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Norman Tweed
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Retiree interested in stocks and financial instruments, especially dividend producing stocks. In the 20th century, I was an electrical engineer with Dominion Resources. I use a dividend growth investment style. Quick rules of thumb for complex questions, like fair value p/e using the Gordon... More
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  • American Capital Agency (AGNC) Goes Monthly

    Mortgage REITs pay some of the highest dividends in the market. American Capital Agency (NASDAQ:AGNC) has paid over 20% yield in the past and currently pays 12.12%. Recently, they changed this distribution from quarterly to monthly. This new monthly payout makes it easier for retirees to budget their expenses against their income. If one were to reinvest this monthly dividend, the compounding effect becomes greater versus a quarterly payout. The outlook for AGNC has also improved.

    With the wind down of the government purchases of mortgage backed securities, there will be more room for private capital to take a larger share of the mortgage market. Mortgage servicing rights will also ramp up as the portfolios become larger. As the housing market picks up, spreads between MBS and short term borrowings will increase. When highly levered (8x) yields can rise rapidly. A considerable amount (80%) of MBS has been purchased by the FED. With that drag on the market removed, prices of MBS will be supported by the significantly reduced supply of mortgage funds. Investors have been underweight MBS due to the interest rate uncertainty which started in the summer of 2013. As the interest rate on the 10 year treasury bond has become more stable in 2014, private investors have bid up mREITs like AGNC (+11.25% ytd).

    (click to enlarge)

    Mortgage servicing rights have been kept by originators until recently-due to wide origination margins. New capital requirements for banks and a tougher regulatory environment for originators and servicers and lower origination margins should force most originators to sell the majority of their MSR. Given the permanent capital nature of mREITs, they are well positioned to take advantage of the MSR opportunity.

    AGNC might consider non-agency MBS in the future as well as increased involvement in origination and sourcing of MSR and MBS. This makes them more like American Capital Mortgage (NASDAQ:MTGE) and other mREITs such as (NYSE:NLY). In the long term, higher leverage may be applied as there is structural change in the industry.

    I see strong growth in both book value and dividend yield over the next several years. mREITs are cyclical based on the 10 year treasury bond interest rate and spread of short term rates with long term (2 year-10 year spread for example).

    Disclosure: The author is long AGNC, MTGE.

    Oct 04 5:08 AM | Link | 4 Comments
  • Resource Wars

    Over the past year, a distinct trend toward energy supply security has arisen around the world. The on-going global recession has exacerbated this trend culminating in the outbreak of war in Ukraine, Iraq-Syria vs the Caliphate of Islamic State and China vs Japan, Vietnam and other Asian countries around the South China Sea. The Ukraine breakup including Russia's annexation of Crimea and fighting in Eastern Ukraine with separate statehood placed on the bargaining table by Russia concerns Russia's natural gas pipelines and delivery to Europe through Ukraine. The Islamic State's seizure of oil wells and territory in the Levant and Iraq concerns oil in Syria, Kurdistan, and Iraq. And China's aggressive posture toward the entire South China Sea including the installation of oil rigs, concerns China's massive demand for oil and possibly gas. Japan's Fukushima disaster from the Tsunami several years ago has caused the shutdown of Japan's nuclear units and driven up their demand for natural gas to fuel new power plants. Even South America is having financial difficulties including Argentina' bond default while Brazil has been slow to develop their oil wells and are importing ethanol from the United States to power some of their vehicles.

    The bright shining light in all of this turmoil is the United States which is experiencing a fracking boom in both oil and natural gas. The infrastructure there has been slow to catch up with production and oil by rail has temporarily replaced pipelines in new oil and gas fields. This has had unexpected consequences for the farmers in North Dakota and other new oil producing areas since the cold winter of 2014 has forced them to store grain on the ground waiting for shipment by rail. Flaring of natural gas in the Bakken has upset environmentalists due to increased air pollution and the effect on global warming. The United states natural gas price with this sudden glut has dropped to ½ that of Europe and 1/3 that of Japan. The United States is rapidly growing its oil production, but there is little price differential between Brent crude and West Texas Intermediate crude. The new fracked oil is light oil and more flammable than heavier crude from Canada or the Middle East. With the Polar Vortex of last winter, there is the possibility that the natural gas reservoirs will not meet the EIA expectations for reserves this November.

    My take on these global political and resource related tensions is a push to maintain the price of energy resources. Demand will be pushed by unbearable pollution in large cities in China, like Beijing. The United States is legislating coal out of the energy mix for power plants and new natural gas fired plants will be the alternative. I have invested in LNCO to gain the high yield ~9% and will continue to dollar cost average into that stock monthly. A byproduct of this investment is return of capital reducing current income taxes on the high dividends. In addition there will be considerable push on the administration to export the excess of gas production through natural gas liquids and compressed gas (Morgan Stanley has applied for permits to run a compressed gas export business). Even Mexico is opening up their energy market and PEMEX will no longer have a monopoly on this business. Mexico is taking a larger and larger share of natural gas exports from the US through pipelines.

