Double-Digit Dividends: 3 Bullish And 3 Bearish Ideas

Summary

• I’ve launched a new series focused on long and short opportunities in the double-digit dividend yield market, and today, I’m trying out a new format.
• I present to you a total of six bullish and bearish ideas in the elevator pitch model.
• The bullish ideas include Ready Capital, Diversified Energy, and China Yuchai International.
• The bearish ones include Sibanye-Stillwater, Impala Platinum, and Four Corners.

peterschreiber.media/iStock via Getty Images

Introduction

Welcome to a new edition of my series of articles focused on companies with dividend yields in the double digits. I've always liked high-yield dividend opportunities and my first ever SA article was about a gold producer with a dividend yield of over 7%.

The articles can be either bullish or bearish and I've already written three of them. Today, I'm trying something a little bit different. Instead of writing a long article on a single idea, I'm doing elevator pitches about three bullish and three bearish ideas.

Bullish Ideas

1) Ready Capital Corporation (NYSE:RC)

The company services, finances, acquires, and originates SBC loans, SBA loans, residential mortgage loans, and MBS collateralized by SBC loans. Think of it as a non-bank lender that is structured as an mREIT. In March 2021, Ready Capital completed a merger with an agency m-REIT named Anworth Mortgage Asset Corporation. It then liquidated $2 billion of Anworth agency RMBS and redeployed the funds into more profitable loan origination pipelines, so the future looks bright.

What I like about Ready Capital is how steadily its operations and dividends have been growing over the past few years.

(Source: Ready Capital)

Ready Capital has a forward dividend yield of 11.64% as of the time of writing and is trading slightly below its book value. Overall, I think it looks like a well-managed non-bank lender and the double-digit dividend yield seems sustainable.

My main concern is that leverage has been increasing fast and the debt-to-equity ratio stood at 5.4x as of June 2021.

(Source: Ready Capital)

2) Diversified Energy Company (OTCQX: OTCQX:DECPF)

This is a U.S.-focused natural gas company that has a very interesting business strategy - it focuses on the purchase and optimization of old producing wells. The aim is to sustain cash generation from a portfolio of low-cost, low-decline assets.

Ironically, Diversified Energy Company isn't diversified as natural gas accounts for some 90% of its business.

(Source: Diversified Energy Company)

The company spent $342 million on new acquisitions this year, with the aim to replicate its success in Appalachia in other places.

(Source: Diversified Energy Company)

The timing seems perfect as there is a global energy crisis at the moment. Russia is cutting natural supplies to Europe, and China is buying large quantities in order to keep its air clean ahead of the Beijing Winter Olympics. Natural gas futures are currently near-decade highs and cold winter could add fuel to the fire.

(Source: Seeking Alpha)

Diversified Energy Company relies on hedging, so don't expect to see its profits soar in Q4 2021. However, I think it's a sound strategy that protects its 10% forward dividend yield and also allows it to repay its debts without facing solvency issues when natural gas prices eventually decline.

(Source: Diversified Energy Company)

My main concern with this one is also the debt load. As of June, Diversified Energy Company had a net debt of $635 million.

If you like this company and want to get exposure, keep in mind that the main listing is on the London Stock Exchange. The liquidity of the shares of Diversified Energy Company is much better there compared to the OTC market.

3) China Yuchai International (NYSE:CYD)

This is a Chinese manufacturer of heavy-duty engines, mainly for trucks, and buses. It also owns a 48.9% stake in Singapore-listed hotel operator HL Global Enterprises. The latter's main asset is Copthorne Hotel Cameron Highlands in Malaysia. China Yuchai International is owned by Hong Leong Asia, which is also listed in Singapore.

(Source: China Yuchai International)

China Yuchai International operates the largest single facility for commercial automotive and industrial engines in China and its total production capacity stands at 600,000 units per year. It's a pretty large company with H1 2021 sales of $2 billion and its forward dividend yield stands at 12.51% as of the time of writing.

The share price has been sliding lately as earnings per share fell by 17% in H1 2021, mainly as a result of high R&D and SG&A costs. Also, I think Beijing's recent crackdown on the technology, education, and entertainment industries isn't helping sentiment.

Higher gross profits in H2 2021 will depend on sales of its National VI engines to obtain bulk discounts from suppliers.

I view China Yuchai International as a company whose market valuation has taken a beating due to weak profits and an uncertain future. However, it's trading at less than 6x earnings and its balance sheet is really strong. As of June, China Yuchai International had $876.6 million in the bank and its debts stood at just $367.3 million.

