Tag Archives: income

Suburban Propane: Better Alternative To AmeriGas

Summary Recent operating history between the two companies is incredibly similar. Long term, shares have traded in tandem. However, Suburban Propane has diverged recently. SPH seems better valued on most valuation methods. If you have to have one, choose the better value. My research on AmeriGas Partners (NYSE: APU ) took a little heat from Seeking Alpha readers. So rather than presenting just the negative case for AmeriGas, I’d like to show Suburban Propane Partners (NYSE: SPH ) as a possible, better alternative for investors looking to establish a new position in companies within this industry. Suburban Propane Partners is a distributor of propane and various refined fuels to more than a million customers throughout the United States by way of its extensive distribution network. The vast majority of the company’s sales are to residential customers who have very few alternatives for heating and cooking within their homes. While propane is generally more expensive on a BTU basis than alternatives like natural gas, it does have the advantage of being easily liquefied and transported. This characteristic makes it ideal to be sold to customers in rural areas with no alternatives other than electric heat or fuel oil. However, unlike peers like AmeriGas Partners, Suburban has diversified its operations to some degree. The company also sells fuel oil, kerosene, and diesel fuel (direct competitors of propane) in the Northeast and also sells natural gas and electricity in the deregulated New York and Pennsylvania markets. While the Propane segment constituted more than 80% of 2014 revenues ($1.6B of $1.9B), the added diversification here should let investors sleep a little bit better at night than pure-play alternatives in the sector. Operating Results Revenue is set to fall dramatically in 2015 because of cheap propane prices as propane reached a high of $3.69/gallon in February of 2014 compared to a high of $2.37/gallon in January of 2015. Investors should note that Suburban’s fiscal year ends at the end of September, so there is no risk to the above estimates due to a spike in price as we start the winter heating season. Operating income has remained stable, however, as the company passes along the costs of the underlying commodity to consumers, taking a fairly fixed margin. In periods of lower prices, like what occurred in 2015, SPH can actually achieve higher gross margins as there is little risk of consumers reducing consumption or switching to alternatives. Expected 2015 operating margins are in line with AmeriGas. From a cash flow perspective, the story here is also very similar to AmeriGas. Both businesses have very little in the way of capital expenditures, so the vast majority of distributions go to shareholders. Both companies made game-changing acquisitions in 2011/2012, resulting in larger cash flows in following years. As a refresher, AmeriGas picked up Heritage Propane and Suburban bought Inergy Propane. At face value, Suburban got a better deal, paying about 10x EBITDA while AmeriGas coughed up 11x for similar assets. Both deals were built around the same idea: larger customer base, new geographies, increased economies of scale resulting in synergies, etc. One area of concern for investors to consider when weighing Suburban Propane versus AmeriGas is the leverage involved. While Suburban has the smaller debt load, it is also a smaller company. Suburban coughed up 46% of 2014 operating income towards interest payments compared to 35% for AmeriGas. This has been a long-term trend that has likely contributed to the premium AmeriGas shares have generally commanded compared to Suburban. SPH will likely take the opportunity to refinance its 7.375% senior notes due 2020 and 2021 in a few years ($750M in face value) when there are no penalties on calling at face value if interest rates remain low for interest rate savings. If the bond market remains as it is for the next few years, the company will be able to shave 1.5% off the interest rates assuming similar terms. This will result in tens of millions in savings in annual interest expense, which could free up cash flow for debt retirement or dividend increases if management chooses to do so. Conclusion Over the past two years, SPH has diverged significantly from its larger peer, APU. They’ve largely traded at similar yields (7.44% five-year average for Suburban, 6.99% average yield for AmeriGas), but this spread has expanded noticeably over the past year. This premium has likely widened due to investors buying into the dividend growth at AmeriGas. Investors appear to be ignoring the sustainability of those increases going forward. Suburban has taken the safer route, electing to hold the dividend stable rather than increase the payout in an industry that is facing dramatic change. TTM profit and operating margins remain higher at Suburban Propane, and the company appears to be the better bargain on metrics like Enterprise Value/EBITDA. Because of this disconnect, investors can now capture over 10% yield on Suburban Propane compared to AmeriGas’ 8.3% yield. In my opinion, these two will return to historical yield spreads once the market realizes large future dividend increases are off the table for both. If this is the case, investors in Suburban Propane should enjoy higher payouts while having better preservation of their initial capital investment compared to AmeriGas if buying at current share prices. So, for investors that really do want exposure to this market segment and are wanting to start a new position, I believe Suburban Propane is the better value play here over the next five years. You would be buying into a better yield today dollar for dollar, better margins, a little added business diversification through the fuel oil/deregulated energy business segments, and be partnering with a management that has a less aggressive style.

