Notes on a couple of stocks
There are a couple of stocks I follow about which I would like to make a few comments. Tetra Technologies Inc. (TTI: 19.69 +0.31 +1.60%) released their first quarter earnings recently and City Bank (CTBK: 15.22 -0.12 -0.78%) has released nothing to tell me why the stock price is acting the way it is.
First, TTI: First quarter earnings were disappointing, off 68% from the previous year at a dime a share, actually worse than very low expectations. The stock price was hardly affected and has moved up nicely from about $15 at the end of March. On the conference call, management repeated their claim that recent restructuring will start to show in the 2nd and 3rd quarters with profits surpassing anything the company has done for several years. Management repeated their April earnings guidance of $1.30 to $1.55 for the year so the next few quarters need to show some serious gains. TTI earned 38¢ for all of 2007. If they start making their projected numbers, the stock has the opportunity to clear $25 later in 2008.
City Bank’s share price devaluation has me seriously perplexed. The stock started the year around $22 and has eroded ever since. CTBK is at the top of it’s peer group as far as banking ratios go and has 30+ years of profitable management. Only 37% of the float is institution owned, who, according to Reuters have been net adding to their positions. So it must be individual investors who are dumping their shares. Do they know something, or just running scared due to the share price? Earnings projections for 2008 remain stable at $2.20 to $2.40 per share and the 60¢ dividend will probably get a year end $1.00 boost if earnings are as predicted. These numbers give a current PE of 7 and a yield over 10%. I am tempted to add to my position, but worry that there is some unknown (to me) info out there that will seriously affect the bank’s earnings.
Final note: TTI is in oil services and CTBK is in banking, maybe that alone is causing one to go up and the other to falter.
Note: I have a long position in CTBK, none in TTI.
Stock Review: Aircastle Ltd.
Aircastle Ltd. (AYR: 16.00 -0.30 -1.84%) caught my eye in March when the company slashed it’s quarterly dividend from 70¢ per share to 25¢. This was after 6 straight dividend increases from 16¢ to the earlier mentioned 70¢. The stock had peaked at about $40 last summer and had been declining steadily, with the downward slope steepening just before the dividend slash announcement.
I think the early stock price errosion was tied the the overall credit crisis and it’s effect on a company that requires a lot of debt. The dividend cut was accompanied by the announcement the company wanted to preserve cash in difficult times. Internet scuttlebutt hinted at difficulty with funding sources.
At this point, Aircastle has shored up it’s financing needs and the recently released Q1, 2008 earnings show a company in pretty good shape. Percentages shown are changes from Q1, 2007 and Q4, 2007.
- Revenues: $135 million, +92.8%, +11.8%
- EBITA: $119.9 million, +101.7%, NA
- Net Income: $31.6 million, +46.9%, -10.5%
- Net income before depreciation: $83 million, +49%, +5.5%
The net income before depreciation is the important one for a leasing company like Aircastle. The $83 million translates to $1.07 per share, giving excellent coverage to the 25¢ dividend.
Since I failed to mention it earlier: Aircastle is in the aircraft leasing business. They currently own 136 aircraft, leased to 59 customers in 39 countries. 92% of the aircraft are to customers outside the U.S. and 25% are air freighters. The company went public in 2006 and acquired approximately 50% of its fleet in 2007. Going forward, growth should be more incremental with several economic trends in their favor.
- AYR finances their aircraft at approximately 60% LTV. This allows them to borrow at attractive rates (last round at LIBOR +1.75%) on aircraft that have a current net lease rate return of almost 14%.
- Global air traffic is growing at a projected 6% rate per year.
- Of the approximate 25,000 global airliners, 4,000 are older, economically obsolete, fuel pigs. Higher oil prices prompt airlines to quickly replace these aircraft.
From listening to the last conference call and reading some of the press releases, I believe Aircastle is in a strong economic position to both grow their business and start increasing the dividend again. On the conference call, management made no commitment about the dividend, but the previous policy was 70% of free cash flow (net income before depreciation). For this last quarter, that number was $1.07 per share. Even if the 70% was too big a slice, 40% to 50% equals to a doubling of the dividend.
