least read articles - by a long shot. And I have never seen a show of hands to those who paid attention and sold when I wrote "There are only two correct allocations to MLP E&Ps: slim and none."
There may not have been sufficient warnings about MLP risk prior to mid 2014 to communicate to retail investors the correct perception of that risk. At the same time, there were all the warnings that I could profitably write out there - and the analysts who were restricted to writing in 'nuance' were consistently posting the degree of warnings they could write and still keep their jobs.
I noted that some BDCs are being treated as if they are guilty until proved innocent when it comes to negative expectations about their upcoming earnings . . . this being the justification for their recent under performance.
I would expect that in some cases such a treatment will prove to be correct. But for which ones? I have no idea. Negative events happen randomly. This could easily prove to be a case where it is better to 'watch the dip' rather than 'buy the dip'. We know (from the business news in general) that the lower liquidity credit market is messed up. (There are no bids on lower quality energy loans.) There could be some larger than average NAV dips upcoming.
Only those with larger than average risk tolerances should be buying this dip - and that is not me. I am guesstimating that it is too late in the credit cycle to be adding any weighting to my BDC allocation.
Scion - that data can be found in prior articles and blog postings.
http://seekingalpha.co...
http://seekingalpha.co... -- contains data for both consumer staples and MLPs.
SDS - I do not know of any such sites. I would guess that the S&P and Moody's would come closest to doing this task. I am making the credit metric calculations part of the chores associated with the earnings release tasks. I would suggest that other investors do the same.
The $860 million deal to acquire an 80 percent interest Trafigura AG’s South Texas midstream assets was announced in Sept of 2014. There was a jump of 10.947 units between Q3-14 and Q2-15 - and a decrease in debt. What's missing is an increase in DCF or EBITDA.
Darnoc111 -- The forward DCF projections for SXL have a very wide range - and that scares me. I do not want ADDED uncertainty in this environment - and the markets appears to feel the same. In a movement that is completely out of character with the historical record, SXL has a falling current year DCF projection. What changed? Since I do not own any - I do not follow it close enough to know.
Darnoc111, you read the Price/DCF spreadsheet correctly if you derived from those numbers that SXL is a strong buy. But there can be (and usually is) wide variations of confidence one can place in the projections for a given MLP.
SXL at a near 7% yield looks very attractive. Historical distribution growth has been great. The distribution/DCF ratio is rising significantly - and that is an omen for slowing growth in all sectors. But with 19.74% LTM distribution growth - it could cut its growth rate in half and still look attractive at 7%.
Summation - there is a lot of uncertainty about the pace of forward growth - but the market is significantly over-compensating for that risk right now with SXL's yield and valuations. And remember - that summation comes from someone who does not follow SXL closely.