More “Best Investments Left Standing” High Yield International

By Travis Johnson, Stock Gumshoe, November 11, 2008

Yesterday I spent some time looking into a couple high yield telecom companies that were being teased by the new High Yield International newsletter from Street Authority … if you missed that, it’s still here, you needn’t worry — the stocks haven’t shot up in the interim.

There are a bunch more to go through today as we apply the mighty Thinkolator to our little paragraphs of clues, so let me jump right in. What we’re looking for today are all international investments with unusually high dividend yields — today’s feature presentations will include an Australasian fund, a semiconductor company, and a shipping company.

First, a closed-end fund. If you don’t know what these are, they’re essentially the same as regular mutual funds, with a few major differences: They have a set number of shares, and they trade on the open market. That means that unlike regular open-ended mutual funds which always trade at exactly their net asset value, closed-end funds can trade at a significant premium or discount to the underlying value of the investments in the fund.

Close-end funds can be a great way to boost your returns if you’re convinced that an asset class will turn around, because market sentiment essentially provides leverage — the shares can go up both from the rise in the underlying value of their investments, and because the discount shrinks as investors get excited about owning this asset class again. Of course, if you’re wrong you can be stuck with something that continues to trade at a discount, or that gets even more discounted, or can stay at the same percentage discount while the asset values continue to fall.

Many closed-end funds also pay dividends, and some of them are specifically designed to pay big dividends either through their trading profits or through high yield bonds or stocks that they hold. And to boost that return, many funds use leverage, which got some of them in trouble with auction rate securities last year, and has gotten several of them in trouble on the dividend front this year. Be careful with CEFs that use leverage and that you’re buying because of their yield — if the value of their securities falls and they trigger some of the covenants of their debt, they have to stop paying dividends. This has come close to happening for several funds I’ve looked at in recent months, though I don’t know of any funds offhand that have actually suspended distributions.

So what do they have for us?

“Fueled by the rapid economic growth of China and India, the Australasian super-region is in a sustained economic boom. This closed-end fund gives you instant exposure to a bevy of the highest-yielding stocks in Australia and Asia. This bargain yields 13.7% and sells at a 21% discount to its net asset value.”

This premise is now frightening for some folks — relying on Chindia growth. That’s part of why the Australian dollar has collapsed in recent months (for much of the Summer the Australian dollar wavered right around parity with the US dollar, meaning $1 was worth AU$1, but now an Australian dollar is worth a bit less than 70 US cents), Australia’s big business is commodity production, and with commodities falling things Down Under are a little hairy.

Will it return to a “sustained economic boom?” Maybe, there is still certainly growth in many Asian countries, and it’s quite possible that demand for commodities will resume its growth. If so, perhaps you’d want to look at this one — it’s possible that the answer could be one of several funds, but the best guess on this one is …

ING Asia Pacific High Dividend Equity Income Fund (IAE)

This fund is currently about 25% in Australian equities, the rest spread around Asia. Today it’s trading at slightly less than a 13% discount, and the yield is almost exactly 20%. You can see all the details on the Closed End Fund Association site here if you like. I don’t believe this fund uses leverage, but they do use options to boost their returns — specifically, they sell call options against their holdings or against the relevant indexes, which could certainly have helped them outperform the Australasian indexes over the last month or two (selling call options when prices are going down helps to muffle those losses, and there’s been no no real upside for them to miss out on).

For a fund of this type, that uses active management, options strategies, and international stocks, the management fee seems fairly reasonable — 1.4% per year is the current rate, it’s not unusual to see closed end funds charge much more than that. Of course, if you ignore the dividends the shares have fallen by more than 50% in the past year, so it’s painful to pay any management fee for that kind of performance, even if almost every fund has stunk over that time period.

Moving on!

