The folks at KCI have been moving to a “pay by the month” format for some new “entry level” newsletters that have been released over the last year or two, and several folks have asked about Roger Conrad’s new one recently … so I thought I’d give it a look for you.
Conrad’s new letter, which they describe as a “free” monthly alert service that happens to cost $5 per month because of “email and handling costs,” is called Big Yield Hunting — and it sounds like what they basically do is give a short buy case for a high-dividend pick each month, without the larger explanation, additional editorial content, or complexity of a “real” monthly newsletter. Conrad’s colleagues Elliot Gue and Yiannis Mostrous do much the same thing for “regular” stocks (ie, not just income-focused) in their Stocks on the Run monthly service, which I’ve written about once or twice. The $5 in “postage and handling” costs for an email newsletter is laughably huge for an email newsletter (it’s roughly the same as we charge for membership in the Stock Gumshoe Irregulars, but if every reader of this free daily update threw in $5 a month the “free” site would be hugely profitable — the costs of doing research and paying people can obviously be high, but the cost of actually emailing your readers is teensy once you’ve got more than a couple hundred of ’em).
Of course, it’s clear why they do this: $5 a month can not only bring in some profit, but it sounds like very little commitment and might appeal to folks who wouldn’t want to pay $50 or $100 up front for a more traditional annual subscription, and it gets people used to spending money for stock ideas … and once you’re used to that and start to like Roger Conrad, you become a very appealing prospect to upsell to his MLP Profits or Canadian Edge for $399. That’s the way the business works — the folks who come in on the free letters are targets of upsells, and the folks who sign up for the “entry level” newsletter make for the best targets for upgrading to the priciest letters and lifetime memberships, which tend to bring in much of the publisher’s profit. As every good marketer knows, the best prospects are the folks who have already bought something from you in the past.
But anyway, what you’re interested in is the new “wonder from the land down under,” right? This is the pick that Conrad is teasing in his current promo for the Big Yield Hunting service … and in case you don’t want to sign up to pay five bucks a month, I thought your favorite little friendly neighborhood Gumshoe might sniff through the clues and identify it for you.
So what do we get by way of clues? Here’s the first bit from Roger Conrad:
“I want to take you down under to the Land of Oz—Australia. My colleague, David Dittman, and I have found a pro-dividend company in a recession-proof industry—essential energy infrastructure.
“The new CEO firmly believes that company assets are there to generate cash flow to pay dividends. Isn’t that refreshing? It has a rich yield—12.6%—and a semi-annual payout.”
And the share price?
“As I write this it currently goes for under $2 American.
“Oh, and that 12.6% yield is in Aussie terms. So when and if the Australian dollar appreciates against the U.S. dollar, expect that yield to jump.”
The Aussie dollar has already appreciated hugely against the US dollar, of course — I don’t know whether or not that will continue, of course, but Conrad seems to expect it and he’s definitely not alone. The Australian dollar was bouncing around down at 65 cents for a while when things were bleak and commodity prices falling, but now that everyone’s enthralled with China’s supermarket the US and Australian dollars trade pretty close to par (not too different from the Canadian/US dollar relationship, though the recovery of the Australian dollar was much more recent and far sharper).
Here’s the bulk of the remaining clues provided in the teaser letter:
“This new Big Yield Hunting pick holds the most solid of energy infrastructure assets and investments tied to the rapid growth of mineral and petroleum assets in Western Australia.
“Average annual growth rates for these industries over the past 10 years are a hefty 15%! Western Australia exports more than $76 billion worth of these in-demand resources. And more than $70 billion has been committed or spent to build out Western Australia’s energy infrastructure to increase output even more.
“This company is sitting pretty and has everything an aggressive investor is looking for in long-term wealth building:
“1. essential-service assets secured by long-term contracts in a regulated environment;
with a pro-dividend CEO;
2. an undervalued stock price, trading at just 1.13 times book value;
3. a double-digit (and rising!) dividend, currently at a tantalizing 12.6%;
4. and in a recession proof industry… with corporate revenue increasing 7.6% in the 6 months ending 12/31/10.”
And Conrad, who does tend to be more sober than most hypesters, also throws in the final clue — that there’s something at least slightly off-putting about this investment:
“There is one small cloud to potentially rain on our profit parade. This company’s financial structure is a little complicated. It’s the reason many weak-willed investors have stayed away and why its share price is so undervalued.”
So who are they teasing? Well, the Thinkolator is back in the garage and humming away nicely, thanks very much, so let me just go load the hopper with these clues, set it on “pulverize” … and here we go:
This must be DUET Group (DUE in Australia, DUETF on the pink sheets)
And I suspect that Conrad must have released this pick near the end of February, because the pink sheets volume picked up to 500K shares on February 24 … the previous high volume on these very lightly traded shares had been not much more than 100K shares way back last Spring, and probably for at least half the trading days over the last year or two the stock hasn’t changed hands at all, with volume almost never getting over 10,000 shares. That’s for just the pink sheets, understand, the US listing that investors use for convenience to avoid having to buy on the Australian exchange — over in Australia, volume is fine, and other than a little discrepancy for a day or two the share prices in the US and Australia has been more or less in harmony, within a couple percentage points most of the time (which isn’t bad, considering that the US and Australian markets are never open at the same time). As of the close in Australia, the shares were at A$1.50, close to a 52-week low, which equates to about US$1.48, and latest trading on the pink sheets was at US$1.51.
