FAQ: Regarding your article, “Warning: The Master Limited Partnership Business Model May Not Survive…”
September 29, 2015
Q: Regarding your article, “Warning: The Master Limited Partnership Business Model May Not Survive,” – what are you basing your comments on financial engineering the dividend on? It seems to me that Energy Transfer Equity has enough free cash flow to cover its dividend with a 1.2x coverage ratio. Am I missing something? A: Thank you for your question. Most master limited partnerships and midstream corporates do not cover their distributions and dividends, respectively, on a traditional free cash flow basis, as measured by cash flow from operations less all capital spending. That means that such payouts are being financed in part, some more than others, from the cash flow from financing section of the cash flow statement, hence the term financially-engineered.
Biotechs Bruised
September 28, 2015
Biotech stocks, in general, are more volatile than the average stock. Small-cap stocks (VB), in general, are more volatile than the average stock. Small-cap biotech stocks then may very well be the most volatile of any grouping of stocks. Unfortunately, the recent direction of volatility across equities in the biotech arena has been of the sharp, downward variety and has been most unwelcome, amid a broader market decline. Mr. Market is having a temper tantrum, but all the while, he may have every right to be upset. The iShares Nasdaq Biotechnology ETF (IBB) is perhaps the best proxy for the market’s appetite to bet on the development of long-term drugs and therapies. The industry ETF, which sports a trailing price-to-earnings
Warning: The Master Limited Partnership Business Model May Not Survive
September 28, 2015
Warren Buffett has famously said that, “only when the tide goes out do you discover who’s been swimming naked.” We now know what’s been swimming naked, and it’s the master limited partnership (MLP) business model during the latest downdraft of this energy cycle. A tremendous fall-out may still be ahead for MLPs, unfortunately, as energy markets weaken and as credit markets tighten. We now believe the financial operating structure of the MLP may not survive in its current form, even as we say that most businesses using the MLP model are good ones. Our view continues to be that most master limited partnerships including Energy Transfer Partners (ETP) and most midstream corporate business models including Kinder Morgan (KMI) are dependent
Dividend Increases/Decreases for the Week Ending September 25
September 27, 2015
Below we provide a list of firms that raised/lowered their dividends during the week ending September 25. The dividend reports of covered firms on this list will be updated shortly with the new information. To access our dividend reports use the ‘Symbol’ search box in our website header. Firms Raising Their Dividends This Week Accenture (ACN): now $1.10 per share semi-annual dividend, was $1.02. AltaGas (ATGFF): now C$0.165 per share monthly dividend, was C$0.16. FNB Bancorp (FNBG): now $0.15 per share quarterly dividend, was $0.13. Hingham Institution for Savings (HIFS): now $0.30 per share quarterly dividend, was $0.28. Lockheed Martin (LMT): now $1.65 per share quarterly dividend, was $1.50. Masco (MAS): now $0.095 per share quarterly dividend, was $0.09. New
Janet Yellen, the Positive GDP Revision, and Nike’s Swoosh
September 25, 2015
Though it may seem much worse, the S&P 500 (SPY, DIA) is down only a few percentage points from the all-time highs set in May this year. We continue to remind equity investors that the US stock markets have roughly tripled from the March 2009 panic bottom only six short years ago, so further declines in the form of profit taking may still be ahead. However, the throngs of investors looking to “get back to even” before selling may account for more overhead supply than we care to admit. Returns have been so wonderful in yesteryears’ upward-sloping bull market that even flat equity market performance may become unbearable going forward, adding to yet more selling pressure. The swoon in late
Caterpillar Prepares for Continued Pressure; Slashing Our Fair Value
September 25, 2015
Caterpillar’s (CAT) shares have taken a substantial hit following the firm’s restructuring and cost reduction announcement September 24. The slowing economy in China, the largest market for construction machinery in the world, has infected the export-dependent countries of Brazil, Canada, and Australia, resulting in severe weakness in mining activity and construction sales, almost everywhere on the globe. OPEC’s dedication to putting US producers out of business has wreaked havoc on the price of oil and orders for oil-related applications. Cat Financial’s exposure to increasingly weaker credits in the mining and energy arenas, however, has us most concerned. We’ve materially lowered our fair value estimate as a result. Caterpillar’s cost reduction plans will begin in late 2015 and are indicative of
Recent M&A Activity
September 25, 2015
Amid the recent market volatility, firms have remained active in M&A. Let’s take a closer look at what companies will be joining forces. DENTSPLY and Sirona to Join Forces DENTSPLY (XRAY) and Sirona Dental Systems (SIRO) announced September 15 that they have entered an all-stock merger agreement. The resulting company will be the world’s largest manufacturer of professional dental products and technologies. Under the proposed agreement, Sirona shareholders will receive ~1.8 shares of DENTSPLY for each existing Sirona share. If the transaction receives regulatory and shareholder approval, it is expected to close in the first quarter of 2016, and the combined company expects the merger to be accretive to adjusted earnings per share for both companies’ shareholders in the first
China, Petrobras and the Circling Sharks
September 24, 2015
The Federal Reserve meeting last week came and went, and now the markets are back to focusing on fundamentals, as they should. The problem for equity investors, however, is that the fundamentals aren’t great, and it is becoming increasingly more difficult for even the most bullish investors to find reasons for optimism, at least in the near term. The economic environment in China (FXI) continues to worsen. We outlined our grave concerns regarding the implications of its collapsing stock market on the health of the country’s property market, and the resulting consequences on China’s largest banks. Commodity-linked entities in China continue to feel pain, and the preliminary reading on the Caixin China manufacturing purchasing managers’ (PMI) index fell to Financial
FAQ: The Wider the Moat, the Lower the Return, Right?
September 21, 2015
Q: The wider the moat, the lower the return, right? A: Yes, that’s correct. Morningstar’s very own data from 2002 through 2012 shows that “no” moat stocks are the best performers. A former colleague of mine, Morningstar’s Warren Miller noted the following in his January 11, 2013 piece titled, “How Our Stock Star Ratings Have Performed:” Figure 3 further illustrates the idea that using moat ratings alone will not yield outsized returns. In fact, the wider the moat, the lower the return. There it is. Go ahead, look at Figure 3 (1). It shows that “no” moat stocks outperform “narrow” moat stocks, which outperform “wide” moat stocks. We don’t think Morningstar is doing anything wrong talking about moats, but we
Dividend Increases/Decreases for the Week Ending September 18
September 21, 2015
Below we provide a list of firms that raised their dividends during the week ending September 18. The dividend reports of covered firms on this list will be updated shortly with the new information. To access our dividend reports use the ‘Symbol’ search box in our website header. Firms Raising Their Dividends This Week Artesian Resources (ARTNA): now $0.2216 per share quarterly dividend, was $0.2183. Blackstone Mortgage Trust (BXMT): now $0.62 per share quarterly dividend, was $0.52. Citizens Financial Services (CZFS): now $0.41 per share quarterly dividend, was $0.405. Elmer Bancorp, Inc. (ELMA): now $0.33 per share semi-annual dividend, was $0.32. The First of Long Island (FLIC): now $0.20 per share quarterly dividend, was $0.19. Golden Enterprise (GLDC): now $0.03375
