“Dividend Superstars: Part 2 … Shipping and Secret Investments”

By Travis Johnson, Stock Gumshoe, August 2, 2008


This is the continuation I promised on the “Dividend Superstars” teaser from Weiss Research — we looked first at the rural telecom company with the 10%+ yield, and now we’re moving on to a secret investment company and a shipping company, both with yields over 15%.

If you’d like to hear my introductory blathering and read about the telecom pick, you can either go back in time or click here to catch up. For the rest of you, let’s move on …

“Dividend Superstar#2: 15.7% Yield from a Secretive Investment Company That’s Paid Dividends for 43 Quarters Straight”

What kind of clues do we get for that?

“… you can buy this company’s shares and it pays very juicy, steady dividends. It currently has about 220 businesses in its portfolio. That gives it tremendous diversification across sectors and industries.

“What’s more, because of the way this company is structured … It must keep its debt under control, making it one of the least leveraged publicly traded financial companies in the U.S., and …

“It must pay out 90% of its profits to shareholders in the form of dividends!

They have paid a dividend for 43 quarters in a row, for all of their 11 years as a public company, for a total payout over that time of more than $2.3 billion. Doesn’t help us much, I suppose, but that’s a fair chunk of change.

And their dividend has compounded at a growth rate of 12%. Not bad.

The company, dividends included, has returned about 18% a year for the last decade.

So that all sounds lovely, no? What is our fine divvie king?

Thinkolator sez …

This is American Capital Strategies (ACAS)

ACAS is one of several BDCs and similar mid-market lenders who are based within a stone’s throw of my home in Washington, DC — Allied Capital and CapitalSource are two other nearby ones. A BDC, for those who don’t know, is a Business Development Company, and they have quite similar rules to REITs — they are not taxed on the corporate level, but have to restrict their leverage (1:1, I believe, meaning they can borrow only 100% of their portfolio value, versus investment banks that typically have levered up 30:1), and pay out most of their earnings as taxable dividends to shareholders.

What do these guys do? Essentially, ACAS and most of their competitors, compalies like Allied Capital, Gladstone Capital, and Apollo Investments, raise money by selling equity, and use that money to lend to midsize companies that are too large to go to the neighborhood bank, and too small or disinterested to be publicly traded. This can take several forms, sometimes they are straight loans, sometimes they are equity investments combined with loans … these are essentially private equity companies that don’t use much leverage.

So … because they’re lending to these relatively small companies and taking equity positions in many cases, they can get higher returns than a bank might, even with lower leverage, so they have tended to have very nice dividends, 6-7% when they were popular investments in past years, and often 20% now that everyone is terrified of companies that do any kind of lending.

I can’t tell you all about ACAS here — it was started by a very colorful guy in his apartment in Bethesda, MD not much more than ten years ago, and has been an incredible grower during that time — they really have paid out more than $2.3 billion in dividends since they went public in 1997, not bad for a company with a current market cap of about $4 billion.

And they are hated, hated, hated right now. The teaser indicated this was a 15% yield, and it was not long ago, but the shares have taken quite a beating, down 20% in just about two weeks. They release earnings next week, on August 6 — an august day, indeed, being also the anniversary of the birth of the mighty Gumshoe.

I’ve been intrigued by this company from afar for a long time, but haven’t been willing to take a chance on them just yet — it’s getting to the point where the shares are so inexpensive that I might get interested soon, they do have a very diversified portfolio of equity and debt holdings, and they just spun off an IPO of a company that will invest in agency (mostly mortgage) debt, so they’re not standing still during this turbulent period. There was a big volume selloff of the shares a few weeks ago, but other than that the shares have not traded anywhere near this low since 2003.

There are absolutely some risks with this one — they took a hit when they had to adopt new accounting rules in the first quarter of this year, essentially the same mark-to-market rules that made all the banks look bad (they have to write down a loan to fair current value and report that change on the income statement whether or not they sell the loan). At the price it’s trading now, a significant discount to last quarter’s book value, I have to assume that investors are afraid of more writedowns or future dividend cuts — management has said that they expect $4 in dividends this year, which would mean maintaining the current rate, though who knows if that promise extends to 2009. The cash earnings that they have to pay out as dividends (at a 90-98% rate, generally) are not the same as the accounting earnings, since with the mark to market writedown last quarter they actually reported a loss, but still paid a hefty dividend of over $1.

