Oxford Income’s “This business could be the most profitable I’ve ever seen.”

by Travis Johnson, Stock Gumshoe | October 28, 2015 10:21 am

Marc Lichtenfeld[1] has an ad running this week that talks about a business that could be the “most profitable I’ve ever seen” — and one that’s so entrenched in our country that he says the equivalent of 10% of US GDP relies on this one company.

So who is it? Well, he gets into some clues and makes it fairly clear, for an enterprising sleuth, which stock it is… but then he throws a bit of a curveball, saying that he’s got a secret way to earn income from this stock — a stock that doesn’t pay a dividend. And he says he won’t be using options[2] or bonds or anything else income-y.

So there, intrepid Gumshoe readers, is our mystery — let’s solve it, shall we? For those who are keeping track (like us), the ad this time around is for the Oxford Income Letter[3] ($49 first year, $79 renewals).

We’ll start with part one, which is identifying the “most profitable business” Lichtenfeld has ever seen… this is the lead-in to the ad:

“The Company That Gets Paid 2,300 Times per Second

“This business could be the most profitable I’ve ever seen.

“But you can’t collect a cent of income from it… unless you follow the exact instructions below well before January 1.

“I’m going to tell you about a single company that might just have the most profitable – and unusual – business I’ve ever seen.

“It doesn’t need retail stores.

“It doesn’t need to manufacture physical products.

“And you’ll never pay it a cent from your bank account.

“Yet, it’s found a way to collect money during every second of every day.”

So what is the business of this mysterious company? More clues:

Safest Stream of CASH in the World

“First of all, this company controls the largest share of what is perhaps the largest market in the United States…

“Retail stores… gas stations… movie theaters… online sites… electronics… grocery stores… restaurants.

“Anytime a transaction occurs at any of these places, this company makes money….

“… it does this by collecting a small fee from the one thing that virtually every person in America and most people around the world use every day…

“Credit cards.”

And it’s not one of the big credit card networks, or the banks who issue cards — it’s one of the “middlemen” in the payment processing business:

“… this company operates like a tollbooth: It helps facilitate the money distribution and, in return, it collects a small fee on every little transaction.

“You can see why our entire economy depends on the company I’m talking about today…

“While Visa, MasterCard, Discover and American Express fight for their portions of the market… this little company dominates this second part of all credit card transactions.

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“The company gets paid on 74 billion transactions per year.

“It holds a near-monopoly on the entire electronic financial system. Banks and credit card companies MUST use this company’s technology.

“It controls nearly half of all electronic transactions… That includes 80% of ALL gas and grocery payments.”

So you’ve probably got an idea of who this is… particularly if you noticed the little bit about the fact that this is actually a recent IPO[4]…

“With that much cash coming in, you’d think it was an old blue-chip stock.

“Quite the opposite, actually.

“The company just went public on October 15, 2015.

“It was the biggest IPO since Facebook… It was the biggest IPO of 2015… Yet it went public with almost no fanfare.”

So yes, he’s talking about the big payment processing company that went public in a private equity-backed IPO a couple weeks ago: First Data (FDC)

First Data was a big IPO on October 15, though the size of the IPO was nothing compared to the size of the go-private transaction when it was taken over by a private equity fund in a huge leveraged buyout almost ten years ago. But, as Lichtenfeld says, it’s a big company and a large and fairly stable business — but it doesn’t pay a dividend or generate income for you directly… so how is he getting you a “payout” from this company?

That’s part two of the tease: the “backdoor” way to earn income from this stock:

“I’m frustrated because regular investors can’t collect a dividend from this company.

“Not one cent.

“And since I’ve built my reputation on enhancing my readers’ incomes, I can’t recommend it.

“To me, it’s like finding a winning lottery ticket… and being told, ‘No, you can’t claim it.’

“Most people would have given up after finding this out.

“But not me…

“I’ve found a backdoor way to get MASSIVE income from this stock.

“I’m talking about income checks as high as $1,888… $4,720… even $9,400.

“Yet it doesn’t require options, bonds or any other less traditional income sources.

“Rather, there is a way to get special dividends[5] – and even bigger capital gains – from one of the best businesses in America.

“But the window of opportunity could close for good as early as January 1.”

So have you guessed that backdoor yet? Here’s a bit more:

“Only about 18% of the company went public.

“You see, the rest of the company is in the hands of the lucky few who already hold private shares.

“These are the people collecting the big income payouts.