$100,000 Investment Into Yearly Income: The Southern Company Example

Summary A dividend strategy is essentially turning investment into a yearly income stream. Boring utilities stocks can help you generate great levels of wealth. Here is the way it can work for you. In the article “Can A $100K Investment Produce A $50K Yearly Income? Walking The Model Step By Step” I introduced a model to generate an ongoing income steam through initial investment of $100,000 and by reinventing the net dividend flow. There were many comments and feedbacks to this model and I thank all commentators for their good inputs. One key concern that was raised was that achieving a $100,000 worth of savings is almost an impossible challenge these days. Well, I will fool you not. Getting to a significant amount of wealth is not an easy task. It requires both discipline and setting straight the priorities. There is no magic here. In order to achieve significant amount of savings one must put aside a portion of his income. These amounts can be either fixed or it can change from week to week or month to month. Nevertheless there should be constant contribution. In order to achieve something there must be a goal. A goal should be set realistically based on the ability to routinely contribute to the accumulated wealth. In the next example I will continue to use the $100,000 as the goal. After we set our mindset straight and agreed to take responsibility over our spending and savings, and after we set up a goal that is reasonable to achieve, how can we generate wealth using dividend investing strategy? The example of The Southern Company I decided to use The Southern Company (NYSE: SO ) as an example as it is conceived as a boring type of investment. It is less exciting from the growth machines out there but it can definitely fit to our purpose of generating wealth. SO is a holding company that operates in the South East counties of the U.S. It owns Alabama Power Company, Georgia Power Company, Gulf Power Company, and Mississippi Power Company, each of which operates as a public utility company. SO is the 16th largest utility company in the world, and the fourth largest in the U.S. It serves more than 4.5 million customers in Alabama, Georgia, Florida, and Mississippi. The company was founded back in 1945 and began paying quarterly dividends in 1972. SO never had a dividend cut and has been steadily increasing its dividend since the year 2002. An investor who decided back in November 2005 (ten years ago) to regularly invest in SO, to routinely invest $450 per month and buy more shares. And alongside during this period, each quarter he reinvested the dividends after tax to buy more of SO’s shares he could have reached the $100,000 goal by the end of 2014. Even after the 2015 correction in the Utilities’ stock prices he would have reached the goal again by the month of September 2015. It means that based on these particular assumptions the goal was achieve after nine years. Let’s see how it worked in more details. The investment Since SO paid a quarterly dividend through the assumed period, the investment is built out of two elements: the first one is the monthly contributions of a fixed $450. That means yearly contributions of $5,400 each year. The second element is the dividends net of 25% tax rate which have constantly grew from year to year. The higher dividends together with the higher number of accumulated shares delivered an everlasting growing purchasing power to buy more shares. As we can see in the next graph, during the recent years the dividend became a significant portion of the yearly investment and by 2014 it was about 40% of the $8,568 yearly investment. The shares accumulation The monthly contributions allowed to constantly increase the amount of shares but the accumulation was highly dependent on the share price. The next graph shows the yearly stock price average during the recent ten years alongside the accumulated number of shares during each period. At times of high stock price the accumulation power was lower. The situation of the zero interest rate brought the stock price to recent highs and by that reduced the buying power of the routine contributions. In a scenario of a hiking interest rate we might see SO’s stock price going down and by that a fix accumulation will allow to purchase more shares. The total investment value: The dividend yield went down from the levels of 6-7% in the years 2005-2009 to the levels of 5% in the recent years due to the stock price hike. But this exact hike also drove the holding value to higher levels and led the total value to exceed $100,000 by December 2014. If indeed the interest rate hike will arrive soon (and it depends how high it would reach in the next couple of years) the value of the portfolio will be highly volatile and might go down in value. The income: Which brings us to the last piece. The accumulated holding at the value of $100,000 generates in 2015 a yearly net income of $3,566. As this machine will continue to work it would grow its income power even higher. Even if the stock price will go down due to a FED’s action the power of time and reinvestment will allow to accelerate the income machine even faster (as lower stock price allows to accumulate more shares). If you are interested in the excel model behind this example you can find it here . Conclusions: Even a boring type of investment like SO can serve well the patient investor to generate wealth using a sound dividend investment strategy. Dividend strategy cannot depend on a sole stock and should be based on a diversified portfolio. The monthly contributions should be aimed towards high quality stocks that face temporary headwinds but have long and proven history. Nowadays this list may include companies like Chevron (NYSE: CVX ), ConocoPhillips (NYSE: COP ), Deere & Company (NYSE: DE ), Eaton (NYSE: ETN ), Johnson & Johnson (NYSE: JNJ ), HCP (NYSE: HCP ) and other names from the Industrial sector. A consistent strategy of constant contributions and dividends reinvestment will allow to obtain sound results overtime. There would be those who would criticize the length of the time required to achieve the goal at it was shown in this example. As mentioned earlier: there is no magic here. In order to accelerate the accumulation and reduce the length of time the monthly contributions should be higher. For example, a monthly contribution of a $1,000 would have reduce the time by ~40% allowing the goal to be achieved in early 2011 or after six and a half years. There are highly subjective decisions to be made and it will vary from one person to the other, but if the mindset should be set to take responsibility over your financials, a sound goal should be set and the only thing left is to execute the strategy. Happy investing.

