Peter Schiff’s “Australian Energy Companies with Attractive Yields”

by Travis Johnson, Stock Gumshoe | February 24, 2010 1:42 pm

Peter Schiff[1] is apparently not scaling back his brokerage work much to manage his Senate Campaign, despite the hit that his campaign took in the polls when Senator Dodd decided to retire rather then run for reelection (probably any of the candidates, including Schiff or Linda McMahon, could have beaten Dodd … beating the much more popular democrat, state Attorney General Richard Blumenthal, will be much tougher).

A big part of Schiff’s job, I expect, is drumming up business for Euro Pacific Capital[2], his brokerage firm that specializes in buying high-dividend foreign-listed stocks for US customers, and as part of that effort he sends out a newsletter several times a year — and in that letter, he usually teases a couple stock ideas that Euro Pacific thinks are appealing. You can see the latest letter here if you’re interested[3] in the whole magilla.

When this happens, I always like to take a look — I disagree with Peter Schiff on a lot of things, but I generally do agree that focusing on stocks with good dividends[4] and on stocks that are less dollar-dependent is a good idea for at least a solid portion of my portfolio. And he did suggest what has been by far the best-performing stock in Gumshoe tracking history, Skyworth Digital[5] (up about 1,500% from December of 2008, when I wrote about his pick). These aren’t “teases” in the same way that newsletters tease stocks — Schiff’s brokers will tell you what the stocks are, but you’ve got to call them and, one assumes, sit through a sales spiel in order to hear about the stocks. I don’t have any interest in doing that, so it’s back to detective work …

So what is he suggesting today? Nothing quite as sexy as a beaten-down Chinese tech company, I’m afraid — today, it’s all about Australian stocks with good yields. He teases us with two of them, I’ll take a look at the first one today:

“Company #1 is a dividend-yielding Australian utility trust dealing mainly in electricity and gas transmission and distribution. It is made up of three trusts as well as an investment holding company.

The company’s asset portfolio contains interests in the following: “a conduit that connects natural gas[6] reserves with industrial, commercial, and residential consumers; a distribution network; a distribution company

“Additionally, Company #1 owns an interest in an energy utility that provides electricity distribution and transmission services to upwards of 500,000 customers, and a firm with distribution licenses for several gas distribution systems. This portfolio offers regulatory and geographic diversity with exposure to regulated assets across Australia and the United States….

“The company’s stock is currently down from its peak in June, 2007, although up from the low reached in March, 2009 (Google Finance, Feb, 2010). We believe this may be a good time to consider this company, with its share price at levels which are below its historic average, and currently offering an attractive yield.”

He goes on to provide a 6-month stock chart for this teaser pick, which allows me to confirm that this must be: DUET Group (DUE on the Australian exchange, DUETF on the pink sheets — you can click here for a free trend analysis on this stock from MarketClub[7], one of my advertising partners … looks like they’d advise you to wait on this one).

And yes, this is exactly the same company that his newsletter teased us with a year ago as a top pick for 2009 — I wrote about that prior tease here[8], and at the time the stock was right in the same neighborhood in Australian Dollars, it’s up a little less than 10% over the past year. BUT, and this is a big “but,” since this is a significant part of Schiff’s strategy, the shares are up much more dramatically in US dollars — something like a 40% gain, thanks to the big rally in the Aussie currency in 2009. The stock is still far below the highs of 2007 and 2008, no matter what currency you count in, but the climb during 2009 was quite strong and steady in US dollar terms.

DUET Group’s traded stock is an odd stapled security[9], consisting of several investment funds or trusts that own assets, managed by two firms (Macquarie and AMP Capital), you can see the assets that they own here[10] — generally speaking, they have interests in a big natural gas pipeline, two electric utilities[11] (one in Pennsylvania, one in Australia), and two gas utilities in Australia.

