At Hidden Dividend Stocks Plus, we aim to seek out undervalued income vehicles which have been overlooked or undervalued by the market. Sometimes that type of situation can come from a broad market selloff, such as the one we experienced in the fourth quarter of 2018.
Even preferred stocks got discounted in the general downturn, sending them far below their $25.00 call values.
An LNG Shipping Pick:
Such was the case with the Dynagas LNG Partners LP, 8.75% Series B Fixed To Floating Rate Cumulative Redeemable Preferred Units, (DLNG.PB), which we added to the HDS+ portfolio on 12/31/18, at a deeply discounted price of $17.99.
These units have bounced back big time in 2019, rising over 20% year to date, vs. a ~3% rise for the S&P 500:
The thing is, though, that they're still more than 13% below their $25.00 call value, which gives them a ~10% yield, with their first distribution coming soon in early February.
These are cumulative units, meaning that DLNG must pay you for any skipped distributions before paying common distributions. In addition, they rank senior to the common units in a liquidation scenario and they have much better distribution coverage.
The coupon rate is 8.75%, but at $21.67, they yield over 10%. They don't go ex-dividend until 2/1/19, with a 2/22/19 pay date:
Another interesting feature is that they have a floating rate, of 5.593% above the three-month LIBOR rate, after their 11/22/2023 Call Date. Here are two looks at how this might play out in the future:
With the three-month LIBOR rate at ~2.81%, the total payout would be $2.10, for an 8.40% rate, but, since these units are only $21.67, the equivalent yield would be 9.69%, which is slightly lower than their current yield of 10.09%.
However, if the 3-month LIBOR rate rises to 5%, the payout would rise to $2.65, for a total rate of 10.59%, and an equivalent yield of 12.22%:
Although DLNG has struggled with its common unit coverage, its preferred distributions have strong coverage.
We estimate that in Q1 '19, when the first DLNG-B payout kicks in, the total preferred coverage should be ~3.45X, vs. 3.06X in Q3 '18.The higher DCF amount in Q4 '18 is due to the Lena River vessel completing its survey in late October and immediately starting on a multi-month charter with a major energy company, prior to its anticipated delivery to its multi-year charter with Yamal. Q1 '19 DCF should be higher still due to there being no special survey/drydocking costs for that quarter, but we kept it flat vs. Q4 '18, to see how that level would look for coverage:
Preferred and common unit holders receive a 1099, not a K-1, at tax time, since the issuer, Dynagas LNG Partners LP (DLNG), has elected to be classified as a corporation for U.S. federal income tax purposes.
All of its common and preferred distributions in 2017 were treated as return of capital, which has a tax sheltering advantage, but will decrease your basis, and impact your taxable profit, if you sell the units in the future. These units pay in the usual Feb/May/Aug./Nov. cycle for LPs.
Dynagas LNG Partners LP (DLNG), through its subsidiaries, operates in the seaborne transportation industry worldwide. The company owns and operates liquefied natural gas LNG carriers. As of 12/31/2018, its fleet consisted of six LNG carriers with an aggregate carrying capacity of approximately 914,000 cubic meters. Dynagas GP LLC serves as the general partner of Dynagas LNG Partners LP. The company was founded in 2013 and is headquartered in Monaco.
DLNG operates on long-term charters with an estimated contract backlog of $1.42B, with average term of 9.9 years. Five of its vessels are designated as ice class, out of a total of 11 LNG carriers in the global fleet with ice class designation. The vessels average age is eight years in an industry where expected useful lifetime is usually ~35 years. DLNG's earliest contract expiration isn't until in the second half of 2021, which gives management the opportunity to hopefully be able to leverage higher rates.
The LNG spot market went on a tear in 2018, hitting rates not seen in a few years, at $150K/day, vs. just $40K/day one year ago. This higher spot market should eventually help long-term charter rates as a vessel shortage may hit in 2020.
Another tailwind that has supported LNG demand is that LNG is cheaper than oil:
A Healthcare Pick:
We've all heard about the demographic tailwinds for the healthcare sector. With all of us boomers teetering into geezerdom at a rapid pace of 10,000 people turning 65 weekly, it's obvious that the healthcare industry should benefit.
The general healthcare thesis is upbeat, but not for all sub-industries, due to the threat of potential US regulations for pharmaceutical pricing, to take just one example, or oversupply in certain sub-industries, such as senior housing.
However, there are niches which are more resistant to these headwinds. The specialty surgery center industry is one of them.
In addition, some healthcare stocks vastly outperformed the market during the 2018 pullback - Medical Facilities Corp. (OTCPK:MFCSF), is an HDS+ portfolio holding which held up much better than the market during that dark period:
But wait, there's more - not only did MFCSF hold up much better in price, it also paid out three monthly distributions in the fourth quarter of 2018, which further strengthened its total return during the pullback:
Founded in 2004, Medical Facilities Corp. is a British Columbia corporation whose operations are US-based. It owns controlling interests in five specialty surgical hospitals located in Arkansas, Indiana, Oklahoma and South Dakota, and an ambulatory surgery center - ASC, located in California.
MFCSF made a major deal in 2018: Through a partnership with NueHealth, LLC, Medical Facilities owns a controlling interest in seven ambulatory surgery centers located in Arkansas, Michigan, Missouri, Nebraska, Ohio, Oregon, and Pennsylvania. The facilities are managed by NueHealth.
The specialty surgical hospitals perform scheduled surgical, imaging and diagnostic procedures. The ambulatory surgery center specializes in outpatient surgical procedures, with patient stays of less than 24 hours. Medical Facilities also owns controlling interest in a diversified healthcare service company located in Oklahoma that provides third-party business solutions to healthcare entities such as physician practices, facilities, and insurance companies.