“They are selling a portion of the company because even that small amount will make them billions in cash returns.”

So what’s Lichtenfeld teasing here? Thinkolator sez he’s recommending: KKR (KKR)

Which, you may have guessed by now, is the company that set up the big leveraged buyout of First Data back in 2006, and probably the one most eager to finally “monetize” that investment with the IPO this year. KKR used to be known as Kohlberg Kravis Roberts, back in the days when they were the “Barbarians at the Gate” with their biggest ever (at that time) leveraged buyout of RJR Nabisco, and they are an investment management company specializing in private equity and leveraged buyouts, using both their own capital and the money they manage for (mostly institutional) investors.

The structure of the firm has flopped around a few times, the current iteration was publicly traded for a while in Europe but moved to a US listing in 2010 and is structured as a publicly traded partnership (so just like with MLPs, or with other investment partnerships like Blackstone, this is a tax pass-through entity and you’ll get a K-1 form for your taxes if you own this one).

KKR Does indeed pay a substantial dividend, though that has little to do specifically with the First Data investment — the dividend (I should say “distribution”, actually, since this is a partnership, not a corporation) over the last four quarters has totaled $1.68, which at the current share price ($17.61 at last night’s close) would be a yield of 9.5%. So yes, you could have earned annual income of $1,888, as teased, from KKR over the past twelve months by owning about 1100 shares (an investment of roughly $20,000). Not bad… though over the past year the share price of KKR has fallen by about 21% (a loss of five dollars or so per share), so that yield would have been little solace unless you’re confident that the share price will recover and want to hold this high-yield partnership for a longer time.

And yes, in case you didn’t want to do the math: earning income of $9,400, as per the teaser pitch, would have required an up-front investment of about $100,000 a year ago.

Many people owned KKR largely for income, the big quarterly distribution, and secondarily for their investment acumen that they think will increase the distribution over time — the same reasons they own the other huge investment management/private equity partnership, Blackstone (BX), and KKR made a move last quarter to both make investors more confident in what the distribution will be… and to cut the distribution considerably. They will be paying 16 cents per quarter as their “fixed distribution” going forward, starting with the fourth quarter, so the forward distribution yield will be much lower, about 3.6%. They also announced a big buyback authorization. (For what it’s worth, Blackstone cut their distribution considerably in this most recent quarter, too, so if they pay out similar distributions for the coming quarters that would be a yield for BX of about 5.5% versus the trailing distribution yield of 9% — but I don’t know whether BX has changed their distribution policy as substantially as KKR has, haven’t looked into that.)

Here’s what the KKR co-CEOs said at the time:

“Our announcements today, including the introductions of a fixed distribution per quarter and a share buyback program, reflect important changes to our capital management strategy. Our strong balance sheet, with approximately $14 billion in assets, allows us to support a meaningful fixed quarterly distribution. We will use incremental retained capital to invest behind our ideas and buy back our units. Over time, we think the market will value what we do with our balance sheet, including repurchasing our own units, more than the variable distributions we have been paying. These changes, coupled with continued investment performance, will allow us to create significant long-term equity value for our unitholders.”

Analyst estimates have been coming down a bit for both of those firms in recent months, though I can’t say I’ve been following them closely so I’m not sure why. So now, going forward, if you want to get a big distribution yield while having some (limited) exposure to First Data by buying KKR shares, you’d have to own about 3,000 shares (a little over $50,000) to get the hinted-at annual income of $1,888.

Which means, really, that you can take this away from being a “high yield[6]” discussion and think about KKR solely based on its merits. They are changing the way they operate a bit, getting rid of those variable distributions, and they are continually active in setting up new investment funds and making new investments, but most of their success will depend on keeping assets under management high, which will mean, over time, that they have to keep managing money well. First Data is a small part of that, and probably not a particularly successful part — they’ve grown the business, but they also larded it up with massive amounts of debt and it took almost ten years before they could reasonably get away with taking the company public again to get some cash return… they even had to put more cash in last year to further support the company.

Overall, they look like they’re in pretty good shape — at the partnership level they have about $65 billion in investments and $16 billion in debt, though the balance sheet looks worse than that because of the large entry for “minority interest ownership,” and they did increase their borrowing this past quarter. Assets under management (AUM) continued to rise, so they have a base from which they can probably keep earning a pretty penny… it’s just that they will be dependent for good years and “exits” on how amenable the public markets are to buying IPOs at nice prices, and on bad years for opportunities to buy distressed assets, load them up with debt, and improve their operations. Can’t say that I’ve been deep into the bowels of their SEC filings, and I don’t know how much each individual investment means to their success — First Data is one of the bigger ones, but it won’t make or break them, even though they still control a large chunk.