Another Asian stock for our consideration …

“This classic Taiwanese technology stock takes advantage of the nation’s engineering prowess to create sophisticated electronic components while manufacturing them in lower-cost mainland China. It makes semiconductors for flat-panel screens for laptops, mobile phones, digital cameras and car navigation devices. Income has more than tripled over the past three years, and it’s a great play on several long-term trends: rising demand for flat-panel displays, the possibility of closer ties between Taiwan and China and economic growth in Asia as a whole. Trading at a P/E of just 2.7 — extremely low for a company expected to grow +20% annually over the next five years — and yielding 17.9%, this is a bargain that’s hard to pass up.”

This one, according to the constantly cogitating Thinkolator, is little semiconductor company Himax Technologies (HIMX).

It does indeed have a crazy high yield — based on this year’s dividend of 35 cents, it’s trading with nearly a 20% dividend yield now. Yes, if you just did that math in your head that means the shares are well under $2 — as I type, you can pick this one up for about $1.80.

Should you? Well, that 20% predicted earnings growth is obviously a wild guess, and no one is investing right now based on that potential future growth. Their earnings most recently have been shrinking, not growing, though they’ve enjoyed relatively high margins in what is in many cases a low margin business and they are indeed very profitable. They have paid a dividend this year and last year, but I have no idea whether you can expect another dividend next year of similar size, they appear to issue their dividends just once per year — this year it was in June.

Himax is focused on many of the industries that people are afraid of right now, and of course if demand falls for all those gadgets in the teaser then it’s quite possible that their sales and margins will suffer. I haven’t dug very deep into this one, but I do know that there are several investing touts who are urging folks to look at Taiwan, many of whose publicly traded companies are semiconductor-related businesses. Bigger firms like Taiwan Semidonductor (TSM) and United Microelectronics (UMC) have fallen much less than HIMX, and, though they have significant dividends, they yield much less, too.

And we’re on a roll here, so let’s look at one more …

“Based in the Marshall Islands, this master limited partnership owns a fleet of tankers that move crude oil around the world. This is perhaps Asia’s best high-income energy play today. Now yielding 19.4%, its dividend has doubled in the past three years — and it should increase every four or five quarters. Its ships are new — which means it will be spending little on maintenance. The final bonus: As a limited partnership, most of your distributions are a return of capital, so you pay zero tax on them.”

There are a number of limited partnerships that own tankers and pay good yields, including Teekay Tankers (TNK), Capital Product Partners (CPLP), K-Sea Partners (KSP), Omega Navigation (ONAV), and a few others, many of which focus on smaller niches like LNG tankers, or domestic barge tankers, or refined products.

Most of the MLPs that could match these clues are less than three years old, and it’s hard to claim that any of them has doubled its dividend over that time. And frankly, the clues seem to contradict a little bit — if you want a MLP that primarily ships crude oil around the world, that’s Teekay Tankers, which has barely been trading for a year (though the dividend has climbed dramatically in that time). If you want one that has doubled the dividend over three years, the closest match for that is Omega Navigation (ONAV), but ONAV owns product tankers, not crude tankers.

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Both have ships that are quite new, ONAV’s are newer, with most of them just a few years old and a big newbuilding order book of vessels that will be delivered in the next couple years. Teekay Tanker’s fleet comes from its parent, Teekay (TK) and is certainly not decrepit, but their tankers — mostly Suezmax and Aframax size crude oil carriers — are, on average, about eight years old.

So I’ll tell you that this one is probably Omega Navigation, even though they don’t transport much crude oil, if any. Why? The dividend was close to 20% a week or two ago, before the shares fell further (it’s now closing in on 30%), and you can stretch it to say that they’ve increased their dividend over three years. They have consistently paid a 50 cent per share dividend for ten quarters, so how can I say that they’ve increased their dividend? Well, they came public late in the year in 2006, so they paid only one 50 cent dividend that year … this year, so far, they’ve paid three 50-cent dividends, so the dividend has “tripled”, I suppose.