    The boom times in the energy business remind me of the 1920s oil boom.

    Disclosure: The author is long LNCO.

    Sep 01 10:02 AM | Link | 6 Comments
  • Dominion Resources: Will Natural Gas E&P Make This Stock A Winner For Retirees?

    I signed on with Virginia Electric & Power Company back in 1967, fresh out of Engineering School. It was a regulated utility which provided electric power and distributed natural gas. This company became Dominion Resources (NYSE:D) and grew. During my career (closing in 2000 with retirement) I saw the natural gas portion of the company morph into one of the largest oil and natural gas exploration and production companies in the country with an export terminal at Cove Point. They also operate one of the nation's largest natural gas storage systems. An excellent overview of the company is presented by Investing Insights: Dominion well positioned to outperform. After this cold winter, it appears that energy has become a prominent global commodity and there is a large differential in pricing between the United States and Europe. In fact, there is geopolitical action in Ukraine over the price of gas and source, especially Russia's pipeline through that country.

    During my career, I raised a family and saved for retirement through the Dominion Resources thrift plan, which started as company stock purchases and company match and morphed into a 401k plan by the time I retired. It was important for me to invest as much as possible each month into the company savings plan and company pension plan. The 401k allowed us to have other investments including an S&P 500 Index mutual fund in addition to Dominion stock. However, with the .com bust beginning as I retired, the S&P 500 (NYSEARCA:SPY) suffered a major pullback. Dominion had a much less pronounced drop, being a utility.

    (click to enlarge)

    I sold a few shares of Dominion during those rough days of early retirement (2000-2003) since both of my children had just married and needed all the help I could give them due to the economic downturn. As you can see from the chart above, the Great recession of 2008 also sank the S&P 500, but once again Dominion held up rather well. I bet my retirement on D stock and Pension and they came through for me twice! Now there is a speculative air about the stock based on global conditions, including climate change. I have always looked at Dominion as a dividend growth stock and will present my analysis here:

    (click to enlarge)

    As you can see Dominion has increased in price from $30 to the current level of $71.09. The forward P/E ratio is 18.98, while the price/book ratio is 3.54. The current yield is 3.38% and it is a Dividend Contender with 11 years of increasing dividends.

    StockDate of reinvestDiv Rate# SharesDividendDrip price# Shares purTotal ValueCurrent Yield
    Totals  408.42$3,733.99 78.42  
             
     02/26/14$0.60404.94$242.96$69.763.48$28,491.603.44%
     12/04/13$0.56401.42$226.00$64.133.52$25,968.823.51%
     09/04/13$0.56397.53$223.81$57.623.88$23,129.603.91%
     05/05/13$0.56393.47$221.52$54.564.06$21,689.344.13%
     02/26/13$0.56389.50$219.29$55.283.97$21,751.124.07%
     11/28/12$0.53385.48$203.15$50.434.03$19,642.734.18%
     08/29/12$0.53381.67$201.52$52.973.80$20,418.693.99%
     05/30/12$0.53377.83$199.49$51.863.85$19,793.514.07%
    D02/29/12$0.53373.91$197.43$50.473.91$19,068.854.18%
     11/30/11$0.49370.38$182.60$51.623.54$19,301.423.82%
     08/24/11$0.49366.73$180.80$49.583.65$18,363.263.98%
     05/25/11$0.49362.94$178.93$47.183.79$17,302.314.18%
     03/02/11$0.49358.99$176.98$44.793.95$16,255.964.40%
     11/24/10$0.46355.12$162.64$42.033.87$15,088.184.36%
     08/25/10$0.46351.39$160.94$43.153.73$15,323.264.25%
     05/26/10$0.46347.26$159.05$38.564.12$13,549.474.75%
     02/24/10$0.46343.18$157.18$38.534.08$13,380.004.75%
     11/25/09$0.44339.14$148.54$36.784.04$12,622.254.76%
     08/26/09$0.44334.77$146.63$33.494.38$11,357.935.23%
     05/27/09$0.44330.00$144.54$30.334.77$10,153.445.78%

    As can be seen from the spreadsheet, an investment of $10,000 on 5/27/2009 with dividend reinvestment would have grown to $28,491 today. This is 23% annual growth.

    (click to enlarge)

    Is it overvalued? I continue to reinvest in it and note that the forward P/E is 18.98. With the run up of 9.89% so far this year, I believe there is speculation about the proposed MLP spin off and export of natural gas to Europe affecting the price. I have always dripped this stock through good times and bad and only sold shares when my family needed the money.

    Conclusion: Dominion Resources is a strong contender in the oil and gas business with regulated electric and gas utilities on the side. This has been an extremely cold winter and natural gas in storage has come down considerably from normal levels. There is global pressure for increased use of natural gas to limit climate change as well as provide heat and energy for industry. This stock is a continuing buy for retirees, like myself.

    Disclosure: I am long D, SPY.

    Mar 30 3:41 AM | Link | 4 Comments
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