So yes, the shares go for less than two bucks, how about the rest of the clues? The dividend has recently been 20 cents per year, payable in two semiannual payments of ten cents each — which brings us a dividend yield of roughly 13.3% now, thanks to the fact that the shares are down slightly from when Conrad (or his copywriter, I suppose) wrote this teaser. The price/book valuation is slightly nicer, too, at 1.06 now.
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And actually, it’s not really a dividend yield — DUET Group is more of a trust or stapled security, so I should say “distribution.” DUET Group, which we have seen teased before (most recently by Peter Schiff both in February 2009 and February 2010), is effectively an investment trust that’s externally managed by part-owners Macquarie and AMP Securities — and if you want a taste of the complexity that Conrad says might be turning off some investors, here’s how they describe themselves:
“DUET consists of three registered managed investment schemes and an Australian public company: Diversified Utility and Energy Trust No.1 (DUET1), Diversified Utility and Energy Trust No.2 (DUET2), Diversified Utility and Energy Trust No.3 (DUET3) and DUET Investment Holdings Limited (DIHL). These four entities are stapled together and trade on the Australian Securities Exchange (ASX) as one DUET Group security (DUE.ASX).
“The responsible entity of DUET1 is AMPCI Macquarie Infrastructure Management No.1 Limited. The responsible entity of DUET2 is AMPCI Macquarie Infrastructure Management No.2 Limited. The responsible entity of DUET3 is AMPCI Macquarie Infrastructure Management No.2 Limited.
“DIHL is advised by AMPCI Macquarie Infrastructure Management No.1 in its personal capacity.
“The responsible entities are jointly owned (50:50) by AMP Capital Holdings Limited (AMPCH) and Macquarie.”
Frankly, looking over their organizational chart is enough to turn your otherwise usually sane Gumshoe into a blithering idiot, so I won’t try to explain much of that detail — the important thing to note is that they pay a hedge fund-like management fee to their managers (AMP and Macquarie), and they otherwise pay out almost all of their distributable cash flow to investors, much like a Canadian Trust (back when we used to have those) or an MLP.
And the MLP comparison is probably most apt, because the most valuable asset for DUET is their part ownership of the Dampier Bunbury Pipeline, which has also brought in their highest revenue growth numbers lately (up 9% for the last six month period) — they also own parts of other regulated utilities and “essential services” businesses, the kind of stuff Conrad generally likes: gas distribution assets in Western Australia, mostly in metro Perth; a gas distributor in Victoria, mostly around Melbourne; and an electricity distribution network also in Victoria. They also own, though are in the process of selling if regulators approve, part of the Duquesne Light, an electric utility in Pittsburgh, so they will once again, if plans go through, become a fully Australia-focused utility-type business.
Things seem to be going along reasonably well for DUET — they did indeed post a 7.6% revenue increase in the most recent report, and they have gotten approval for capital spending plans and rate increases for some of their regulated assets, though also disappointing regulatory response for their smallest one. I don’t know if those overall increases were as much as analysts or investors had hoped for — the distribution was cut in early 2009 but has been steady for about two years, so there must be something else driving investor discontent with the stock recently (the shares are down about 20% from their highs this year in nominal terms, though the strong performance of the Aussie dollar has meant the impact was felt far less by the few US shareholders).
Australia has a withholding tax for foreign dividend and interest payments, I don’t know what it is since I don’t know what kind of reciprocal tax treaty we have with Australia and I haven’t checked to see exactly what percentage of each payout is return of capital, interest, or dividend, but I wouldn’t be surprised if it averaged out to being in the 15-20% range of the total distribution. One reason to maybe not hold this in a retirement account unless you can be sure they won’t withhold taxes, since I don’t think you can claim foreign tax credit for a tax-deferred account.
And please, do not count on that paragraph being exhaustive or specifically accurate — I’m NOT a tax expert in any way. Just pointing out a couple things you might want to be aware of.
They do have a new CEO as of February, though I don’t know if he’s particularly more committed to dividends or increasing the payout than the previous guy — he has been the COO for several years, so it doesn’t appear that he was brought in to shake things up, at least not publicly. The point of this stapled security has always been to supply high distribution income, I don’t expect that to change and don’t know if they plan to raise the distribution in the near future — so far, it is expected to still be 10 cents for the first six months of this year, payable in August.
And DUET does appear to have done fairly well so far in their effort to refinance and perhaps deleverage a bit — they’re turning more of their debt holding in the Denbury pipeline into equity, it appears and also engaging in some refinancing for other utility assets that seems to involve DUET borrowing money to pay itself back and turn that utility debt that had been owed to DUET into equity. I assume they will also use the sale of their Duquesne Light position to improve their balance sheet. I haven’t looked at the refinancing or restructuring details as I imagine Conrad has, and it makes your head spin a little bit since most of the assets are held with partners, and they’re paying themselves back … but from a quick glance it looks like those numbers are moving in the right direction. They carry a lot of debt (roughly $6 billion), but have been able to recently refinance near-term maturities at seemingly reasonable prices — and though the market cap is small relative to debt (market cap is less than $1.5 billion), they do have huge fixed assets of great value, particularly the pipelines, and the refinancings seem to take away any near term concern investors might have had about debt levels.
So what do you think? Interested in a yield on Australian energy transmission assets of about 13%? It does certainly stand out in a time when most of the US and Canadian pipeline pass-through entities (MLPs and the like) pay out more like 6-8%. Think there are better ideas out there, or have concerns to share after digging through DUETs numbers? Let us know with a comment below.
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