The big question for ACAS investors, or investors in any of these BDCs, is whether you think they’ll take a beating on loan defaults from their portfolio companies — will the nonperforming loans spike up if and when the economy continues to struggle? It’s certainly always possible, and that rate has gone pretty high during tough economic times before — I like that ACAS has a relatively large and diversified portfolio, and has a history of openness about their portfolio positions, but that’s no guarantee that they won’t suffer, even suffer more than they already have.

I’ll be watching this one around earnings — I’m curious to see what their comments are about the performance of their loan portfolio, in particular, and their confidence in the viability of the dividend. Not sure I’m interested in buying, but I like this sector more than traditional banks and investment banks, since the lack of leverage and the diversification allow for some downside protection, and I am starting to get a little bit tempted. We’ll see.

Didn’t mean to throw out that much speechifying about Mahlon and his ACAS gang … will squeeze the next one in quick:

“Dividend Superstar #3 15.4% Yield from Fleet of Profit-Gushing Oil Tankers That Generate Up To $4.4 Million Each Day”

“Oil companies are geysers of cash. No secret there. But an even steadier business is the massive container ships that transport the oil. These companies churn out fat profits whether oil prices are up or down.

“If you own those ships, you stand to rake in a constant stream of cash, and that’s especially true of my favorite dividend superstar in this sector.

“Take a guess how much it charges to use one of its ships! In the first quarter of 2008, the average rate for one of its Very Large Crude Carriers (VLCCs) was $82,400. And according to early numbers, it was getting an average of $112,000 in the second quarter.

“Once you realize that the company boasts dozens of ships, you’ll get a sense of just how much money it can make in a single day. Take the average day rate from early 2008 and multiply it by 54 — that’s $4.4 million in 24 hours.

Has paid out dividends that are pretty remarkable:

“In 2005, it handed investors dividends of $8.10 per share.

“In 2006, it paid out dividends worth $7.55 a share.

“And in 2007, it paid dividends of $8.25 per share.

What else does our friend at Dividend Superstars tell us?

“Looking ahead, whether oil is up or down, I certainly don’t see less oil being shipped anytime soon. And I should also note that this company is involved in transporting other hot commodities like coal and iron, too. If anything, rising worldwide demand for natural resources argues for even bigger profits ahead for this shipper.”

Well, time escapes me but I’ll just tell you that this is almost certainly …

Frontline (FRO)

He’s got the dividend payments understated, as far as I can see — I think they paid more like $11 in dividends in 2007, but perhaps we’re using different calculators. No other VLCC owner pays out nearly as much in dividends as Frontline, the massive oil tanker owner (well, now operator more than owner) controlled by modern-day viking John Fredriksen.

I’ve written about FRO several times before — it has been picked, quite successfully, by other newsletters in the past and is one of the top-performing picks here in Gumshoedom, though it’s also a stock that gives analysts fits, especially when compared to more conservative US tanker companies. I also owned the shares for a couple years and enjoyed a couple years of very nice dividends as they started their huge leveraging process to take advantage of high tanker rates, the phaseout of single-hulled tankers following a raft of spills, and low interest rates — they essentially sold their whole fleet to a subsidiary (Ship Finance Limited), then spun off that subsidiary to shareholders and as an IPO, and leased back all the tankers at a fixed (cheap) long term rate with a bit of profit sharing thrown in. That was the source of a lot of those dividends in 2005 and 2006, the capital gains from selling the tankers, but generally high tanker rates have also allowed them to continue to pay out huge dividends, a hallmark of a Fredriksen company (he usually owns about 30% of the equity of his companies, and likes to return capital to shareholders, himself included, through dividends that come as quickly and as generously as possible).

If you’re curious about my previous notes on Frontline, there was one back in January when it was also teased as a high yielder — it certainly is a high yielder, around 17% at the moment (one-time special dividends plump up that number), but also quite volatile and in a very competitve supply/demand business, so keep an eye on tanker rates and newbuilds if you want to see how Frontline is likely to perform in any given quarter, they’ve had some tough dips in the last few years since I’ve owned them, as well as some nice runs up and some fantastic dividends … and they have a lot of very loyal individual shareholders who loooove those dividends, so take care not to be standing in front of the exits if the divdiend policy were to change signfiicantly, or the dividend get cut dramatically, in the months ahead.

