Two Yield Screens Worth A Review
Businessweeks' Michael Kaye, CFA has written two reports on dividend paying stocks. Kaye, is a CFA, which indicates that he knows his way around a company's financial rations as well as the yield curve, which is important now that it is inverted, with all that suggests. Kaye's first report is just the kind of thing we look to do here at the Hoe. He focused on high yielding stocks with solid finacial ratios that ranked high on S & P's Fair Value screening, which amounts to a sorting out stocks that trade at a discount to the current market overall. The screen rates elements of each company's intrinsic value, such as the quality of earnings, growth rates, return on equity and price to book value. Next, Kaye screened for stocks yielding more than 7%, which is just the kind of thing we look for at The Yield Hoe, as well as, companies that pay no more than 70% of earnings out in yield. Stocks include CDL, IMH, RIN and PCU (a Yield Hoe favorite). The second report screens for moderatly high yielding stocks with a measure of safety to their divdends based on the overall S & P ratings, and their above average historic dividend growth. The idea that dividend growth is the best measure of safety to the dividend leaves us a little cold. Nonetheless, stocks here include BAC, BOH, C, NXL and PFE
Tobacco Companies Take a Hit, VGR Yields Over 9%
Recently, New York's Southern District certified a class action against tobacco companies, or "Big Tobacco", as if there is a "Small Tobacco" selling loose stogies on the side of the road. Several companies are named in the suit, including the biggest in the space, MO, with its nice steady moderate 4% yield. However, another of the companies named and hammered in trading after the fact is The Vector Group, a small tobacco company with a market cap of t just under 1 billion in an industry that averages 6 billion. But VGR is yielding something that appears TGTBT, a dividend of more than 9.20% per year.
Vector Group (A/K/A "Brooke Group"), is symbol: VGR is a holding company with a few irons in the fire, including the packaging and sale of several off brand, discount smokes in a strong distribution chain that includes candy stores and military bases. There brands are listed as follows: "LIGGETT SELECT, EVE, JADE, PYRAMID, USA, and various private label brands." VGR also owns 50% of the Douglas Elliman real estate brokerage in New York city, as well as a Sheraton Hotel in Hawaii.
The chart for VGR shows that it's bouncing off it's bottom Bollinger Band after getting hit with the rest of the companies named in the law suit for marketing "Light" cigarettes as more safe to smoke than regular brands. From 2003 it is down from 40, and from 2004, it is up from 10 dollars per share.
VGRs p/e is more than 25, which is not exactly cheap, with its industry average trading at 16; but who among us is paying shareholders 9% to wait?
VGR has options, but they are thin on the call side, but a heavy open interest in 14.50 level Feb 07 puts, for those included to buy a little downside protection, just in case people stop smoking on in 130 countries, and the south pole.
Holders of VGR include Carl Icahn (who bought 11 million shares this past July), along with Schwab, Vangard, and several other heavy weights, which is to say, buyers would not be going it alone.
VGR's trailing 12 month gross margin is higher than its industry peers, and so is it revenue per employee, and return on assets, all good things.
VGR's trailing twelve month profit margins are better than its average 5 year profit margins, which is also a good thing. It's peers are generally in as good or better position, but without as dramatic improvement as VGR.
But then again, VGR is also more leveraged than its peers, with a string of press releases that show a willingness to sell off its attractive cashflow in the form of seconday offerings, and funky senior note, and convertable bond deals, and more shares outstanding than ever. See the MSN newsfeed here.
Now, we are not Booya Boy, but this would typically indicate that something stinks, and it's not necessarily smoke.
So, I get a call, and a guy says, "VGR"? What do I say-- "no thanks, I'm trying to quit?" Hell no: I say a company that sells tobacco in a very nervous world, and forwards 9% to shareholders each year may be worth its weight in smoke. But I also say, speaking of profits going up in smoke, a smart sap would make sure he mind his stop limits and price out and consider picking up those puts options on an up day if you'd like a little downside protection.
What is NAT and how does it pay people 12%?
NAT, is Nordic American Tanker Shipping, Ltd. The name says it all-- double hull oil tankers, based in Bermuda, with shares on the NYSE, yielding more than 12%. On first gulp, it appears to peg the TGTBT meter (or the instrument that whispers, "is this to good to be true?" in our ear).