AYR currently yields 6.3% on the $1.00 per year dividend. I am adding this stock to my site’s Income Portfolio with the expectation of both dividend and share price increases over the next year.
Note: I currently have a long position in AYR.
Income Portfolio Additions
I have been looking for a couple of securities to round out my Income Portfolio. Currently the portfolio consists of only 7 stocks: 3 energy LPs (or Canadian royalty trust), 2 oil tanker stocks, a REIT and a bank. To give some balance and hopefully a little stability to the portfolio I am now adding a CEF and an ETF. Both pay monthly distribution, always a nice factor, and give some opportunity for future capital appreciation.
First up is the ETF: PowerShares Preferred Financial Portfolio (PGF: 21.42 -0.01 -0.05%). This fund tracks an index of preferred shares of financial institutions. PGF is about 40% each in the preferred stock of insurance and banking. The balance of about 20% is diversified financial services. The current distribution yield is right at 7%. Financial companies have had a terrible last year (self inflicted!) but many good companies have been driven downward at the same time. I think PGF is a good place to invest for income and the possibility of price appreciation if/when the financial sector recovers.
The closed end fund (CEF) that has caught my attention is the Alpine Global Dynamic Dividend Fund (AGD: 18.98 +0.09 +0.48%). This fund employs several strategies to maximize tax advantaged dividend income. Here is an outline of their stated strategies (paraphrased):
- High dividend value stocks: High yielding companies that management feel are undervalued. Global approach to find opportunities.
- Dividend “capture” strategy: Rotation in and out of high yield stocks to capture extra dividends paid in different months and special one-time payouts.
- Growth potential: Attractive yielding companies with potential for earnings and dividend payout growth. Again, a global approach to selection.
Some positives for the fund are that they do not use leverage or sell covered calls to enhance the yield. All payouts have been earned income, not returns of capital. Also, AGD definitely has a global approach; only 22% of assets were U.S. based companies. Current yield for AGD is 10.2%. If someone is planning on investing with a tax advantaged account, they may want to look at the similar, Alpine Total Dynamic Dividend Fund (AOD: 17.15 +0.08 +0.47%), which cares not about finding tax advantaged dividends and yields and attractive 12.4%.
I do have a couple of concerns about the fund. First, it currently trades at a 13% premium to NAV. Historically, the fund has traded at a premium, but this is at the high end of the range. The other concern is the NAV errosion: Is it due to market conditions or the result of faulty trading activity in the dividend capture strategy? Adding AGD to this site’s Income Portfolio give me the opportunity to watch for buying opportunities if the price/NAV premium narrows.
Note: I currently do not have a position in PGF, AOD or AGD.
Nordic American Tanker nice dividend boost
Nordic American Tanker (NAT: 39.46 +0.56 +1.44%) is out with their first quarter results and the boosted the dividend 136% from Q3 and Q4 of 2007. Nordic American runs a fleet of 12 Suezmax tankers all in the spot market. The first quarter results are good news and the company indicated the 2nd quarter of 2008 is off to a great start.
The revenues for NAT are entirely derived from spot market rentals of their oil tankers. The company has a policy to pay out all of a quarter’s free cash flow as dividends. Dividends fluctuate tremendously as do spot market rates for their ships. Nordic American believes the spot market will give the best returns on their tankers over time. Investors have to live with the fluctuating dividends, although the stock has historically yielded over 10%. Here are couple of notes from the press release:
- The declared dividend for the first quarter will be $1.18. This is compared to 50¢ for the previous two quarters.
- The company has now paid a dividend for 43 consecutive quarters.
- Average charter rate for the first quarter was $46,600 /day/tanker. This compares to $27,000 in Q4, 2007.
- Average charter rate for the 2nd quarter, 2008 is exceeding the first quarter.
- Of the 360 worldwide Suezmax tankers, 46 are single hulled and will be out of service by 2010. New building has slowed, reducing the chances of a tanker over supply in the next few years.
