This Hot Dividend Stock May Still Be Undervalued

| About: Calumet Specialty (CLMT)
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Our quest for undervalued high dividend paying stocks keeps leading us back to the energy sector, which took a beating in the second quarter but has come back strong since late June. In a previous article, we wrote about Pioneer Southwest Energy (PSE), an energy stock that had been left behind in the summer rally.

This article focuses on Calumet Specialty Products Partners (NASDAQ:CLMT), an LP that is a combo oil and gas processor/refiner. With its 8%-plus dividend yield, CLMT is listed in our High Dividend Stocks By Sector Tables. Unlike PSE, CLMT hasn't been left behind this summer and has greatly outperformed the S&P since late June. It also looks closer to being overbought than oversold on its stochastic chart:

Click to enlarge images.

Undervalued Thesis

Thanks to a series of acquisitions CLMT had great growth in 2011, and thus far in 2012, with 2012 EPS estimated at $3.34 on average, grew at a torrid 151% pace. Its long-term five-year growth projection of 26.81% gives it a very low 0.36 PEG:

Here's the rub: Analysts are currently estimating a -3.89% downturn in EPS for 2013:

But analysts may be underestimating the 2013 earnings impact of CLMT's acquisitions, if the last two quarters are any harbinger of what's to come. CLMT earned $0.97 in the first quarter and increased to $1.14 in the second quarter of 2012, an approximately 87% to 100% increase over the previous year's quarters.

If CLMT matches the lower, $0.97 first-quarter figure over the next two quarters, it would earn $4.05 in 2012 and probably even more in 2013, since it has made more acquisitions since the second quarter -- which will be accretive to earnings:

Source: Yahoo Finance.

Using a risk-adjusted discounted rate of 8.37% vs. future earnings also shows CLMT to be undervalued, with a whopping value of $132.97.


After paying its first two quarterly distributions of $0.63 in 2007, CLMT's payout slipped to $0.45/quarter in 2008-09. However, it has increased steadily ever since -- $0.46 in 2010, from $0.47 up to $0.50 in 2011, and from $0.53 to $0.59 in 2012.

Even though it still looks undervalued on a long-term basis, given the big run that CLMT has had, you may want to wait for a pullback. Alternatively, you could sell covered calls to achieve a lower breakeven cost.

Here's a trade for CLMT from our Covered Calls Table, which lists 30 other high-yield trades:

This five-month trade offers a couple of different income scenarios:

  1. Static: Maximum income of $2.48 (dividends + call premium) if CLMT doesn't rise above the $30.00 call strike price near its ex-dividend dates, or at expiration.
  2. Assigned: Minimum income of $2.15 ($.85 price gain + call premium) if CMLT does rise above the $30.00 call strike price near its first ex-dividend date, and your shares are assigned. Maximum income of $3.33 if CMLT gets assigned at expiration and you collect both quarterly $0.59 dividends.

CLMT also has put options available, but the only high yield is on a $30.00 strike price, which is above the current price/share.


CLMT has good management efficiency ratios, but does carry more debt than industry averages. However, it has a 4.1 interest coverage ratio. Its operating margins should improve as it integrates its acquisitions.

Company Profile

According to the Calumet website, Calumet is a master limited partnership and is a leading independent producer of high-quality, specialty hydrocarbon products in North America. Calumet processes crude oil and other feedstocks into customized lubricating oils, solvents, waxes and asphalt used in consumer, industrial, and automotive products. Calumet also produces fuel products including gasoline, diesel and jet fuel. Calumet is based in Indianapolis, Indiana and has nine facilities located in northwest Louisiana, northwest Wisconsin, western Pennsylvania, southeastern Texas and eastern Missouri.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.