If you check out KKR’s latest presentation for investors[7], you might find their plans appealing — they are focused on growing book value in the mid-teens and think that the flat distribution will help, their presentation includes a “what if” scenario: If they had had the fixed flat distribution since their US IPO in 2010, the book value would have risen to over $15 a share instead of the current $12. Of course, whether that means you want to pay 1.5X book value for the stock now, with the book value really at $12, is up to you. Just don’t buy it for high yields, or for access to First Data shares.

Endnotes:
  1. Marc Lichtenfeld: https://www.stockgumshoe.com/tag/marc-lichtenfeld/
  2. options: https://www.stockgumshoe.com/tag/options/
  3. Oxford Income Letter: https://www.stockgumshoe.com/tag/oxford-income-letter/
  4. IPO: https://www.stockgumshoe.com/tag/ipo/
  5. dividends: https://www.stockgumshoe.com/tag/dividends/
  6. high yield: https://www.stockgumshoe.com/tag/high-yield/
  7. KKR’s latest presentation for investors: http://files.shareholder.com/downloads/KKR/924974062x0x856752/8F2FEE65-CFE6-4E8B-99BB-9CAF03476075/Earnings_Supplemental_Q3_15_vF.pdf

Source URL: https://www.stockgumshoe.com/reviews/oxford-income-letter-the/oxford-incomes-this-business-could-be-the-most-profitable-ive-ever-seen/


28 responses to “Oxford Income’s “This business could be the most profitable I’ve ever seen.””

  1. Carbon Bigfoot says:

    Been in and out of KKK the last couple of years. Currently <$17/ share I bought it this time at $21. It currently pays a +9% dividend. Earnings $1.57 paying $1.68. Trying to decide whether to hold on, or dump due to the differential and continuing losses. Only own 200 shares and it represents a very small portion of my wife's IRA which I manage.
    Maybe I should sell or being tagged an incompetent buffoon by Obama's IRA Confiscation Team.

  2. Bob says:

    This might not be a bad recommendation. The stock is down today on poor earnings and at current prices yields nearly 10%. A few shares could be a good investment.

  3. john_smith says:

    Incidentally I have received to-day a similar invitation from Mr. Lichtenfield.
    This time for the “Lightning Trend Trader”, a rather kinky sounding service for $ 1,450 per annum:
    http://pro.oxfordclub.com/BET1495MLBNDCAETTTSPESDBNIUP/ETOTRAB8/?email=rancho_cucamonga%40msn.com&a=9&o=105865&s=115008&u=2289235&l=524086&r=MC&vid=RlZn5b&g=0&h=true
    However, contrary to the last word of his link (=true), this exalted message sounds too good to be true to me.
    Anybody a more accurate opinion than me?

  4. chuck says:

    Thanks Travis for calling my attention to KKR. Have smallish (250 shares more or less). Bought at 15 some time ago so even at 17 am still a net gain, Just bought additional today as my last re-invest was at about 22. You didn’t say in your latest why you think the approximately $5/share drop was attributed to (may be this was slightly out of scope for your article). Keep up the good work. Always try to read all of your stuff.

  5. Island Trader says:

    Travis

    As always, I love your work and you deliver the goods. When you read what wealthy people have to say about how they got there, the answer invariably is to first of all protect what you have, and second then where warranted, generate multiple and diverse streams of cash flow.

    KKR I believe is one of those companies where the principals are very focused on these two goals, so worth considering as an investment, but only after investing in Apple and Berkshire (Buffet)

    A good stream should generate 7% return on investment. Most companies can’t deliver that kind of return, but keep looking and Travis let us know when you find one worth buying. High dividend payouts are always a red flag. As you clearly pointed out, a red flag is indeed warranted on this questionable recommendation.

    Cheers

  6. backoffice says:

    I remember the movie about KKR, James Garner was running RJR – Nabisco it made for an interesting story.

  7. SoGiAm says:

    On the subject of payment processors, this equity came in as chart of day:
    The Chart of the Day belongs to Vantiv (VNTV). I found the payment processing stock by using Barchart to sort the Russell 3000 Index stocks first for a Weighted Alpha of 50.00+ or more, then for technical buy signals of 80% or better and then again for a 50-100 Day MACD Oscillator buy signal. Only 55 stock passed these benchmarks. Since the Trend Spotter signaled a buy on 8/27 the stock gained 13.69%.

