Tag Archives: investing

CenterPoint Energy: Investors Have Nothing To Fear

Summary The stock continued to decline after Q3. Equity investment write-down doesn’t reflect the investment’s true value. Results from core operations improved from last year. The market continues to be bearish about CenterPoint Energy (NYSE: CNP ). Given the company’s performance in 2015, it would seem that investors are doubting the stability of the utility company. After falling 20% from $23.43 at the beginning of the year to $18.68 before Q3 earnings, shares have since dropped another 8% to $17.10. Do the fundamentals support this rapid decline? Revenue continued to fall. Following Q2’s 19% drop, Q3 revenue decreased by 10% ($1.8 billion to $1.6 billion) as well, primarily as the result of lowering natural gas prices. However, this was offset by the drop in natural gas expense, which decreased from $702 million to $527 million. Due to various cost reductions, the company was able to decrease its operating expense from $493 million to $479 million. This impact may seem small, but this allowed the company to increase its operating income by 14% when compared to Q3 2014. This rise in operating profit is the first time the company achieved growth in 2015. Q1 and Q2 operating profit decreased by 13% quarter on quarter, and Q3 operating profit was flat. Isn’t this evidence that the company is improving? What are investors worried about? Possible Concern One thing that could trouble investors is the loss from equity investment ($794 million), which is the biggest reason that the company delivered a $900 million loss before taxes. The equity investment consisted solely of Enable Midstream (NYSE: ENBL ), a stock that I’ve talked about before. You can read my previous articles ( here and here ) to learn more about the company. Enable Midstream Partners is a midstream company that is suffering from industry headwinds. However, the company continues to deliver good cash flows due to its fee-based contracts. Furthermore, it is well capitalized with a good interest rate coverage ratio. Enable’s transported volume continued to grow in Q3, offsetting declining prices that negatively impacted product sales. Going forward, I believe Enable will come out on top even if natural gas prices don’t improve. What does all of this mean? I believe that the write-off of equity investment is not representative of Enable Midstream Partners’ true value. Core Operation Remains Stable Enough about Enable, what about CenterPoint’s existing operation? In my last article , I talked about the company’s stability. The Electric segment is not directly affected by commodity movements since it is not involved in power generation activities. The Natural Gas Distribution segment does have some exposure to commodity movements due to a time lag between purchases and deliveries, but the company actively uses derivatives to hedge any uncertainty. So overall, I would expect profit to be stable over the long term. CenterPoint’s stability is once again evident in Q3. Every single segment improved quarter on quarter. Operating income for the Electric segment rose 5%, Natural Gas Distribution’s operating income recovered from last year’s volatility, improving from a loss of -$8 million to a gain of $11 million, and Energy Services’ operating income increased by 17%. Takeaway I believe there’s nothing in the third quarter that was particularly alarming. The company continued to deliver stable profits amid a volatile commodity environment. Unfortunately, investors have been focusing on the wrong things. In particular, the Enable Midstream fear is overblown. Results from core operations should continue to improve, and that is what will really support the company as a whole.

VCSAX: Consumer Staples Don’t Get Much Better Than This

Summary Low expense ratio with great long term returns. High yield for some volatility protection. Good sector diversification and strong holdings. Mutual funds are a good way to improve an investor’s risk adjusted return. Investing in consumer staples is not only a good way to diversify, but also helps with downside risk when the market takes a tumble. The fund I will be looking at is the Consumer Staples Index Fund Admiral Shares (MUTF: VCSAX ) which seeks to track the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. This index has performed well over the last decade and comes with a decent dividend yield Yield This index has a distribution yield of 2.47%. If you’re looking for a high yield portfolio and seeking to invest in consumer staples, VCSAX is a great fit. Even without needing an income from your portfolio this has been a good investment showing an annual return of 10.39% over the past ten years. A lot of this can be attributed to consumer staples not taking the same hit the S&P took in 2008. Expense Ratio The expense ratio for VCSAX is .12% which is fine for being a passively managed mutual fund. I’m in favor of going the passively managed route for the consumer staples sector. With the Lipper peer average expense ratio being 1.51% it’s not worth the trouble of trying to beat an index. This is a top percentile performing index compared to competitors; When you don’t have to pay a high expense ratio – don’t! Diversification Index is well diversified and attempts to fully replicate its benchmark. The benchmark makes investments in the consumer staples market and should tend to be less sensitive to economic cycles. There is high correlation with the S&P and an investor should expect a lot of volatility if this is a large portion of their portfolio. Here are a list of the top ten holdings: There are 100 holdings and 56% of the weight is in the top ten. Even though this fund has performed very well, I would still like to see more diversification. I would make this a small portion of my portfolio for a more balanced return in the event of another big hit taken by the market. On the bright side, many of the companies in the top ten have been around for a while and shown they can shift strategies when needed. Procter & Gamble (NYSE: PG ) has been around since 1837 and has changed strategies many times. If there was ever a company to bet on surviving, this wouldn’t be a bad choice. PG has shown a long track record of a rising dividend which will help in a down market. The growth has been iffy lately but PG is making many changes and investing in the future. During an earnings calls management said they had many new products coming out. With the billions they are spending on R&D, if some of the proprietary technologies are successful there may be some serious company growth down the road. If I were to pick a single consumer staples company for my portfolio, Procter & Gamble is an easy choice for a long investment. Performance The following graphs show a major upside to consumer staples over the last decade: Over the past five years VCSAX and the S&P 500 have shown a strong correlation, as I would suspect. Looking at the ten year range there is a large difference. During a market crash a consumer staples index is going to take a punch but people are still going to make purchases. There will be some cutbacks, but nothing like there will be on the market as a whole. The other reason for the index to show lower losses is the high yield which will help protect returns during a down market. Conclusion When it comes to a consumer staples index VCSAX is as good as they come. The low expense ratio is really nice to see and helps with staying close in returns to the benchmark: In addition to having a good five year annual return of 14.54%, there has also been a great ten year return of 10.39%. With the crash in 2008, many investments reacted like the S&P 500 and it really diminished returns over the last decade. Consumer staples is a great way to reduce portfolio risk when it comes to the market taking a dive.