QLC: Large-Cap ETF With High-Quality Stocks

Summary QLC is an equity fund focusing on large-cap companies that are financially strong, have low valuation, and have positive performance. I compare QLC’s portfolio to four categories of large-cap ETFs, with a total of 16 ETFs being compared. There are some interesting characteristics to be found in large-cap ETFs that may be of interest in trying to choose an effective investment. A serious all-ETF portfolio needs at least one fund that focuses on large-cap U.S. equities ; arguably, large-cap companies are the mainstay of the American economy and, as a result, large-cap holdings are arguably the mainstay of any portfolio. There are currently at least 118 ETFs that focus, in one way or another, on U.S. large caps. 1 There are a variety of ways of approaching such a target: sector, size, growth, value, dividend yield, earnings, fundamentals – what have you. For its part, Northern Trust Investments ‘ FlexShares Funds recently issued a new fund: the FlexShares U.S. Quality Large Cap Index Fund (NASDAQ: QLC ). As I looked into this fund I found some interesting things that lead me to believe this ETF may have tremendous potential. The Fund The index used to model the fund’s portfolio consists of the 600 largest companies among the companies listed in the Northern Trust 1250 Index . 2 Companies are selected on the basis of three criteria: “Companies that exhibit financial strength and stability relative to the broader universe of eligible securities.” “Securities trading at lower valuations .” Stock that is displaying ” positive momentum .” 3 The weighting applied to holdings is also determined by the three criteria listed above. The fund is rebalanced/reconstituted quarterly. 4 In view of the potential frequency of reconstitution, the ER of 0.32% seems reasonable. There would seem to be the likelihood of a high turnover rate. Distribution of dividends is planned to be quarterly; distribution of capital gains is planned to be made annually. 5 In the table above, my estimate of the fund’s income includes only dividends that may be realized from its holdings as of 6 October 2015. Expenses are my estimate based on NAV (as of 6 October) and ER. The calculation of a dividend yield of 1.80% is based solely on dividend income realized by the fund that would, in principle, be paid to shareholders. 6 ,7 In the course of selecting its holdings, FlexShares manages to maintain diversity in its portfolio: (click to enlarge) Performance As is the case with any new ETF, there is little to go by in terms of the fund’s actual performance. As a substitute, I have been taking the at-the-time current portfolio for the fund and running it back for five years, to give an indication of how that particular iteration of the fund’s index has paid off. I use the weighting for each holding as it is on the day I download the fund’s holding. This may not be exactly precise , but it would be practically impossible to accurately weigh the portfolio’s holdings as they would be weighted by the index over the past five years – particularly when the weighting system is a proprietary one, as it is for QLC . The test is done with an initial $25,000 in funding. The basic performance of QLC ‘s portfolio since 1 October 2010 is reflected in the following chart: (click to enlarge) The growth of the portfolio has been fairly steady, although it does reflect the poor market conditions of the past few months. The total performance over the five years has been 103.85%. By itself, of course, the performance of the portfolio – while attractive – does not give any indication of it compares to the market in general. The following chart compares QLC ‘s portfolio to three indices: the S&P 500 , the Dow Jones Industrial Average , and the Dow Jones U.S. Large-Cap Index . 8 (click to enlarge) The performance of QLC portfolio has been quite nice when compared to the performance of the three indices; it has outperformed the S&P and the Large-Cap Index by more than 300bps , and has nearly 500bps over the DJIA. This piqued my interest. If the QLC portfolio did well compared to relevant indices, how would it look compared to other large-cap-focused ETFs? To see how the performances would compare, I performed four trials: QLC versus Large-Cap ETFs that did not use specialized focus (“straight”). QLC versus “growth” oriented large-cap ETFs. QLC versus “value” oriented large-cap ETFs. QLC versus large-cap ETFs that based selection on specialized criteria (“alternative-factor”). In each case but one I compare QLC to four other ETFs; in the case of “alternative-factor” ETFs there are only three “competitors” – most of these funds are relatively new, with less than two or three years performance to consider. 