It might also help to think about where oil is coming from and going to — that’s what really matters for the day rates for oil tankers, which for companies like Frontline that don’t fix many long term charters (they tend to charter at much more volatile day rates for single voyages, as opposed to leasing a ship for several years to an oil company). If we get much of our oil from Venezuela, Canada, Mexico and Nigeria, then the ships have to travel less far to deliver their huge loads of crude to Louisiana. If Venezuela stops selling to us, or Nigeria cuts production, then the marginal barrels of oils that the US needs have to come from the Middle East or other, farther away locales, that means longer trips on tankers, especially if they’re the biggest, most efficient VLCCs that have to go around the Horn of Africa, and therefore more demand for the ships and higher rates. It’s a complex business, with many folks following it very closely, though the shares also often move in sympathy with oil prices even if that doesn’t necessarily make sense.

Fredriksen is also an M&A junkie who believes that many companies could benefit from his aggressive financial strategies, so he’ll be taking runs at other companies that could bring movements in either direction to the share price — most recently he’s been sniffing around Overseas Shipholding Group (OSG), a much more staid US company that has a very similar business in shipping oil and petroleum products.

And finally, there have also been a few decent articles on FRO over at SeekingAlpha in recent months, and there was a good chat about it at the Gumshoe forum just recently, so there’s plenty of opportunity to do some learnifyin’ if you so desire.

For full disclosure, my personal largest holding, Seadrill, is also a Fredriksen company that is implementing this same sale/leaseback leveraging strategy for a fleet of deepwater drilling rigs as FRO did for tankers, but I no longer own Frontline and I do not own shares of American Capital Strategies (I do still hold shares of CapitalSource, which was briefly mentioned above).

Related Gumshoe Articles

“These Government Bailout Contracts Can Hand You Profits As High As 63.6%, 102.8%, and 350.7% …”

Sniffing out the truth behind Nilus Mattive's claim that "because of a massive government screw-up, you can buy them right now in your regular brokerage account. "

7 Comments Read More

Leave a Reply

34 Comments on "“Dividend Superstars: Part 2 … Shipping and Secret Investments”"

avatar

Dividends4Life
Guest
0
August 2, 2008 4:29 pm

ACAS has been one of my favorite holdings over the last few years. I have been in and out of it a couple of times, but overall I am still up. Even given the perceived problems, they have continued to raise their dividend the last several quarters. ACAS currently makes up 2% of my income portfolio.

Best Wishes,
D4L

Crazy B
Guest
0
Crazy B
August 2, 2008 6:00 pm

Does the term”Private Exit Triggers mean anything that makes real sense?
This comes from “Pirate Buried Treasure”
He says this is is the 1% solution because 1% of all the investors make 99% of the money.
Just thought i would Ask

destry
Guest
0
destry
August 2, 2008 8:21 pm
We’ve about bandied Frontline to death, elsewhere. And probably with good cause. Fredriksen feels that having the largest fleet, takes a lot of the downside out of shipping gluts…Besides…I’d rather Norwegian, and Danish ships, currency-wise, than USD denominated ships…I think we FRO owners, are as much floating our stick with Captain Fredriksen,as much as for any other reason. Two things to keep in mind: 1. The “Yield” can change dramaticaly,based upon the net profit of voyages. I’ve seen a shipping company go from 32% dividend, to 11%, the next month, on an annualized basis. 5 VLCC’s, and one gets laid… Read more »
Rae
Guest
0
Rae
August 2, 2008 9:32 pm
I don’t know anything about ADAS, but for insight into Allied Capital read “Fooling Some of the People all of the Time” by David Einhorn. Sounds like Einhorn did extensive, in-depth research on Allied and found serious problems, if not fraud. The BDC’s business model would appear to have many ways to make the emperor’s clothes appear beautiful, paying distributions (aka “dividends”) off of new equity coming in and “funny accounting” (and possibly payments for bad debts from SBA (aka our taxes). I can hear you all screaming that Einhorn was short and trying to “talk down” Allied’s stock; but,… Read more »
spreadtrader
Guest
0
spreadtrader
August 3, 2008 2:05 am
Reply to Comment #2……without knowing the context of the reference I’d say that “Private Exit Triggers” are no more than techniques employed by chartists to exit a trade with a profit or to take a loss to protect capital. Do they make any “real sense”? They absolutely do when they are used correctly. In fact, it takes more skill as a trader to do this than it does to pick the security for purchase in the first place(if you’re a chartist and not a fundamentalist). Three “exit trigger” techniques for handling a possible decline in FRO (btw, see the close… Read more »
spreadtrader
Guest
0
spreadtrader
August 3, 2008 2:11 am

Well…I also come to the website due to the brilliance of “the Thinkolator”. Thanks Gumshoe.

