Three Yield Ideas: Wendy's, United-Guardian, Blackrock Credit Allocation

Includes: BPP, UG, WEN
by: Yieldpig

Let’s meet this week’s three lil’ piggies…

“Here’s the beef!!”

Wendy’s/Arby’s Group, Inc. (NYSE:WEN)
Recent Price: 5.01
Current Yield: 1.59%

The Skinny
Wendy’s founder, the folksy Dave Thomas, honed his fast food craft under the wing (that’s a joke…son) of fast food pioneer Colonel Sanders and built a burger empire. WEN is the parent company of Wendy’s International and Arby’s Restaurant Group which are the franchisors for the fast food outlets. The company also owns The New Bakery Company of Ohio, which produces buns for some of the Wendy’s restaurants and the T.J. Cinnamon's concept which includes 108 units. The yield isn’t all that spectacular. So why are we even talking? We feel that WEN holds a lot of unlocked value, namely the bakery and T.J.’s. Like the competition, the company understands that international growth is the key which was the motivation to committing to developing 50 units in Argentina over the next two years. Last, the primary reason why this is an intriguing idea is the possibility of private equity take out. These are the kind of deals PE loves and there has been some talk. The dividend is just lagniappe.

The Danger
There’s a reason WEN would need to sell itself to PE. They’re not exactly setting the woods on fire. As brands, Wendy’s and Arby’s are definitely second tier. Well known but second tier. The company turned in an $18 million operating loss (before taxes) for 2010 and revenue is flattish. Flat revenue is not a good thing in the burger eat burger world of fast food. Margins are constantly compressed due to human capital cost, rising food prices, energy etc. Plus, the company is carrying a bunch of debt ($1.5 billion). They need to figure out what to do with that. Private equity takeout would help solve that problem but, again, a takeout is a BIG if.

“United we lube…”

United-Guardian Inc. (NASDAQ:UG)
Recent Price: 15.17
P/E: 19.01
Current Yield: 4.60%

The Skinny
Ever wonder where companies that make cosmetic and personal care go to get the components that go into their goo? From companies like UG. The bulk of UG’s business is cosmetic and medical lubricants. Their Lubrajel product line accounted for 78% of the company’s sales. By the way, they sell that stuff in 45 pound buckets and 55 gallon drums. That’s a lot of lube. Good numbers. 9% YOY revenue growth was a respectable 9%. ROE is an attractive 25.6% and they grew the dividend by 5% last year. 50% of UG’s total sales are international. Someone has to sell catheter lubricant around the globe..

The Danger
On the whole, UG is a pretty tight company. A couple of things, though. The dividend payout ratio is too high at 118%. Most likely, this is the result from a onetime charge stemming from the company terminating is defined benefit pension plan. Regardless, it is an area of concern. UG is a tiny company with a market cap of $66 million and annual revenue of $13 million. They’re good at what they do but they’re a relatively small fish in big pond. It’s hard to compete with the likes of a JNJ at $66 million. And while UG’s numbers have been consistent, income from operations was off slightly.

“Credit where credit is due…”

Blackrock Credit Allocation Income Trust III (NYSE:BPP)
Recent Price: 10.35
Current Yield: 6.26%

The Skinny
It feels like we’ve been talking about a CEF every week so far this year. But our mission is to root out value so…we’re going to go to where the value is and, recently, that’s where the value has been. Launched in 2003, BPP’s stated objective is high current income consistent with capital preservation. At any given time the fund will invest at least 80% of its assets in high yield and corporate bonds, bank loans, convertibles, and preferreds. Shares are currently trading at a 14% discount to NAV. Nearly half the portfolio is investment grade which is good to know. The dividend is paid monthly so there’s some good consistent cash flow. And even though BPP uses leverage, they’re currently only using about 23%.

The Danger
While nearly half of BPP’s holdings are investment grade, the other half (save for the 7% or so in U.S. Government stuff - a whole different conversation) isn’t. Although the market seems to like the junkier space these days, mainly because of the spread over treasuries, it’s still riskier to hold. That volatility will always affect the fund. The most burning question in our feeble little minds is this: while bonds have had a pretty good decade, why has this fund underperformed both 3 and 5 years compounded? 3 years was -7.5% on NAV and 5 years has been -3.9%. Blackrock is exceptionally good at running fixed income. The iShares Barclay 7-10 year treasury ETF has averaged +6.05% over the last five years. Why has BPP blown? Enquiring minds want to know.

Disclosure: None

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