Recently (July, 2006) NAT's revs were up 20% from last year, as a shipping CEO explained on CNBC. It appears that "old tankers are being phased out..." and "the demand for oil is rising....". NAT's CEO has a streaming video on the company's website.
Moreover, the world's largest shipping banks just gave NAT 500 million line of credit to buy more boats (we know, we know "ships"). The company's PR suggests this is a positive thing, and not like giving a strange man rope with which he may or may not hang himself.
So why has NAT taken a beating over the last few weeks, along with its peers? Grandpa used to say: "don't tell me who you are, tell me who your friends are," which is an important insight here. NAT's peers are companies such as FRO, GMR, OMM, OSG, TNP and VLCCF, some of which yield a lot and some which don't.
A "C-level" executive of Genco (GSTL, which is forking over wopping 10% yields) was on CNBC Friday the 23rd of September after a presentation at Jefferies, pounding the table on his sector, and underlying the difference between changes in the price of gas, and the underlying demand that drives the tanker biz. His thesis was the same as NAT's CEO: the demand for oil (China and India of the 4 BRIC coutries) remains the strong whether it's 77 or 55 dollars a bucket, which means that tankers will do well for the next several quarters.
On the other hand, there is plenty' O bad press on dry bulk shipping and tankers alike. For example, take Stephan Ellis' comments at The Motely Fool. Stephan is holding his nose at a newly minted Dry Shipping company called DryShips in a report with a catchy title called, "Dry Ships: An Investing Ship Wreck", which sounds a little personal with respect to the CEO head honcho of General Marine. Ellis quoted someone, who was quoting someone, who heard the guy say that he took his company public because American investors are stupid, making it as good a time as any to sell off the company to the saps. But is this a good reason to stay behind your 10 foot pole on these babies?
On the charts, NAT has been beaten down to China Town. Other have made notes about it. For example, a man calling himself "Oliver Schwinder" on the website SeekingAlpha.com (which also offers "Free Canadian Stock Reports" on its homepage ) has pointed out, and gone so far as to predict a rebound in the sector, whether or not the democrats take the congress and Cramer likes his oatmeal. This story actually was fed to yahoo and posted as a headline story under NAT and his peers "News" section. Oliver's "Disclosure: The author has long positions in FRO, GMR, OMM, OSG, TNP and VLCCF."
Alot has been said that reflects on the danger to the dividend, but here at the hoe, we try to dig a little deeper on these things. So how does NAT look next to his peers on the basis of earnings, profit margins, revenue growth, debt ratios and the host of fundimentals that count to those who count? Well, we are working on a new way to table these kinds of insights, but for now, let's just lay it out, like Astro Turf in the New Orleans Supadome:
NAT is rocking a 42% (net margin) with a P/E ratio of 9.4, versus. its peers (from top to bottom by market cap)
Symbol (Net Margin); P/E
- TK (16%); 10
- FRO (43%); 5.9
- OSG (37%); 6.4
- CKH (17%); 9.5
- TNP (43%); 5.1
- GSTL (47%); 9
- VLCCF (31%); 10.5
So NAT is no more stinky than the rest of the class with respect to how much it keeps and how much an investor will pay per dollar of earnings.
How does Revenue growth calculations look for NAT, versus its class? NAT's revenue growth has been around, 100% with EBIT Margin of more than 60%, which leads the field. CKH is as high, but CKH's Ebit Margin is nowhere near NAT. So NAT also looks good in the gross earnings and all vital growth areas. FRO, TK GMR, BULK and VLCCF are shoing negative growth, so if you are looking collect yield in any of these, understand that their revenue growth is trailing the field. OSG is growing, albeit slowly, as is TNP, OMM, TBSI and MCX, which all have solid Earnings yield.
NAT profit margins, versus its 5 year profit margins rock the 40% to 50% range, as do VLCCF, TRMO, EXM, FRO, TNP, OSG, GMR and OMM. Again, NAT looks great.
Who holds NAT? Click here to see. It is always a good idea to see who may be ponying up with. Major holders include some big brand name Mutual funds, such as Royce, Penn, Kayne Anderson, and American Century. Big institutions include Bank of America, UBS, and Morgan Stanley.