    Vantiv, Inc. is an integrated payment processor engaged in providing advanced technology solutions for businesses and financial institutions. The Company operates in two segments: Merchant Services and Financial Institution Services. Vantiv offers acquiring and processing transactions, value-added services, merchant services and reporting for electronic payment transactions. It also provides card issuer processing, payment network processing, fraud protection, card production, prepaid program management, automated teller machine driving, network gateway and switching services. Vantiv, Inc. is headquartered in Cincinnati, Ohio.
    Interesting… Best2ALL-Ben

  8. butitom says:

    A caution for potential newsletter subscribers. Bad luck on the timing of solving this teaser Travis, because he only recommended KKR for his more risky Retirement Catchup / High Yield portfolio (one of three alternative portfolios depending upon an investor’s timeframe). For this portfolio, stop losses are used and because of the massive Samson Resources private equity bankruptcy (KKR owned ) that was “revealed” in late August, KKR collapsed before the newsletter ink was even dry and hit its stop loss in Sept. The investment would have probably been sold this week anyway because the new conservative “fixed distribution” would no longer qualify as high yield.
    You have become much more interested in stop losses this year, and have commented you don’t know why someone would use stop losses on a consistent dividend paying company if the original investment thesis was sound, so just a note that Marc uses NO stop losses in his “Compound Income” portfolio, but uses them in his other two portfolios.
    Stock price losses are actually an occasional benefit in the Compound Income portfolio because reinvested dividends can buy more shares, and if you do this over decades its a great opportunity. But of course the down periods have to be a lot shorter than the rising price periods otherwise these would be bad long term investments. But the only exit rationale in that portfolio is if the business prospect for the long term investment thesis changes dramatically.
    If its true this KKR spiel is currently being used in advertising emails for Oxford (and not just recirculated emails), it says a lot more negative about the service and the newsletter management company than one bad choice of an investment. Clearly Marc was blind-sided by KKR’s change in capital allocation policy, but should not have been surprised by the pending Samson bankruptcy and fortunately this time I was not suckered in because I am staying away from all partnerships that have anything to do with energy, i.e. depleting assets. KKR is still too heavily leveraged to the energy sector through its investments (especially natural gas that is in a real tailspin), and while even I would bet the worst is over if it was someone else’s money, my money is staying on the sidelines if energy appears anywhere in a company’s SEC filings.
    The conversion last year of Kinder Morgan to a regular C corporation from an MLP (not to mention their “child” MLP’s) shows how corrupt the management became. Yes, there were nice distributions over the years, but the reduction in capital was much larger than the distributions for return of capital, and they depleted the partnerships of capital to the point where capital equaled zero for many unitholders like me and all the conversion price was taxed. And half of the tax was ordinary income (those friendly IRS deductions just for the oil companies that aren’t available unless you are an energy MLP) . So much for tax deferred cash flow.
    Unless an investor is fully prepared to hold MLP’s until they die (when the basis gets a step-up under current tax law), I strongly recommend against owning any of them. They are too easy for corrupt management to manipulate, and too easy to hide poor investment decisions that deplete capital with no benefit to unitholders. In some ways its similar to a pyramid scheme. As long as the MLP can keep making new investments that increase the capital structure (usually leveraged by debt) and allow them to continue distributions while other assets are getting depleted to zero, then all is OK. Hit a major downturn in the ability to finance new capital and they are sink holes. But of course I am just an angry investor, not a tax expert. So as always, consult your tax advisor whenever considering investing in a partnership to see if its appropriate for you.

  9. dcinvest says:

    Travis, thanks for your valuable review of the pitch which I received via my Oxford subscription sales pitch just 2 days ago.

  10. mygumyacct says:

    Fast forward 6 months. If you buy KKR in a non-tax deferred account, which Lichtenfeld recommended in his August 2015 newsletter, you will receive a K-1for tax filing purposes. The 2015 K-1 for KKR is 28 pages long and is a nightmare if you do your taxes using the H&R Block Premium tax program. Depending on your tax situation it is possible that you may have to file a non-resident tax form in some states that you do not reside in. And because KKR invests in companies world wide it is even more complex. I have done K-1 investments before but KKR’s is far more complicated than I have previously dealt with.

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