Management has diversified the company's geographic base over the past few quarters - it now has 13 facilities in 11 states.
MFCSF's niche services include specialized operations which are usually elective procedures, which aren't done in just any hospital. In addition, the surgeons who work at its facilities can participate in company profits via owning a non-controlling interest in the company.
Part of our attraction to MFCSF are its niche operations within the healthcare field, which has strong tailwinds, due to demographics.
There are under 300 physician-owned specialty surgical hospitals in the US - MFCSF owns five of them:
Another positive is that the company's ASC's feature many elective surgical procedures, which skews the company's payer mix toward a heavier concentration of private insurance vs. the general US healthcare system mix:
MFCSF pays monthly distributions of ~$.07 and yields 6.95%. It tends to go ex-dividend near the end of each month and to pay in the middle of the following month.
Although its payout ratio jumped in Q3 '18, this should be a temporary blip. They've averaged a 73.19% payout ratio over the past four quarters. The payout ratio rose due to "higher current taxes in the current quarter of $4.4 million, mainly stemming from a net unfavorable difference in book-to-tax adjustment of $2.7 million."
Umpqua Holdings Corp. (UMPQ) is a holding in our legacy DoubleDividendStocks.com service's portfolio. We've owned many community banks through the years, and UMPQ cleared the hurdles we usually look for - a Return on Assets above 1X - (UMPQ's is 1.21X), a moderate payout ratio of 58%, and an attractive yield of ~4.77%.
Umpqua Holdings Corp. is the parent company of Umpqua Bank, an Oregon-based community bank. Umpqua Bank has locations across Idaho, Washington, Oregon, California and Nevada. Umpqua Holdings also owns a retail brokerage subsidiary, Umpqua Investments, Inc., which has locations in Umpqua Bank stores and in dedicated offices in Oregon. Umpqua Private Bank serves high net worth individuals and nonprofits, providing trust and investment services. Umpqua Holdings Corporation is headquartered in Portland, Oregon.
UMPQ reported net earnings available to common shareholders of $91 million for Q3 2018, vs. $66.0 million for Q2 2018, and $63.8 million for Q3 2017. Earnings per diluted common share were $0.41 for Q3 2018, vs. $0.30 for Q2 2018, and $0.29 for Q3 2017. Net interest income increased by $2.3 million. This increase was primarily attributable to a higher average balance of loans and leases. Provision for loan and lease losses decreased by $1.6 million, and Non-interest income increased by $0.7 million. Non-performing assets to total assets was 0.37%.
ROA was 1.21% for the 9 months ending 9/30/18.
But even with good earnings like this, the market turned sour on most things financial during the downturn - it was a "baby with the bathwater" dumping scenario, and UMPQ's price/share got discounted heavily, dropping from $22.12 at the September market highs, all the way to $15.90 at 12/31/18.
However, like our other two picks, UMPQ has bounced back in 2019, and is up 12.14% so far in 2019. It seems that the sky isn't falling and that small banks will continue earnings in the future.
As we've previously written, the community banking sub-industry is the safest part of the banking sector. They typically do first lien loans to local businesses and often have a major market share in their communities. Conversely, these small banks only average around 4%-5% exposure to consumer-based loans.
Lower Regulatory Costs - On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act, sponsored by Sen. Mike Crapo of Idaho was signed into law. This legislation seeks to ease the compliance and regulatory burden of small banks.
This legislation is a big step in the right direction for small community banks and their overall profitability. Ironically, the worst offenders, the "too big to fail" banks, caused much more regulatory expenses to happen, in the wake of the housing crash, which was a much heavier burden on small community banks.
Our legacy DoubleDividendStocks.com investing service specializes in enhancing dividend stock's yields via selling covered calls and cash secured puts.
In the case of UMPQ, we initiated a cash secured put trade on the first trading day of 2019, Jan. 2.
We chose the June 2019 $15.00 put strike, which was ~7% below UMPQ's $16.17 price. This put option paid $.90 at the time, which was a 6% nominal yield for this six-month trade, or 12.88% annualized.
This trade gave our subscribers a breakeven of $14.10, which was ~$1 below UMPQ's 52-week low of $15.09. The idea was to hedge our bet with an attractive option yield, in the event of another pullback.
With UMPQ's price rise, the June $15.00 put has declined to $.35, giving our subscribers nearly 67% of their put profit in a week.
At $17.83, UMPQ yields 4.71%, with a 58% dividend payout ratio. It goes ex-dividend in a March/June/Sept/Dec. cycle, and issues a 1099 at tax time - no K-1.
If you're new to selling options, we have an FAQ glossary which explains the terms and concepts you'll come across.
Given the current bounce-back in the market so far in 2019, many stocks have received renewed support, but we feel that the three stocks mentioned in this article still represent good entry points for long-term income investors.
All tables furnished by HiddenDividendStocksPlus, unless otherwise noted.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
CLARIFICATION: We have two investing services. Our legacy service, DoubleDividendStocks.com, has focused on selling options on dividend stocks since 2009.
Our Marketplace service, Hidden Dividend Stocks Plus, focuses on undercovered, undervalued income vehicles, and special high yield situations.
We scour the US and world markets to find solid income opportunities with dividend yields ranging from 5% to 10%-plus, backed by strong earnings.
We publish exclusive articles each week with investing ideas for the HDS+ site that you won't see anywhere else.
Disclosure: I am/we are long DLNG.PB, MFCSF, UMPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.