I Don’t Understand Why Ausnet Moved 10% Higher After Its Update

Summary Ausnet’s performance doesn’t seem to improve, and the high capex (sustaining + growth) results in a free cash flow negative result. Despite being FCF negative, Ausnet has actually increased the dividend, attracting more income investors. The dividends are currently borrowed by issuing more debt, but with a net debt/EBITDA ratio of in excess of 5, it might be locked out of the debt markets. I still prefer to sleep well at night, and I’m not taking a stake in Ausnet. Introduction Back in June, I warned investors Ausnet’s ( OTCPK:SAUNF ) dividend was at risk because the company had to borrow cash to fund the dividend payments. That’s a red flag for me, and even though a large part of the capex was growth capex, I still don’t feel comfortable investing in such companies. SAUNF data by YCharts Ausnet is an Australian company and you should most definitely use the Australian Stock Exchange to trade in the company’s shares. The ticker symbol in Australia is AST, and the average daily volume is approximately 3.25 million shares while the daily dollar volume is almost $4M. The H1 revenue jump was nice, as was the net profit result The top line looks really good, considering Ausnet was able to increase its revenue by 10% to approximately A$1.07B ($770M). In fact, the income statement looks really good, as not only did the revenue increase by a double-digit amount, operating expenses also fell by approximately 3%. While this doesn’t sound like a big deal, these two factors allowed Ausnet to increase its operating income from A$340M ($245M) to A$455M ($327M), a 34% increase compared to the first semester of the financial year 2015. (click to enlarge) Source: Financial statements The (much) higher operating income also led to a higher operating margin, which increased to 42.5% compared to 35% in H1 2015. The finance costs increased, which is directly due to the fact Ausnet had (and still has) to issue more debt to cover its dividend payments. Thanks to the higher operating income and despite the higher interest expenses, the pre-tax income increased by in excess of 50%. Additionally, the tax bill is much lower as well, resulting in a conversion of last year’s net loss into a net profit. The EPS was almost 11 cents per share. (click to enlarge) Source: Financial statements That’s good, but once you turn the page to have a closer look at the cash flow statements, you’ll start to see why I’m quite worried about Ausnet’s ability to cover the ongoing dividend payments. The operating cash flow was approximately A$284M ($203M), but this still wasn’t sufficient to cover the A$350M ($252M) capex. Yes, the negative free cash flow was lower than in H1 2014, but it’s still negative. And yes, some of the capex is growth capex and doesn’t impact the “sustaining” free cash flow, but still… But the cash flow doesn’t cover the dividend payments Based on the headline numbers, the free cash flow was negative as the total capital expenditures were higher than the incoming operating cash flow. And it doesn’t look like Ausnet is planning to slash the dividend to reduce the total cash outflow from its balance sheet. It has declared another dividend of A$0.04265 per share ($0.03) payable in December, and based on the current amount of outstanding shares, this dividend payment will cost the company almost A$150M ($107M). So I’m worried about Ausnet’s ability to continue to pay a dividend. And I’m not alone with this view. The Royal Bank of Canada (Nov. 18): Dividends are aggressively positioned and balance sheet is going to come under pressure if AST wishes to retain an A range rating. (…) We believe AST has an unhealthy reliance on the dividend re-investment plan to fund capex. And Deutsche Bank (Nov. 18 as well): AusNet reaffirmed guidance for FY16 distributions of 8.53cps, implying growth of 2%. Consistent with full-year guidance, and DB expectations, AusNet declared an interim distribution of 4.27cps. However, on our estimates, cash coverage ratios will remain stretched with the Electricity distribution business facing lower earnings from next year once the new regulatory period begins (lower regulatory WACC). We forecast FY17 distribution cash coverage of c.93%, which makes the company reliant on its DRP to help fund its FY17 distributions. I had the impression I was all alone with my warning back in June for Ausnet shareholders that the company might not be able to meet its dividend commitments, but financial institutions are becoming increasingly wary of the dividend coverage as well and are now openly wondering whether or not the dividend is sustainable, and the “reset” periods in the next 24 months will be important for Ausnet’s ability to generate cash flow. (click to enlarge) Source: Company presentation Investment thesis So there’s no reason why I would have to change the opinion I expressed in the article I wrote in June. Ausnet is paying a very handsome dividend with a current dividend yield in excess of 5%, but I fail to see how the company can afford this dividend. Right now, the current capital expenditures aren’t covering the dividend expenses, and the investment in growth capex will be offset by the expected lower revenues due to regulatory pressure. Ausnet still remains an “avoid” for investors, and even though shareholders might have been lured by the attractive dividend, I fail to see how this dividend could be maintained in the longer run (unless the company continues to have access to the debt markets, the regulatory situation improves or its shareholders continue to use the reinvestment plan). I understand people are attracted to high-dividend stocks, but I’m not comfortable with Ausnet’s dividend policy right now. And yes, that’s an (arbitrary) personal choice. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.