Mxlplytz
Guest
0
Mxlplytz
August 3, 2008 9:54 am

Travis- quick question, what do you sea (pun intended)in Seadrill? Every time you mention it I look at it but don’t see anything to get excited about. Do you have some good juicy inside info to share?? hmmmm 🙂

Hollis Whitney
Guest
0
Hollis Whitney
August 3, 2008 11:36 am

Hi Gum:

Not all refineries are in Louisiana. Irving Petroleum is in St.Johns, New Brunswick, Canada.
They have a 300,000 gal per day refinery on the deepest port on the east coast and are in the process of building another of the same size.
Also branching out in new england with retail stations. I have a hunch Venezuela ships into their location.

Lauder
Guest
0
Lauder
August 3, 2008 12:26 pm
All BDCs can have elements of a Ponzi scheme as they try to grow. They have to maintain a 1 to 1 equity to debt ratio and the loans they make generally have a 5 to 7 year repayment time frame. Once their initial capital is fully invested, they have to issue more stock to get the capital for additional investments. To determine whether a particular BDC is a Ponzi scheme, you need to know the amount of payment-in-kind (PIK) interest they earn, the proportion of equity to senior debt in their investments, and how they appraise their investments. The… Read more »
Bennie
Guest
0
Bennie
August 3, 2008 1:12 pm

What is the symbol for Seadrill?

Robert
Guest
0
Robert
August 3, 2008 1:18 pm

This is off the current topic but…
Has anybody out there used Trading Markets “Power Trades”? I’ve been with them now three months and the end results have not been that good. Some of the Power 9’s & 10’s make good money while others tank and cancel out the gains. Anybody else using them? and how?

JAZU
Guest
0
JAZU
August 3, 2008 6:43 pm

Hey Gumshoe, I’m confused, There are two companies ACAS and AGNC both shares listed on the NASDAQ one was iPO’d in 2007 and one has been around for 11 years. They share the same address and web page setup and some officers, but which one is a subsidiary of the other?

ACAS is American Capital Ltd.
AGNC is American Capital Agency Corp. .

investorgirl
Guest
0
investorgirl
August 4, 2008 7:48 am

I am wondering if any of you have BIF on your actts, it is a monthly dividend payer. What is your opioion of BIF? Those who own it, are you happy with their performance? Where do you think this stock will go in he future?

farley 5
Guest
0
farley 5
August 4, 2008 9:27 am

Danger Will Robinson Investorgirl! This broke down in May of ’07 at $10, $9.50, $8.75, etc.

http://stockcharts.com/def/servlet/SC.pnf?chart=BIF,PLUADANRBO%5BPA%5D%5BD%5D%5BF1!3!.25!!2!20]&pref=G

This is a one for 5 technicals positive. The above chart shows the Price Objective at $5.25. If you really like the story, see if it can break the Bearish Resistance line at $9.00.

Read&Invest
Guest
0
Read&Invest
August 4, 2008 8:18 pm
I have owned ACAS for many years. It’s been a great stock, except for recently. S&P still reiterated a “buy” and, absent a depression, I believe they will continue to be a great company. I believe the yield is fantastic and the price will come back when the economy improves. ACAS is the parent; AGNC and European Capital are children. David Gladstone, who started GLAD and GOOD, was with ALD, the moved to ACAS, then started his own shop. I’ve owned them all and made nice dividends from them all. BDCs are not allowed to get as leveraged as the… Read more »
destry
Guest
0
destry
August 4, 2008 9:56 pm

“Well said”…Huzzah!!!!

destry
Guest
0
destry
August 12, 2008 7:19 am
Jeeze louise! Let’s put this to bed… Stansberry& Assoc., Daily Wealth editor, Tom Dyson; Published a little book earlier this year, called “American Quitters”(I got 2 copies free). On page 14, Dyson enthusiastically includes in “Private” Equity Dividend Companies; American Capital (ACAS), and Allied Capital (ALD). Then, he spends the rest of the page and the next, with supportive quotes, as to the wonderfulness of it all….Of course Dyson; First of all has (ALD) wrong. 1) ALD is not a “Private” Equity company. 2)It’s dividend raises since 2000,(16),are irrelevent…It’s raised it’s dividend every year for the past 30+ years, and… Read more »
farley 5
Guest
0
farley 5
August 12, 2008 8:54 am

Destry, destry, destry… You mean to tell me you don’t want to pay 3%/year plus 20% of all profits and 0% of all losses to make substandard returns? Shame on you.