In reality, they currently pay an annual dividend of two dollars per share. This is an MLP, so it probably won’t be surprising that this is more than their actual earnings — distributable cash from MLPs often includes a fair amount of return of capital, in part because the depreciation charges can significantly depress reported earnings without cutting into free cash flow.

I am not an expert on any of these tanker MLPs, but my initial impression from looking them over quickly is that I’m more impressed with Teekay Tankers (TNK) — they own the much larger crude oil tankers that benefit from the increasingly long trips that oil makes around the world, and they have a very strong partner in Teekay that actually operates the ships. Currently, the dividend is also higher, though it also exceeds their reported earnings.

Keep in mind that one of the reasons why these MLPs exist is so that the operating companies and general partners can generate nice, steady fee income and not subject their balance sheets to the heavy debt, depreciation, and asset price risk of owning these capital-intensive vessels, risks that are certainly different than for the more staid and stable pipeline MLPs that generally have been around much longer and pay much lower yields (still often up to 9-10% or so).

You can compare this to some degree with the hotel companies that sell off their properties to REITs or real estate investors — Marriott, for example, doesn’t own many hotels anymore so they don’t much care whether the values of the properties go up or down, and they get franchise and operating fees from the hotel owners in exchange for running the properties. This tends to mean that they’re more sheltered from vagaries in occupancy rates, and that their costs are much more predictable. Of course, if things really go to hell in a handbasket they also don’t have those nice assets sitting on the balance sheet as a final prop for their shares, but neither do they have to carry all the debt to service those assets.

I’ll have to look into these guys a bit more, most of the tanker companies are taking a beating as oil prices fall and people fear that China’s oil demand will collapse, but it seems quite likely that oil will continue to be transported around the world.

You can also find companies that perform somewhat similarly in Nordic American Tanker (NAT) and Knightsbridge Tanker (VLCCF), neither of which is a Marshall Islands company or an MLP, but both of which generally operate as high-yield companies which own large oil tankers and pass through earnings as dividends. On a larger scale there’s also Frontline (FRO), which I’ve written about before and which is fairly highly leveraged, or its leverage partner, Ship Finance Limited (SFL), which is a finance company that buys tankers (and some other ships) and leases them back to operators, principally their former parent FRO. All of those and many other shipping companies also pay high current dividends, and most have seen their share prices clobbered with the falling price of crude.

If you’ve got any opinions to share about these investments or about any high yield international ideas (or anything else, frankly), feel free to comment below.



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Tom Bates
Tom Bates
November 11, 2008 4:27 pm

two things:
one, I’ve gotten some e-mails, I think from the Skousen letters but can’t remember, recently (past week) that touted somethin I’d really like to find out about. But can’t remember–I get so much and delete so much–BUT ALWAYS READ YOURS–love to meet you, buy you dinner, if you are ever in NY–I’m in Westchester but can get into the city easily.

Second–take a look at PLD! Today’s range $8.74-5.07, closing at 6.87. Unbelievable. Its trading at less than 25% of book. OK, say book is over valued. Cut it by half. Its still trading at a 50% discount to book. Its dividend is over 39%. It went ex dividend Friday and funds from operations covered the full dividend. OK, say going forward it cuts its dividend by 3/4. Its still paying 10%. Analysts currently project 2009 earnings (not cash flow–earnings) of $2.53. The low estimate (out of 14) is $1.90 next year. Take that. That’s a PE of only 3.6 times. What am I missing?

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farley 5
farley 5
November 11, 2008 5:07 pm

PLD broke the Bullish Support Line in June and did not look back. 0 for 5 in the unfavored Real Estate market. From their Website:ProLogis is the world’s largest owner, manager and developer of distribution facilities, with 548 million square feet (51 million square meters) of industrial space in 136 markets across North America, Asia and Europe.

Since we are in a global recession – depression, these guys are in a world of hurt. There has been huge buying since October and the stock is still in a free-fall. Set your alert for $15.50 and simply wait. Cash is still king in this market.

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