They project paying a 20 cent distribution for fiscal 2010, and they pay twice a year (the first payment, for the last six months of 2009, was just issued a week or so ago at 10 cents), so that gets you a yield of almost 11%, though I don’t understand the Australian withholding rules for outside investors — it’s quite possible that there’s a withholding tax on those dividends, so if that’s important to you make sure to check into it. This investment is definitely not designed for non-Australian investors.

And those dividends are down substantially from when I last wrote about them a year ago — at the time, the six-month dividend was a bit over 14 cents, and the expected yield therefore substantially higher (in the 16% range). According to the interim financial release last week[12], however, they are at least covering the dividend with earned income, which is promising … and while the group carries quite a bit of debt, which is not unusual for big utilities, they say they don’t have any maturities to be concerned about this year. Not that we would necessarily be concerned about bonds coming mature in this low-interest-rate environment, but after last year we’re probably all wiser if we ask about them.

Speaking of the low interest-rate environment, a significant part of Schiff’s argument for investing in Australia is that their commodity export-driven economy has helped the economy perform at a much higher level, and recover faster than most developing economies. Part of that recovery has been Australia’s rate hikes by the Reserve Bank, which puts their base interest rate far above ours, or Canada[13]’s, or the European Union (and way above Japan[14]’s, of course) — which also has drawn more money into the currency, helping drive the Aussie dollar higher.

It’s worth noting, however, that Australia has plenty of potential to see economic downturns, too — not only because of the shock that would hit if iron ore[15], coal[16] or gold[17] prices fall, or if China[18] simply stopped buying quite so much … but also because many Australians have followed the US lead and built up a lot of personal debt. On the other hand, if the economy performs well and bond rates start climbing, we might also note that this doesn’t necessarily bode well for income investments like the trusts and utilities held by DUET — income investments like DUET Group compete with other income investments like corporate and sovereign bonds, so if bond rates go up the relative safety can sometimes drive investors from utilities and similar investments.

The same thing sometimes happens in the US, if bond rates are low then investors take additional risk with utility stocks, MLPs and REITs[19] to get their income up a bit; if bond rates rise, investors can have a tendency to look at the safer bonds instead, which then drives the somewhat riskier income stocks down a bit in price to get them more competitive yields. That’s not to say that this always happens, or that rising long bond interest rates will necessarily mean that income stocks fall, it’s just a dynamic to keep an eye out for — and since most of us are not in Australia (though I do love my Aussie readers, of course), it’s worth keeping that in mind — FYI, the Australian 10-year bond yields about 5.5% right now, savings accounts can yield around 3%. Australian stocks in general sport higher yields than the S&P 500, with the largest Aussie ETF yielding also about 3% (the S&P yield right now is about 2%). If you’re interested just in Aussie dollar exposure, one-year MarketSafe CDs from Everbank[20] denominated in Aussie Dollars yield 3.5%.

So … if you’re interested in DUET Group you do get a nice yield of better than 10%, assuming no taxes, and you get exposure to much the same kind of relatively stable energy infrastructure dynamics you would from investing in large US pipeline MLPs, Canadian trusts like AltaGas (a, or electric and gas utility companies. And, of course, you get to hold an investment in Australian dollars and receive your dividends in Australian dollars, which over the past year has goosed returns in US dollar terms — though the reverse could certainly also happen. And if you like the general idea of investing in Australian energy infrastructure, we also looked at a more pipeline-focused Aussie stock back in December, also following some Schiff clues — that one was APA Group, you can read my older article that mentions them here[21].

That’s all I’ve got on DUET Group, if you’ve an opinion to share about them, by all means, let us know with a comment below. And if you’ve ever been a client of Peter Schiff’s, we’d like to hear what you thought — it’s not quite the same thing as subscribing to a newsletter … but we do have some Euro Pacific Growth reviews on the site, you can see them or add your own experiences by clicking here.[22]

Full disclosure: I do not have any interests in any of the stocks mentioned above, but I did profile AltaGas for the Irregulars back in December.[23]

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