John
Guest
0
John
January 29, 2009 3:33 pm

Dividend Superstars…terrible record. Current issue crows about a double in ACAS from their last recommendation at $3 per share. Didn’t mention they originally recommended ACAS at $43!!

Don’t believe ACAS is paying a dividend at all now, yet is carried in the Superstars current recommendations…yikes!

Michael Levine
Guest
0
Michael Levine
July 12, 2009 8:36 pm

ACAS

The stock price has fallen from $45 per share to $2.84 per share.
But the Dividend Yield is 150% which means they still pay out a dividend of $4.20 per share!

What is the underlying value of ACAS? What do they own? Will the $4.20/shr dividend continue?

Michael Levine
Guest
0
Michael Levine
July 12, 2009 8:48 pm

FRO is a $20 stock with a 5% yield. That implies they have cut the dividend from $11 in 2007 to only $1.00/shr in 2009. Can you confirm?

OSG is $30 stock with a 6% yield. That implies they pay about $1.80/shr in 2009. Can you confirm?

Are these yields sustainable?
Are there higher yielding alternatives you would recommend?

Kinder Morgan at 8.19% yield or El Paso Pipeline at 7.33% yield?

mauijim
Member
0
August 3, 2008 12:30 pm

All his info on Seadrill is on the Irregulars site. Well worth the $4.50 a month.

Mxlplytz
Guest
0
Mxlplytz
August 3, 2008 1:40 pm

thxs!

Mxlplytz
Guest
0
Mxlplytz
August 3, 2008 1:42 pm

SDRLF

Lauder
Guest
0
Lauder
August 3, 2008 10:17 pm

ACAS is probably the parent (or at least they exercise control over AGNC) ACAS management has a tendency to set up various subsidiaries to hide questionable/non performing investments.

Gravity Switch
Admin
11
August 4, 2008 8:17 pm

AGNC is the new company, I think it’s actually a REIT, that ACAS formed recently to buy agency securities (which usually means Fannie Mae and Freddie Mac mortgage bonds). ACAS manages AGNC and owns much of it. They are very different businesses, though both managed by more or less the same people.

vaag
Guest
0
vaag
August 3, 2008 11:17 pm

I worry about ACAS. If stagflation turns to recession turns to mini depression the write downs will be enormous.

trevor peasland
Guest
0
trevor peasland
August 3, 2008 11:44 pm

There’s also HTE.UN refinery in Come-By-Chance, NFLD. Pays 16.4%

Gravity Switch
Admin
11
August 4, 2008 6:22 am

I know, I just mentioned LA because LOOP is one of the busier terminals. Thanks for the extra info.

destry
Guest
0
destry
August 4, 2008 9:45 pm
You’d have a better case if the District Court hearing Einhorns suits, hadn’t not only dismissed the suits as being unfounded; But also took the trouble of formally accusing Einhorn of purposely making false accusations in order to profit from selling ALD short. The book is a parting shot against the court, and ALD. Furthermore,Laddy…Einhorn has sold ALD short at least twice before in the past 15-years, accompanied by unfounded rumors, subsequently driving the stock down, to Einhorn’s profit. What a coincidence…I don’t think there is a law against it. There are a lot of analysts, who claim not to… Read more »
destry
Guest
0
destry
August 4, 2008 9:53 pm

Curiously enough, (GLAD) was started by the same David Gladstone, who founded Allied Capital (ALD)
in 1958.
Anb “Ponzi” schemes are not legal, and fairly
easy to prosecute.

Lauder
Guest
0
Lauder
August 5, 2008 5:34 pm
Didn’t mean to imply they were true Ponzi schemes, the loans they make are real enough. However, PIK interest is not real income, and it won’t be received if the investment turns sour – a real possibility in today’s environment. When PIK consistutes a significant part of the BDC’s taxable income, the BDC is either borrowing from its lender or from new investors to make its dividend payments. Using money from new investors to pay early investors is a primary aspect of Ponzi schemes. PS Maybe Gladstone left ALD because he didn’t agree with they way they do business.
Lauder
Guest
0
Lauder
August 5, 2008 9:05 pm

What’s even more ironic is that Einhorn is now on the board of a start-up BDC (I believe it’s symbol is FSC) founded by Bob Toll’s son-in-law.

At least FSC shareholders won’t have to worry about Einhorn’s hedge fund shorting that BDC. Although plenty of other hedge funds will probably be lining up to short it. (and maybe ALD management as well)

destry
Guest
0
destry
August 12, 2008 4:35 pm

I’m ashamed…….

wpDiscuz