Tag Archives: cash

Oxford Lane Capital And Eagle Point Keep Churning Out The Cash, While High Yield Market Jitters Drag Down NAVs

Summary As high yield bond and corporate loan markets continue to be hammered by nervous investors, funds like OXLC and ECC have seen their NAVs drop even more. This is a natural result of their leverage, but essentially is irrelevant to their ability to generate cash flow and make their dividend payments. These are tough vehicles for some retail investors to understand and appreciate, but offer impressive income potential to those willing to make the effort. As the proverbial blood continues to run in the streets of the high yield bond and leveraged loan markets (because of a range of fears related to the Fed increasing rates, the world economy slump, etc.) the non-investment grade companies that comprise those markets continue to go about their business, making their interest and principal payments. This translates into strong cash flows and high distributions for Oxford Lane Capital Corporation (NASDAQ: OXLC ) and Eagle Point Credit (NYSE: ECC ), the two closed end funds that specialize in buying collateralized loan obligations (“CLO’s”). CLO’s are leveraged, special purpose vehicles that function like “virtual banks,” buying and holding senior, secured floating-rate loans to non-investment grade companies. (This is the same cohort of companies that issues high-yield bonds. But whereas high-yield bonds are unsecured and typically recover only 20-30% in the event of the issuer’s default, senior secured loans have historically recovered 70-80% in the event of default, so the overall credit loss on a portfolio of loans over time is less than half the credit loss on a portfolio of high yield bonds.) Both ECC and OXLC put out quarterly reports yesterday and followed up with investor conference calls this morning. In both cases the messages were similar, that the market for the assets they hold – CLOs and the loans held by CLOs – are way down, the cash flows from those assets continue strong, and the reinvestment opportunities for CLOs in the loan market are very attractive. But the strong income prospects this represents (OXLC yields over 22% and ECC over 14%) are not enough to offset the fears of many closed end fund investors, who remain fixated on the net asset values (NAVs) of both funds. These have dropped in recent months to reflect the depressed markets for their underlying assets. Here is why the NAV of a CLO fund would drop as the market for its underlying assets drops. Suppose the equity in a typical CLO is leveraged 10 times. If the market for the loans held by that CLO drops by 1%, then the mark-to-market or “paper loss” to the equity of the CLO will be 10 times 1%, or 10%. This means that investors should not be surprised to see NAVs of ECC or OXLC fall at about ten times the rate as the drop in market prices in the loan market. None of the drop however, has any relation to the ability of the portfolio to generate the cash needed to pay distributions. Investors who can understand that and be comfortable with it can appreciate the opportunity these funds represent for income investors. But be prepared for a potentially volatile ride in terms of market value, although many of us who have owned the funds for awhile may feel – given the current entry point versus where we got in – that today’s new investors will have a smoother ride than we did.