So there is NAT, bouncing off its bottom Prof. Bollinger band, with its moving averages crossing over each other like pigtails, kicking off 12.90% yield. So if you are thinking of loading the boat on NAT (stop me before I pun again), remember those stop limit orders to protect any yield you do manage to extract from the high seas here, and of course, options are also tools to lock up the yield that Nordic American Tankers pays investors to wait. Now, if we would only take our own advise, we might be okay.
PCU or Southern Copper Company Yields Greater than 8%
High in the Andes Mountains of Peru and in parts of Mexico too, the Southern Copper Company, symbol: PCU, mines for Copper, Zinc and Silver, along with Gold, Coal and other minerals. Back on the New York Stock Exchange, it's ADR shares offer an outsized yield of more than 8 percent that appears almost TGTBT (or "To Good To Be True") at first glance. Since 2003, it's up from 25 to near 100 today, and trades at a P/E ratio ranging from 7 to 11 over the last year and currently sits below 8, which is well below its peer group of dirt diggers.
PCU has had a run up, which mirrors the motion of its gross annual margins and net annual revenues, measures that have spiked with the demand and price of copper over the last three years. It's gotten enough attention from the financial media, and from other, more critical outlets. So its not exactly a big secret.
Nonetheless, currently PCU trades below it's 50 day moving average but above it's 200 day average, which suggests a good place to plough in. It's net margins at 36%, are among the highest in the industry, topping the industry's biggest player measured by market capitalization, BHP Billiton, which enjoys a net margin of 27% and a P/E of 14, as well as, Freeport Mac's 29% net margin, with it's P/E of 9.
PCU's EBITD Margin (near 50%) and Earnings Yield (near 40%) verses its Revenue growth (near 50%) are above average, and look good next to its peers, which included these symbols-- RIO, EZM, TCK, RTP, ACH, and FCX. But it really shines where its profit margins outpace their five year average, showing great profitablity vs. its peers. PCU has moderate debt (near 35% to 40%) vs. its peer group; but a Return on Equity of more than 50%, which tops most of its class.
Television personality Crammer, has pumped the stock under is Booyahboy brand, and today, options expert and guru, A Bernie Schaffer reporter issued a green light on PCU under its "contrarian takeaway" series in Investor's Business Daily. On 9/11, 2006, Reuters upgraded it, as did Marketedge earlier on 9/5 and Thomson Financial in late August.
The general thinking here is that China is going to be entering the market to buy more Copper, which is consistent with the popular investment theme of capturing the eye popping demand from any or all of the big four BRIC countries (Brazil, Russia, India, and China) that sharpies are talking up at places like Goldman Sachs. The demand there appears strong, and will be so for the forseeable future, as economies in China and the rest leap frog to first world levels of production, and Biggy sized Burgers, Fries and Colas, a laptop and maybe car for everyone.
How safe is the yield on this copper, gold, silver, zinc mining machine? It's a good question, and something keep an eye upon (along with estimates and headlines from China's about the demand for Copper). Of course, if you don't want to review orders for copper on a regular basis (and who wouldn't?), placing a stop loss order under your purchase price could help you sleep a little better at night, if you were to park the money in it. There are also active calls and puts on PCU, which is to say you can buy or sell a little downside protection if you'd like to spend the time sorting through options tables on PUC to find a series that fits. The Jan 100 calls, for example will pay you 4.30 ($430) to write on ever 100 shares. So there you have a greater yield, and protection in the event of a decline in PCU's shares by Jan 2007.
In conclusion, you have a copper company, selling its products to the big BRIC countries, that's trading below it's lower bollenger band, that's yielding more than 8% (Schaffer's reported 10%, but I don't see it), and that has calls that will pay you a nice bit more to wait til January. The dividend is not a the nature of a REIT, and so it's not disqualifited for favorable tax treatment. Sounds TGTBT? We'll it's copper, not Enron.
So let's role play-- what am I goig to say if a guy rings me on my phone and says, "hey, I just bought 100 of this PCU toilet paper, and wrote one Jan 2006 95 call for 6. That means I get more than 8% yield (or about 700 dollars per yea from the companyr), and another $600 dollars from the options exchange, next year after the Holidays (which is taxed next year, at a qualified dividend rate of 15%), which also amounts to downside protection to the 83 level, where I can set a stop loss order? Who'se better than me?" What can I say? I'm going to tell him, Tiger Woods is better than you, but he has to practice. Nice trades, maybe.