9 The four straight large-cap ETFs are: iShares Russell 1000 ETF (NYSEARCA: IWB ) iShares Morningstar Large-Cap ETF (NYSEARCA: JKD ) SPDR S&P 500 ETF (NYSEARCA: SPY ) Vanguard Large-Cap ETF (NYSEARCA: VV ) (click to enlarge) The growth-oriented ETFs consist of: iShares Russell Top 200 Growth ETF (NYSEARCA: IWY ) SPDR S&P 500 Growth ETF (NYSEARCA: SPYG ) Vanguard Growth ETF (NYSEARCA: VUG ) Vanguard Russell 1000 Growth ETF (NASDAQ: VONG ) (click to enlarge) The value large-cap ETFs include: Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) iShares Russell 1000 Value ETF (NYSEARCA: IWD ) SPDR S&P 500 Value ETF (NYSEARCA: SPYV ) Vanguard S&P 500 Value ETF (NYSEARCA: VOOV ) (click to enlarge) The three alternative-factor ETFs are: First Trust Capital Strength ETF (NASDAQ: FTCS ) Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) PowerShares S&P High Quality (NYSEARCA: SPHQ ) (click to enlarge) In all four trials, only one ETF was able to rise to the occasion: Guggenheim’s RPV , in the “value” category; indeed, until this year, RPV outperformed QLC’s portfolio, and did it quite handily. While 15 ETFs may not be a very large selection of the 117 (besides QLC ) large-cap ETFs, it would seem to constitute a representative sampling. To the extent that is true, there would seem to be very little to differentiate between the various funds out there. The overall range of 74.20% to 94.74% (( RPV )) belies the fact that (A) RPV exceeds the performance of all other ETFs (other than QLC ) by at least 600bps; (B) as a group, the growth-oriented ETFs outperformed the other groupings, clustering between 88.02% (( SPYG )) and 87.15% (( IWY )) – a spread of 87bps; (C) the ETFs in each grouping tend to cluster together, within a few hundred basis points of each other. In any event, the portfolio of companies currently held by QLC far outperforms the competition. Whether this will translate into outperformance in the future remains to be seen, and past performance can never be taken as an indication of future performance. That being said, however, there is more than passing cause for some optimism here. Assessment There are a couple of observations that can be made, but let’s start with QLC : the fund seems to have a lot going for it. If the success of QLC ‘s portfolio can be attributed to the formula used by Northern Trust’s indices, this is certainly an ETF to keep an eye on. It would definitely be a fund to put on one’s watchlist – it might bear watching until it has a year behind it, to get a better idea of turnover rate, ultimate distribution yield and trading volume/liquidity; it is simply too early to get a feeling for these. I have put QLC on my watchlist as a potential replacement for the PowerShares S&P 500 Low Volatility ETF (NYSEARCA: SPLV ), or to compliment it. What seems to be something of interest (at least, to me ) is RPV . This ETF outstripped it value-based brethren, and outperformed everything but QLC ; in general, however, each grouping had a tendency to cluster. It might be worth further investigation if one is interested in finding a large-cap ETF that has proven potential . The only real question I have is why it has experienced a drop this year that has been disproportionately worse than that experienced by other large-cap funds. As for the large-cap funds in general, it looks as if the growth-oriented funds are where the best performance (as a group) are to be found. There is a fairly large gap behind the growth cluster, with the alternative-factor cluster coming in next, straight cluster third and value ETFs bringing up the rear. Except for RPV . Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s Prospectus, Statement of Additional Information, and fact sheets. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from The Wall Street Journal . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. ——————– 1 A recent search on the ETF.com screener shows 118 funds when U.S. large-cap funds are searched. 2 Which, as one might expect, consists of the 1250 largest companies (by market cap) in the U.S. 3 FlexShares Trust Prospectus, FlexShares US Quality Large Cap Index Fund (QLC), p. 1. My emphasis. Prospectus is available here . A company’s “financial strength and stability” is measured by proprietary formula. A stock’s momentum is calculated regularly by the index. 4 Prospectus, p. 1. 5 Prospectus, p. 15. 6 Investors are reminded that the income distributed by an ETF is not limited to dividends it has received from its holdings. ETFs also distribute capital gains, interest received, as well as income from other instrumentalities. My estimate is typically below the sum actually paid out by the fund. 7 I am trying out some new data. In addition to my “expense margin” (how much is left after expenses are taken out of gross income), I have added “income yield” (gross income divided by NAV) and “return on NAV” (RONAV) (net income divided by NAV). All of these are intended to reflect aspects of ETF performance the way certain data reflect the performance of a company (operating margin, sales to assets, ROA, respectively). Certainly, some of this data will be more meaningful once a fund has a year’s worth of activity behind it. 8 This is in no way intended to make any claim about the performance of QLC – which didn’t exist until September, 2015; nor is it intended to make any claim about the future performance of the fund. 9 I wanted to limit the comparisons to funds with 5 years of performance history, for sake of fairness.