- NAT has 2 new tankers on order to be delivered in 2009 and 2010.
I like NAT in the tanker space for it’s strong dividend policy, which is related to their low cost structure. NAT’s daily expenses per tanker are less than half those of larger fleets like Frontline (FRO: 62.59 +1.03 +1.67%). This allows the company to keep paying a dividend when spot rates are low, and really boost the payout when charter rates are good. NAT is a component of my Income Portfolio.
Note: I have a long position in NAT
End of the month with new portfolio system
On this blog I have been tracking a portfolio of selected stocks since September of 2007. I started with a 20 stock portfolio of those companies I had researched and believed had great potential for profit. As my portfolio evolved, I discovered I was interested in stocks of two distinct varieties so Starting in April 2008 I have divided the stocks I track into two separate portfolios, an Income Portfolio and a Growth Portfolio.
I have been tracking my portfolios on a quarterly basis, starting with an equal dollar amount of each stock at the beginning of each quarter. If I add a stock in the middle of a quarter, it starts with the same dollar amount. I have not tried to time any buying or selling in the portfolios.
After one month with the dual portfolios, the results have been interesting. The Income Portfolio significantly out performed the Growth Portfolio for the month. The outperformance does not include any dividends, most of which have record dates in May.
The Income Portfolio had a total stock price gain of 7.57% for the month of April. This was primarily driven by an almost 30% gain in Terra Nitrogen (TNH: 149.53 +1.49 +1.01%) and Nordic American Tanker (NAT: 39.46 +0.56 +1.44%) up over 20%. NAT was boosted by the company announcing at least a doubling of the dividend for this quarter. TNH has been riding the agricultural products boom. As of yesterday, I have dropped TNH from the Income Portfolio for reasons I have written on here and here.
The Growth Portfolio was up 1.8%, significantly under performing the major stock market averages. Hardinge Inc. (HDNG: 14.38 -0.09 -0.62%) and KHD Humboldt Wedag International Ltd. (KHD: 31.1699 +0.2799 +0.91%) were the stars, both up around 20%. The portfolio was pulled down by Silver Wheaton (SLW: 14.44 +0.20 +1.40%), Headwaters (HW: 11.44 +0.29 +2.60%) and VeraSun Energy (VSE: 6.19 -0.01 -0.16%), all down about 15%. SLW and HW were hit by negative earnings news and VSE is stuck in the negative ethanol news and commodity trend.
The results for April were very interesting, and I look forward to what happens from here. Someone with the Income Portfolio would be tempted to take the 8% gain and go money market for the rest of the year!
Note: of the stocks listed I have positions in KHD, HW and VSE
Change to Income and Growth Portfolios
On this blog I track a couple of portfolios, a Growth and an Income portfolio. The components of these protfolios are stocks that I have researched and believe will provide above market returns over time. The Income Portfolio consists of high yield dividend paying stocks. The Growth Portfolio is a little more complicated, holding growth companies, turn around and contrarian plays, and stocks that provide some trading opportunities.
I have written a couple of articles over the last few days concerning Terra Nitrogen Co. LP (TNH: 149.53 +1.49 +1.01%), a component of my Income Portfolio. I believe the high dividend days for this company are over, and a majority of the cash flow with go to Terra Industries instead to the shareholders of TNH. For this reason, I am dropping TNH from my Income Portfolio.
I will be adding Terra Industries (TRA: 45.97 -0.18 -0.39%) to the Growth Portfolio. In this article, I discussed the cyclical nature of TNH’s stock price. I will be looking for a similar pattern for TRA.
In my portfolios I have been tracking an equal dollar amount of each of the stocks starting each calender quarter and rebalancing each 3 months. I am working on a portfolio tracking system to be available on this site where I will make actual portfolio decisions concerning the timing of stock purchases and sales. Keep tuned!
Note: I currently do not hold a position in either TNH or TRA.
-
Amazon gift card link
Investing Bestsellers
Subscriptions