New Century Financial's 19% Yield from its Option ARMs Mortgage Business
Mea Culpa-- what we originally cobbled together and wrote about NEWs business was JUST WRONG. In our search for worts on NEW's stock price and high yield, we were mislead to conclude they write many interest only mortgages. I thought the risk in NEW was Option ARM related, but it clearly is not. It's 19% yield is not subject to the Option ARM lending issues (which are being addressed in Congress).
NEW is not in the Option ARMs mortgage business to any large degree, and so our conclusions about its massive yield were off base in this respect. As the company's Media Relations Director pointed out, NEW's Option ARMs business is less than 1% of its business which is much less vs. companies writing mortages.
However, Businessweeks published a list of subprime lenders, companies with a high level of Option ARM business, and guess what-- NEW is not on the list.
See, the list here.
We are in the process of contacting the company to get the facts straight, and sort out the risks (if there are any) of getting paid 19% yield on NEW shares.
Original, mistaken report:
At first look, New Century Financial (NEW) may look TGTBT (or "Too Good To Be True" as we like to say here at The Yield Hoe). And if you read the cover story in Businessweek (Sept. 11, 2006 issue), you may find plenty of reason to just walk away from the temptation of NEW's it's massive, juicey and otherwise wopping 19% yield.
Since it's October 1, 2004 move up from the NASDAQ to the NYSE, it's price has faced a bit of a drop, well below it's 50 and 200 day moving averages, which is generally a sign of a good place to buy if the company's is not in deep stuff.
Turns out the NEW sells something not so new in subprime mortgages. What is new is that massive roll out of these exotic mortgages to folks who don't have the best credit rating. (WRONG) These Option Adjustable Rate Mortgages, ("or Option ARMs"), as they are called are often sold with contract clauses that you might see in a Contracts law book as an example of an one sided deal, where courts see a deal written by a big bank with a lot of smart lawyers as something that can be modified when the consumer is in a poor position to negotiate anything (such as refinancing fees). Businessweek's Mara Der Hovenesian rightly point this out with examples of several cases, including a hardworking Police officer in California who can not afford to refinance but for the fees that his Option ARM mortgage contained.
There are several companys making hay packaging, selling and laying off these notes to hedge funds and other investors. A lot of NEW's earnings come from these Option ARM sales. (WRONG AGAIN) Some experts think it may be a good idea to buy NEW and hedge with options. Stop limit orders are another way to plan your exit before a drop in NEW that could knock that 19% yield down to earth.
For example, if you read options reporter Kopin Tan's view in "The Striking Price" section of Barrons, you'll find a different slant. Tan looks at the pros and cons of NEW as an investment, weighing the outsized yield against the bad news, and rough ride subprime lenders have faced as the Fed has raised rates almost 20 times over the last two years. Tan asked around, and a few options bookies (not Option ARMs (not relevant), but the other kind-- the right, but not the obligation to buy or sell an underlying security at a given price) even think writing calls on NEW is a good way to collect more rent for parking your money here and give you downside protection, as they say. Maybe even a few Puts to offset your downside risk on NEW, in the event maybe Congress goes democratic this fall, and they start cleaning up this profitable little mortgage lending nook to release hardworking people from loans they can not refinance without paying way too much. Many think the risk to NEW's dividend is factored into its price, which makes sense. Maybe an careful investor may want to buy NEW, write the calls and collect the premium, and use it to buy puts, for further downside protection against the risk of rising rates, and do good democrats.
As a REIT, NEW stands out among it's comps in a few ways, including a outsized total debt to total capitalization ratio, which tops 75%, verses it's very respectable Return on Equity, which tops 20% .. These include. Profit margins seem steady for NEW over the last five years, verses it's last 12 months, which is so so. On the plus side, NEW has both high revenue growth (almost 50%) and high earnings yield when looked at next to its peer group. It's peers include other real estate investment trust, such as H, SLG , AIV, SFI and more, which The Yield Hoe will be covering in upcoming episodes.
What's the bottom line on NEW? As always, that is up to you, but if you are looking to load the boat on NEW, in spite of its big debt ration, we'd keep those stop limit orders tight like a drum, to protect that downside from taking back what NEW offers via it's great big return from its offbeat dividend yield.See, Feb. 7, 2007 posting for an update on NEW's massive drop.