(Source: China Yuchai International)

My main concern is that the gross margin has been falling every year. It seems that competition is getting fiercer. Looking at the future, China Yuchai International just announced an investment into clean tech, with the idea of manufacturing fuel cell systems, range extenders, and electric drive systems.

(Source: China Yuchai International)

Bearish Ideas

1) Sibanye-Stillwater (NYSE: SBSW)

This is a South Africa-focused platinum group metals (PGMs) producer that has a TTM dividend yield of 13.36% as of the time of writing.

(Source: Sibanye-Stillwater)

I've covered Sibanye-Stillwater a total of four times over the past 12 months, turning bearish in May. Looking at the share price chart, I'd say I've been pretty spot on with my coverage.

(Source: Seeking Alpha)

There are two main reasons I've turned bearish on this company. First, we're in the middle of a worldwide chip shortage that shows no signs of abating. On the contrary, a power shortage crisis in China is forcing local chip enterprises to halt production, including suppliers of semiconductors for foreign companies. The result is a significant hit on demand for PGMs as automakers have to decrease production due to this chip shortage.

Second, battery energy vehicles are selling in record numbers in 2021. Unlike hybrids, BEVs don't use any PGMs.

(Source: EV-Volumes)

The reason Sibanye-Stillwater has such a high dividend yield and its profits are soaring is because rhodium and palladium have been in deficit for several years. This has led to the prices of the two metals reaching very highs levels but they can rapidly get back to earth if a glut appears. Unless the chip shortage gets resolved soon, Sibanye-Stillwater is in big trouble.

(Source: Johnson Matthey)

http://www.platinum.matthey.com/prices/price-charts

2) Impala Platinum (OTCQX:IMPUY) (OTCPK:IMPUF)

This is another South African PGM producer, which I've also covered several times on SA. Impala has a TTM dividend yield of 13.21% as of the time of writing.

There are three key differences between Impala and Sibanye-Stillwater. First, Impala has a stronger focus on PGMs, especially rhodium. Sibanye-Stillwater owns 51% of gold tailings retreatment specialist DRDGOLD (NYSE:DRD) and recently revealed it's buying half of the Rhyolite Ridge lithium-boron project in Nevada for $490 million.

Second, a significant part of Impala's revenues and profits come from Zimbabwe through Zimplats (OTCPK:ZMPLF). It's a very unstable jurisdiction with high inflation and unemployment and a history of nationalization. Things haven't been getting better since Mugabe was overthrown and the country recently imposed load shedding schedules lasting up to 12 hours.

(Source: Impala Platinum)

(Source: Impala Platinum, measured in million South African rands)

Third, most of Impala's PGM mines are better-positioned on the cost curve compared to those of Sibanye-Stillwater. This means that Impala can at least survive lower PGM prices.

(Source: Sylvania Platinum)

Overall, I think you can view Impala as a lower cost and less diversified alternative to Sibanye-Stillwater that also comes with a large amount of jurisdiction risk.

3) Four Corners (OTCPK:FCNE)

The company owns K&B (trading as Goodtime Action Games), which is a licensed distributor of electronic equipment and supplies for the charity bingo industry in Texas. Over 90% of its revenues come from paper pull-tabs and electronic card-mind devices and the forward dividend yield stands at 10.81% as of the time of writing.

(Source: Goodtime Action Games)

Four Corners claims in its Q3 FY21 financial report that the U.S. bingo industry is experiencing a nationwide supply shortage in consumables and that it's seeing unseasonably high bingo gross profits as the Texas economy is getting a boost from all the stimulus checks people are spending.

Looking at the income statement, we can see that revenues are soaring and net income almost doubled in the first 39 weeks of FY21.

(Source: Four Corners)

I think that what makes this one a good bearish idea is that it's clear that the strong financial results are temporary and the double-digit dividend yield is unsustainable. Even the company says so in its financial report:

(Source: Four Corners)

My main concern is that this is a small and illiquid company and it's very hard to find shares to borrow. According to data from Fintel, the short interest usually stands at just a couple of hundred shares. There aren't any shares available for borrowing as of the time of writing.

(Source: Fintel)

Investor Takeaway

I hope you liked these six investment ideas. I'm still focusing on real estate and out of the stock market, so please stop asking me why I don't have exposure to any stocks covered.

Out of the six companies covered, my highest conviction idea has to be Diversified Energy Company. I really like the business model of the company and I think it can deliver compelling returns during both good and bad times. I would also consider taking long positions in Sibanye or Impala once the global chip shortage starts easing, assuming BEV sales aren't growing at over 100% on the year.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.

