Pick of the week 9/2/2019

Preferred Stocks – Pick of the Week

Summary

  • The market is trying to determine whether we are going into a recession or if we are about to enter a new phase of growth.
  • Even though America is, or soon to be energy independent, the energy industry is lagging.
  • I introduce 3 midstream energy preferred stocks that offer high yields with various risks to go along with it.

This article was written by Rich Hill

“I Prefer Income!” has a Preferred stock & ETD database program with over 640 preferred stocks & ETD (exchange traded debt securities).  The list is updated daily and contains more than just a simple list of names.  There are 37 fields of information, including demographics and important financial metrics to help the member dig a little deeper when doing research on individual issues.  The metrics include earnings, payout ratios, debt ratios, dividend metrics and Credit Ratings from Moody’s and S&P on the individual preferred stocks and ETD securities.

The Pick of the Week is written to provide information on various preferred stocks and ETD that I feel might be of interest to our members and other interested visitors.

The stock market has not been able to determine whether we are going into a recession or if we are ready to enter a new phase of growth.  As a result, the market has been volatile and somewhat rudderless.  It appears the market is focused on the Fed and interest rates; and also on China and the tariffs.  There is no doubt that the economy has done very well over the last couple of years and unless we talk ourselves into recession, there are good reasons to believe the economy can continue its march forward.   One of the reasons for such as good economy is the energy industry.  We are, or will soon be, energy independent.  That should be good news to the oil and gas industry, including MLP and midstream companies.  However, it appears that the market has concerns about the industry going forward.

I remain guardedly optimistic; however, for those that are on the sidelines until the dust clears, income investors may want to consider some of the preferred stocks that offer high yields with less risk.

Therefore, for the current Pick of the Week, I have selected 3 preferred stocks that are MLPs or Midstream companies that are priced below $25.00, with yields above 6%, have stock dividend payout ratios below .90 and preferred dividend payout ratios below .3.   It turns out that all issues have floating rates that start on their call dates. The earliest call date is 12/15/22 by NS-C.   I should also mention that all of the preferreds issue K-1 tax forms.

As is my practice, I analyze the securities I am interested in by reviewing 5 important financial areas: Earnings, Payout Ratios, Debt Ratios, Dividend Metrics and Credit Ratings.  These metrics are grouped and highlighted with different colors.  This gives me a great first review of the issues and lays the foundation for further analysis.  My goal is to uncover solid choices that meet my requirements for safety and reliable / sustainable income.  The 3 picks for this week are located in the table below.

Preferred Stocks

(Source, I Prefer Income)

To read the table properly, the Parent company is located in the top row with grey background.  The preferred stock issue is located directly underneath.  All metrics are on the parent as they are responsible for the preferred stock.  However, the credit ratings are on the preferred stock.   Here is information on each parent and issue.

DCP Midstream, LP (DCP) is a midstream company that owns, operates, acquires, and develops a portfolio of midstream energy assets in the United States. It gathers, compresses, treats, processes, transports, stores, and sells natural gas.  It also produces, fractionates, transports, stores and sells natural gas liquids and recovers and sells condensate, and transports, stores and sells propane in wholesale markets. DCP has 2 preferred stocks.  DCP-C has a coupon rate of 7.95% and is priced at $24.00 with a yield of 8.3% and Y-T-C of 9.3%.

The metrics are generally favorable.  For earnings, they report 5 profitable (GAAP) years and quarters against no losses.  See table 2 for a comparison of EPS (GAAP) to DCF (Non-GAAP) earnings.   For payout, DCP reports good payout records for dividends, preferred and operating cash flow.  All ratios are comfortably below 1.  Debt ratios are mixed with debt-to-EBITDA being high.  Credit ratings for both the parent and the preferred are below investment grade.  Dividend metrics are steady with 0 growth over the last 5 years and quarters (see table 2).  It should be noted that DCP started paying dividends in 2006 and has never reduced them, even during the great recession.

Preferred Income

(Table 2. Source, I Prefer Income)


Energy Transfer, LP
 (ET)  owns and operates a diverse portfolio of energy assets, making it one of the country’s largest and most diversified midstream service providers with logistics and transportation platforms for natural gas, natural gas liquids, crude oil and refined products.  ET has 3 preferred stocks. ETD-E has a coupon rate of 7.6% and is priced at $24.98 with a yield of 7.6%.