Some Prefer Southern Company Over Wisconsin Energy: I Just Don’t Get It

Summary I recently published a follow- up article about Wisconsin Energy after the acquisition of Integrys. Several friends told me that I should prefer Southern Company over Wisconsin Energy. They claim that the superior yield is due to some short term hardships that will soon be over. I totally disagree, I believe Wisconsin Energy is by far a superior investment. I will now try to explain why. Introduction A week ago I wrote this article about Wisconsin Energy (NYSE: WEC ). In the article, I tried to analyze the company after the acquisition of Integrys (NYSE: TEG ). The article is really in favor of buying the shares of the company. Several friends told me after reading the article that I should prefer Southern Company (NYSE: SO ) over Wisconsin Energy. They claim that the superior dividend yield and the longer streak of dividend raises make it a superior investment for dividend growth investors. They believe that currently, the company suffers from short-term headwinds. I read a lot about Southern Company and I totally disagree. In this article, I will show the fundamentals and valuation of the company, and then show a comparison with Wisconsin Energy, that I believe will allow me to emphasize the superiority of Wisconsin Energy over Southern Company. Southern Company through its subsidiaries, Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company, supplies electric service in the states of Alabama, Georgia, Florida, and Mississippi. Each of those subsidiaries is an operating public utility company. Additionally, Southern Company owns all of the common stock of Southern Power Company, which is also an operating public utility company, which constructs, acquires, owns, and manages generation assets and sells electricity at market-based rates in the wholesale market. Fundamentals Southern Company has terrible fundamentals, really, it is hard for me to describe it otherwise. The revenues for example grew from $13.554 in 2005 to $18.467 in 2014. This is CAGR of 3%, which might be reasonable if the income is growing at least at the same pace. Yes, it is a utility company which doesn’t show fast growth, but I still have higher expectations. SO Revenue (NYSE: TTM ) data by YCharts EPS growth is even worse, when thinking about the EPS growth together with inflation, well there is practically none. The EPS grew from $2.13 in 2005 to $2.18 in 2014. This is CAGR of 0.23%, which is practically no growth, and when taking inflation into consideration, it is practically declining. Let’s look now towards the future. The analysts’ estimates are for growth of 2.5%- 3% in EPS for the next 3- 5 years. Having said that, I am not happy with the EPS growth in the past and the future estimates. SO EPS Diluted (Annual) data by YCharts The dividend is another weak fundamental in my opinion. The annual payment grew from $1.49 in 2005 to $2.1 in 2014. That is CAGR of just 3.5%. As you read above, as EPS is flat, the dividend rose by expanding the payout ratio. This is not sustainable for the long run, and therefore it makes me worry about the ability of the company to show real growth. In 2014, the payout ratio was over 95%, and even for the estimate for 2015, the payout ratio will be over 75% which is high for utilities. Currently, the company yields just under 5%. I don’t think the yield is high enough to justify such slow growth. SO Dividend data by YCharts Usually I like it when companies reward shareholders by using big parts of the FCF for dividends and share repurchases. However, with such a high payout ratio, I didn’t expect Southern Company to buy its own shares. Yet, I figured out that not only that the number of shares didn’t decrease, it actually rose by over 22% over the past decade. I don’t mind being diluted when smart acquisitions are made like the acquisition of Integrys by Wisconsin, or by the purchases of new properties by Realty Income (NYSE: O ). In these cases the dilution is used to grow EPS and FFO. In this case, the dilution comes with low growth. Not my cup of tea. Valuation When I look at the valuation of Southern Company, I find a company that is valued cheaper than Wisconsin Energy. The difference in the valuation makes perfect sense as Wisconsin Energy is growing its EPS while Southern Company has stagnated. In my opinion, the difference isn’t big enough. I find Wisconsin Energy fairly valued for a company that will grow at around 6% every year. By looking at the forward P/E for this year and the year after, I can see that the gap is becoming smaller and smaller. As a long term investor, it is hard for me to justify purchasing Southern Company at the current valuation. SO PE Ratio ( TTM ) data by YCharts The lower valuation is not low enough for me to consider Southern Company at the moment. It might sound odd, but I find it overvalued when compared to other high yielding companies, with slower than average growth. Risks As I see Southern Company, there are two main risks to this investment. The first one is the lack of growth catalysts. The company is forecasted to grow its earnings by less than 3% annually over the next several years. This is very low even for a utility company, especially one that expanded its payout ratio so much. The company must find new ways to grow its income and revenues. The second risk is the still increasing expenses of the Kemper project in Mississippi. This project consumes more and more money, and it takes a big part of the cash flow as it increases the capex. In 2014 alone, the expenses on this project cost the company $0.83 per share. Southern Company will have to invest more money in order to finish it. Finishing it will indeed free some if its cash flow, but it will still not be able to serve as a real growth catalyst. Opportunities Southern Company still has several opportunities, but I find them pretty vague. Firstly, most major expenses on the Kemper project are behind us already. The necessary investment will now be much lower, and it will allow the company to use the money in a better way. Another opportunity is the fact that even when it suffers from headwinds, Southern Company still manages to show fair margins and fair return on equity. If the company will be able to find growth prospects, it will be able to utilize its efficient structure to create more income and more value to its shareholders. Comparison with Wisconsin Energy I will now sum the comparison between these companies. I believe that Wisconsin Energy has superior fundamentals when looking at the past decade and the next five years. Southern Company is valued cheaper, but not cheap enough to justify the lack of growth in the EPS. Wisconsin Energy, doesn’t suffer from huge expenses due to problematic projects such as Kemper in Mississippi. This kind of projects consume a lot of capital, and it will be hard for them to return the money invested. Wisconsin Energy has a lower debt burden. The debt to equity ratio is lower, and it gives Wisconsin Energy more flexibility. Southern company has more debt and a very high payout ratio. This is a combination that can be damaging to the company. It puts the dividend in an unpleasant place. Not only that, Wisconsin Energy is working on lowering its debt after the acquisition of Integrys. Southern Company on the other hand has higher margins and return on equity. This is a positive sign, which is not enough when the company can’t find growth prospects. Yet, to be fair, holding a more profitable company is always a plus. I am writing from my position as dividend growth investor, so it makes perfect sense that I will give Southern Company credit for the higher dividend yield. The dividend yield is much higher at almost 5% compared to the yield of over 3.5% that Wisconsin Energy has. If you look for income it is an important aspect. Conclusion I am certain that Wisconsin Energy can show superior returns for the near future. It has better fundamentals and growth opportunities, and I think that dividend growth investors should prefer it over Southern Company. In my opinion, it will also beat Southern Company in total returns even though the latter has higher dividend yield. I would only pick Southern Company if I were a retiree who is looking for income right here and right now.