Comments

[mdkb]

I always felt like Zimbabwe is ahead of the world in terms of trying reparations and learning how bad an idea that is. but SA has yet to go through that, despite all Mandela's changes there is still a huge disparity. So in as much as Zimbo is troubled, I actually see it as the long term best investment since it has the lessons that SA and even USA have yet to experience.

[charliezap]

@mdkb
""I always felt like Zimbabwe is ahead of the world in terms of trying reparations and learning how bad an idea that is. but SA has yet to go through that, . . "

Complete nonsense, in my opinion. And no parallel with South Africa.

Zimbabwe was run in dictatorial fashion by Mugabe. And following the fashion of dictators, Mugabe had no concern for the people and was only interested in himself and in maintaining power. Mugabe ran Zimbabwe down economically for 30 years. Previously agriculturally productive, Zimbabwe had to start importing corn to feed the people during Mugabe's reign. Inflation also raged. About 15 years ago, I traveled to the Victoria Falls with my daughter. We stayed at the marvelous old British colonial style Victoria Falls Hotel on the Zimbabwe side. One evening we decided on a full dinner in the main dining room. The bill came to 4 million Zimbabwe dollars. Translated at the then current exchange rate, that was equivalent to $64 (US) for the 2 of us!

South Africa chose democracy in 1994 with Mandela. It is still a democracy with free elections. Yes, incompetency and corruption were rife in the government when Zuma was president (he went to jail when he refused to appear in court to face corruption charges). The situation has improved under the current president, Ramaphosa.

[Gold Panda]

@charliezap Improved? Nope, that butcher Cyril is just better at stealing discretely IMO. Eg not building swimming pools and claiming it's for fire safety. South Africa looks like a kleptocracy at the moment, I wonder if things would improve if the DA ever got into power. Not that there's any chance of that happening

elections.timeslive.co.za/...

I find it weird that a country can be so terribly mismanaged and the people keep voting the same party into power.

[Gold Panda]

@charliezap What exactly has Ramaphosa fixed so far? How is unemployment? How is education? How is crime? Cyril is a joke, just like the entire ANC

"South Africa's unemployment rate rose to a new record high of 35.3% in the fourth quarter of 2021 from 34.9% in the third quarter "

"4.4 million adults in South Africa are still illiterate"

"In 2021 trust in police dropped to an all-time low of 27%."

[Alex_1917]

Small performance update ( 13.02..2022)
Ready Capital, Diversified Energy, and China Yuchai International ( bulish trades) are by +/-0%
as well as
Four Corners

Sibanye-Stillwater, Impala Platinum (bearish) are by +32 to 38%

In fact @iggir was very precisied with his forcast.

[Pappel]

What you missed in your analysis is that SSW is not a pure PGM play. They produce gold and invest in lithium and recycling. Additional they may go into Uranium.

[Dollarsandcents]

@Pappel - The first two illustrations that Gold Panda posted under the SBSW discussions are right from their investor presentation and clearly indicate the breakdown by precious metal. It should be pretty clear to anyone reading these slides that SBSW is diversified. At this time Lithium is not a factor in their operating results. With that said, I think the writer should have been a but more specific about the metals within PGM as Paladium and Rhodium contributed a much greater % of profits and have seen a greater decrease in their spot price. (I believe the writer has discussed this in their prior articles.)

Long SBSW

[Gold Panda]

@Pappel "First, Impala has a stronger focus on PGMs, especially rhodium. Sibanye-Stillwater owns 51% of gold tailings retreatment specialist DRDGOLD (NYSE:DRD) and recently revealed it's buying half of the Rhyolite Ridge lithium-boron project in Nevada for $490 million."

Try to read the whole thing

[iggir]

Funny case when I totally disagree and believe the bearish companies here are bullish in fact and vice versa. It is the time to watch on commodities and buy the dip especially in impala and sbsw with high divs and clear future. And to avoid all chinese and growth shares

[Slade_01]

I suspect that at some point SBSW will be a great opportunity so it is on my watch list.

[Gold Panda]

@911Slade most definitely, but timing is everything. In the past two years alone, it went from $10 to $4, then to $20, and then to $12. That's commodities for ya ;)

[Gold Panda]

@911Slade if you like PGMs, also keep an eye on Impala, Anglo American, Norilsk, Northam, RBPlat, and Sylvania. The best mine in the whole damn world is Mogalakwena while Marikana sucks

static.seekingalpha.com/...

[Andy D.]

@Gold Panda
Marikana is the "Crown Jewel" with high Rhodium content, the addition of the K4 shafts coming on stream over the next few years.
POC processing distorts it's AISC versus pure mining.

[Instigator928]

I am enjoying your double digit series. Thanks!

[Gold Panda]

@Instigator928 thank you very much :)