Friday, October 17, 2014

Two and a half purchases I made this week

This is going to be a short article. The purpose is to discuss how I was able to acquire shares in two companies this week. The third transaction is explained in more detail below.

The first company I purchased shares in included Eaton (ETN). Eaton Corporation plc operates as a power management company worldwide. The company has increased dividends for five years in a row. However, it has not cut dividends to shareholders but increased it every other year since 1983. The company has managed to deliver an 11.80% average increase in annual EPS over the past decade. Eaton is expected to earn $4.60 per share in 2014 and $5.34 per share in 2015. In comparison, the company earned $3.90/share in 2013. The annual dividend payment has increased by 13.80% per year over the past decade, which is higher than the growth in EPS. Currently, Eaton is attractively valued at 13 times forward earnings, and has a dividend yield of 3.30%. I initiated a position in the company in the past quarter, and have since added to it. I would be looking forward to adding to my position in the company in the coming years, subject to availability of funds, opportunity cost and valuation. Check my analysis of Eaton on Seeking Alpha.

The second company in which I purchased shares was Williams Companies (WMB). It owns the general partner interest in Williams Partners (WPZ) and Access Midstream Partners (ACMP) along with any limited partnership units in both MLPs. Those are pretty valuable, especially if the pipelines do manage to increase cashflows. Williams Companies is a dividend achiever, which has managed to raise dividends for 11 years in a row. The company has a pretty aggressive plan to increase dividends per share through 2017 and expects to pay $2.46 in 2015, $2.82 in 2016, and $3.25 in 2017. Given the current annual payment of $2.24/share, which translates to a roughly 4.70% current yield, I would be interested in the company even if growth slows down to 5% – 6%/year. But no, Williams Companies expects to grow dividends by 15%/year through 2017. Those projections are one of the reasons I initiated a position in the company a few months ago. Given that pipelines are under pressure in the past two weeks, I think prices are starting to get more attractive. I probably need to write a more detailed analysis of the company, so please stay tuned.

These purchases are relatively small, given that I didn’t expect to have enough funds till sometime in November. I might make another small purchase either next or the week after next week. The purchases I am trying to make are basically additions to shares of companies I own, in an effort to increase positions by taking advantage of decreasing prices.

The third transaction I did earlier did week involved some shares of Kinder Morgan Inc (KMI), which I sold in my taxable account and purchased Kinder Morgan Management LLC (KMR). Since I am replacing one security for another, I view this as a half “purchase”. Actually, since once the deal closes I will end up with KMI anyway, it shouldn’t even be considered a purchase. A few weeks ago, I discussed that there is an arbitrage opportunity, where by purchasing KMR shares, an investor who waits till the acquisition by Kinder Morgan Inc is complete, can end up with more KMI shares than purchasing them outright. This is because the price of KMR shares is lower than the conversion factor times the value of KMI shares. If that paragraph is making your head spin, read the whole article explaining the process.

On the plus side, Kinder Morgan Inc (KMI) announced it increased quarterly dividends to 44 cents/share, which is a 7.30% increase over the same rate paid in the same quarter last year. Unitholders of Kinder Morgan Energy Partners (KMP) will get a quarterly distribution of $1.40/unit, which is a 4% increase over the same distribution paid to unitholders in the same quarter last year. Given that Kinder Morgan Management LLC (KMR) is equivalent to KMP, minus the ominous tax structure of a partnership, and given its higher yield relative to Kinder Morgan Inc ( plus it is not taxable since I get shares "reinvested" without triggering any taxable liabilities to the IRS), I think that I made the right choice. Now if Kinder Morgan Inc (KMI) drops to $30 or below, I would replace my remaining position with Kinder Morgan Management LLC (KMR) shares.

The other half I transaction I did was the fact that I replaced most of my position (90% or so) in ONEOK Partners (OKS) in my taxable account with the general partner ONEOK Inc (OKE). There are multiple reasons for the switch. The first reason is that if you like an MLP, the best returns in terms of dividend growth and capital appreciation are always derived from investing in the general partner. Thus I believe that OKE will do better than OKS over the next decade. I also made a mistake by chasing yields in the first place in 2011, when I sold OKE to buy OKS. Chasing yield on my part is not the smartest thing to do. I discussed this mistake in a previous article I posted a few months earlier. I needed to fix the mistake, once I identified it. Another reason for the change is that I need to simplify my life, as I will no longer have to do K-1 forms. They are not that difficult for me to do, and ONEOK Partners (OKS) does a really good job in showing you what forms to file with the IRS. However, if I am no longer in charge of the DGI portfolio ( due to death, disability, insanity etc), I know that this would make it more difficult for whoever inherits the dough. Thus, I used the sell-off in the pipeline sector to get in on the general partner, which declined much faster and much more than the limited partner units. On the surface, it sounds crazy that I replaced a 5.80% current yield for a 4% current yield. The thing of course is that the second yield is expected to grow by 10%/year, while the first higher yield would grow much slower. Over time, investing in the general partner interest will likely achieve better yields on cost. For the time being, I am still going to keep the remaining ONEOK Partners (OKS) in my IRA however.

Full Disclosure: Long ETN, WMB, KMI, KMR, OKE, OKS

Relevant Articles:

Ten Dividend Seeds I Planted for Long Term Income
Canadian Banks for Long Term Dividend Growth
How to buy Kinder Morgan at a discount
Kinder Morgan Limited Partners Could Face Steep Tax Bills
Seven Dividend Stocks I purchased for the long-term

4 comments:

  1. Gas pipelines in general are a strong dividend play for the next 10-20 years. With recent EPA regulations, natural gas will be the dominate electric generation fuel source for the foreseeable future, but even today there is a significant pipeline capacity shortage (e.g., http://www.bloomberg.com/news/2014-05-23/u-s-energy-rigs-drop-by-4-to-1-857-baker-hughes-says.html)

    Gas pipelines obtain authority to build new capacity directly from the federal government, and should be able to grow EPS as they continue to expand pipeline capacity from the many new shale plays across the US. Kinder Morgan, Oneok, Williams, Enterprise, and others all have strong existing yields and commitments to dividend increases/

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  2. Good pickups! I especially like how you are leveraging the Kinder Morgan mergers and the ability to gain a little ground from it. Very impressive!

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  3. Hey there,
    I just got around to starting to read your blog after being on the new reading list linked from another website. I just wanted to say "nice site" and I willbe reading it from now on.(I didn't know about it before). I know you helped me before on Joshua's site so I just wanted to say thatns again!

    dave (nestle)

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  4. Great purchases this week. Eaton is great company. It is headquartered about 20 minutes from where I live, so i always keep a close eye I the company. It is great that you have used the recent downturn to invest in some high yielding stocks. I am not really sure why KMI decreased st the beginning of the week. But not surprisingly the stock increased once the Dividend increase was announced.

    Keep up the great work and adding strong companies to your portfolio!
    Bert, one of the Dividend Diplomats

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