ET metrics are generally favorable.  Earnings show a perfect record of 5 years and quarters of GAAP profits with no losses.   See table 3 for comparison between EPS (GAAP) and DCF (Non-GAAP) earnings.  ET has been involved with recent mergers so not all DCF figures are available.  Payout ratios are excellent with all 3 payout ratios comfortably below 1.  Debt ratios are mixed with Debt-to-EBITDA being higher than management and most investors would like to see.  Credit ratings are below investment grade.  Dividend metrics show a small amount of growth over the last 3 years.  Table 2 shows 5 years and 5 quarters of dividend history.  ET also has been designated as a Dividend Diamond, having increased their dividend for 13 consecutive years.

(Table 3, Source, I Prefer Income)


NuStar Energy LP
(NS) is a master limited partnership and one of the largest independent liquids terminal and pipeline operators in the nation. NuStar currently has approximately 9,800 miles of pipeline and 74 terminal and storage facilities that store and distribute crude oil, refined products and specialty liquids. The partnership’s combined system has approximately 74 million barrels of storage capacity, and NuStar has operations in the United States, Canada and Mexico.  NuStar Energy has 3 preferred stocks and 1 ETD.  NS-C has a coupon rate of 9.375% and is priced at $23.72 with a yield of 9.5% and Y-T-C of 11.1%.  This makes this issue tied for the highest yield and the highest Y-T-C of all preferreds in the list.

NS metrics are mixed.  GAAP earnings show 4 years of profits and 1 year of losses.  Quarterly GAAP earnings report 2 quarters of profits and 3 quarters of losses.  However, the Non-GAAP earnings are much better with a 5 years and quarters of positive results.  See table 5 below for a comparison between GAAP and Non-GAAP earnings.  Debt ratios are the highest (worst) among the 4 companies in the list with debt-to-EBITDA of 11.7 and debt-to-equity of 1.9.  Credit ratings are below investment grade.  Dividend metrics mixed with a negative 3-year dividend growth record.  The good news is that since 2004, they grew their annual dividends every year until 2012.  NS kept the dividend stable until 2017 and then reduced it in 2018. So, over a span of 15 years they have raised their dividend many times and reduced it once.    The payout ratios are favorable with all 3 ratios comfortably under 1.

It is fair to say that NS is currently in a turnaround stage and reporting progress.   After the 2nd quarter, Brad Barron, president and CEO stated “. “All our key indicators were up in the second quarter, including net income, total pipeline and storage segment revenue, earnings before interest, taxes, depreciation and amortization (EBITDA), and distributable cash flow (DCF) available to common limited partners.” Barron noted that NuStar has continued to substantially improve its debt metrics,  say that “I am very pleased that we were able to close on our sale of the St. Eustatius operations at a healthy double-digit multiple in July, and that sale, along with the EBITDA improvement evident in our results for the quarter, has allowed us to lower our year-end 2019 Debt-to-EBITDA ratio projection to 4.1 times.”

Preferred Stocks

(Table 4, Source, I Prefer Income)


In summary
, all 3 preferreds stocks provide the investor with 3 high yield investment choices while the market is trying to figure out if we are headed for recession and also whether or not the energy industry is one than can be depended on for the foreseeable future.  All 3 companies have positive metrics to support a buy; including payout ratios, Non-GAAP earnings and good dividend records.  However, all 3 are below investment grade (not unusual) and have high debt metrics.  The good news is that America is becoming energy independent and the need for energy will continue for many years (decades) to come.  I prefer not to give recommendations, but I think the yields indicate how safe the issues are.  ETP-C is probably the most conservative choice with NS-C have the most risk.  However, if you are looking to add a little spice to your portfolio, take a deeper dive into DCP and NS and you might be surprised at what they are doing and the progress they are making to improve all metrics.

Thanks for reading.  To view the complete list of all preferred stocks & ETD securities, go into Dividend Kings and click on Tools and Preferreds Tracker.  The list is long, so you will see 2 tabs at the bottom of the tracker.  These tabs will allow members to sort by parent and industry.

(Disclosure.  I own preferred stocks from all 3 companies in the article)