Black Hills Corporation: A Stability And Growth 2-For-1

Black Hills Corporation’s shares have become undervalued as a result of its oil and gas exposure. A healthy dividend yield and stable diversified cash flow streams make the Company an excellent anchor for investors. The oil and gas business segment is a free call option if the industry recovers. For a mixture of stability and growth, investors should snap up Black Hills’s shares. Utilities companies are some of the most stable companies in existence due to their inelastic consumer demands. Even during economic downturns, consumers will not save money by cutting off their water or heat; they will save money through other means. As a result, the cash flow is always running high for utilities companies, and by the same token, investors can always depend on a steady cash flow (in most instances). Utilities companies are what we might consider as defensible investments, in which investors invest in them to “defend” their investments against loss during economic downturns. However, as investors know, small cap companies offer investors higher-than-expected growth when compared against the S&P 500 and other similar market-wide indices. This is because small cap companies have more room to grow than their large cap counterparts. As such, investors’ capital has more room to grow with the growth of the small cap firms. Thus, when investors combine small cap growth with the stability of utilities companies, they get a hybrid small cap utilities company that can offer the best of both worlds: a medium to low-risk, medium-reward investment that can both generate capital appreciation with the added benefit of capital preservation and a steady quarterly paycheck that the company puts in your bank account. One small cap utilities firm, Black Hills Corporation (NYSE: BKH ), offers this opportunity for investors to simultaneously benefit from capital appreciation and capital preservation. Black Hills Corporation is a diversified utilities company that runs a variety of regulated electric and gas utilities subsidiaries. The Company serves customers in the Midwest and Rocky Mountain states, so the Company is specialized in a certain region. Black Hills Corporation’s business segments can be divided into three main segments: Power Generation, Coal Mining, and Oil & Gas. The Company has both cash cow businesses and high growth businesses, which is always a great way for investors to get in on that stable cash flow and share value growth. From just the stock chart, investors can see that the Company has returned a healthy return to investors: capital invested in the Company at the onset of 2011 has generated a return on investment of about 75%. Keep in mind that this number does not include dividends that the Company generates for shareholders. With a dividend yield of about 3%, the dividends add a substantial amount of return on top of the pure capital appreciation return. While it appears that the stock price has begun to stagnate and even slowly slip, that is more of a result of macro conditions than anything else-it is not Company-specific. Furthermore, the Company has oil and gas exposure, which has resulted in the Company feeling some of the pain from the collapse of oil prices a few years back. However, because the Company is diversified in several sub-industries, the Company has only suffered a little. From a technical perspective, the 50-day moving average has swung alongside the 200-day moving average for quite some time-the two continuously move back and forth. Most recently, the 50-day moving average has been below its bigger brother, but it appears that the spread between these two indicators is closing, which could indicate near-term upside. (click to enlarge) Source: Stockcharts.com From a fundamental perspective, what investors are looking at is an undervalued, cash-flow generating Company that has suffered from the setbacks in the oil and gas industries. Black Hills Corporation has its hands in a variety of submarkets within the utilities industry, including oil and gas, coal, electricity, and some other markets. The cash cow generating businesses include its Power Generation and Coal Mining businesses. These businesses provide ample cash flow for the Company to inject back into the Company for further growth and for the Company to return to shareholders as dividends. The fast growth segment is the Oil & Gas segment, which has been dealt a blow as a result of the collapse of oil prices. However, it is this segment that essentially gives the shares a free call option. This segment is subject to the volatility seen in the larger oil and gas industry, and this can be viewed as a negative. At the same time, it is important to remember that this greater volatility can swing the shares in the positive direction as well. Thus, Black Hills Corporation has a number of aspects that investors will find favorable. A strong dividend yield, excellent stable cash flows from diversified business segments, and a free call option in case the oil and gas industry recovers (which it probably will-the question is more when than if it will) all make the Company an excellent investment for long-term investors.