If there is one word for my web-based advisory service, it would have to be "comprehensive."
There are 89 publicly traded MLPs in the United States... and about 30 more on foreign exchanges. If you jump blindly into this group, you're likely to run into a few nasty surprises. MLP Profits gives you a handful of the healthiest.
Amazon.com (NasdaqGS: AMZN) released the latest iteration of its Kindle Fire tablet computer yesterday.
Called the Kindle Fire HDX, the device comes in seven- or 8.9-inch screen sizes and features higher resolution than the previous models.
It also sports a Qualcomm (NasdaqGS: QCOMM) 2.2-GHz Snapdragon 800 processor, which is the fastest chip in any tablet, providing three times the processing power of the previous version. (See below for more on Qualcomm.)
The device's main strength comes from its close integration with Amazon's vast collection of content, such as movies, books and music. For example, the HDX's enhanced X-Ray feature lets users see the names of songs playing in the background of the film they're watching and instantly buy them from Amazon.
In a move to attract more new tablet users, the company has introduced the Mayday button, which quickly connects the user to tech support, where an expert can personally guide them through any of the tablet's features. This support is available 24 hours a day, seven days a week, and is free.
"You shouldn't have to be afraid of your device," said CEO Jeff Bezos.
In addition to the new HDX models, the company cut the price on the Kindle Fire HD, which will now be its entry-level tablet. The HD will have 8 gigabytes of memory—compared to the previous version's 16—but it will cost just $139, down from $199. The seven-inch HDX will start at $239 and will ship October 15, while the 8.9-inch starts at $379 and will go on sale on November 7.
Aiming for a Bigger Slice of a Growing Market
According to research firm NPD, 17% of all tablets sold in the U.S. between May and July were Kindles. The iPad accounted for 48%, and 8% came from Samsung's (OTC: SSNLF) Galaxy line.
Around the world, NPD says 470,000 Kindles were shipped during the period, down 59% from a year earlier. (However, the company tends to make most of its sales around the holidays, leading Business Insider to dub it the "fruitcake of tablets.) Apple shipped 14.6 million iPads, down 17%, while Samsung unit sales jumped 539%, to 10.8 million.
The Kindle Fire HD's low price and Amazon's focus on new users through features like Mayday on the HDX put it in a good position to increase sales as the tablet market continues to grow. Market research firm IDC recently lowered its tablet sales forecast for 2013, partly due to rising competition from smartphones with bigger screens, but it still sees sales volumes hitting 407 million units in 2017, up from an expected 227.4 million this year.
Tablet Strategy Is Classic Amazon
In an October 2012 article, Investing Daily's Jim Fink referred to Amazon as the "Teflon stock," a reference to Ronald Reagan, who was known as the "Teflon president," because bad news just never seemed to stick to him. In the same way, investors seem to rally behind Amazon's shares, regardless of the fundamentals.
"Some stocks are impossible to analyze or predict because investors are so enamored by the 'story,'" wrote Fink. "Silly things like a company's profits have no bearing on the stock price.Amazon.com is one such stock."
A recent example is the company's second quarter earnings report, which it released on July 25. Sales rose 22.4%, to $15.70 billion, but Amazon lost $7 million, or $0.02 a share, compared to a profit of $7 million, or $0.01 a share, a year earlier. That was well short of the Street's expectation of $0.06 a share.
Revenue has always mattered to Amazon more than profits, but the company also fell short of expectations there—though only very narrowly—coming in just shy of the consensus forecast of $15.73 billion.
The result? Amazon's stock jumped 2.8% in the following day's trading, to close at $312.01. It moved lower in August and September, but it's now back around $312.
Nonetheless, it's hard to argue with the company's success. As Fink points out, it survived the dot-com bubble of the early 2000s and paid off its $2-billion debt in 2009. It's also the 11th-biggest retailer in the U.S. by sales, just behind Wal-Mart (NYSE: WMT) and ahead of Best Buy (NYSE: BBY).
It is also taking a run at Netflix (NasdaqGS: NFLX) with its Amazon Prime service. In typical Amazon style, it is undercutting its main competitor on price, offering Amazon Prime for $79 a year, or $6.58 a month, compared to Netflix's fee of $7.99. In addition to unlimited viewing of Amazon's over 41,000 movies and TV shows, Prime members get two-day shipping on all their purchases and one Kindle book to borrow for free each month from the Kindle Owners' Lending Library.
The stock up 342% in the past five years, and investors expect that rise to continue, going by Amazon's high forward p/e ratio of 110.9.
Another Way to Profit From Tablets
As we've written in previous Investing Daily articles, there are other ways to profit from the rising popularity of tablets than through Amazon, Apple or other manufacturers. For example, you could look to component makers like Qualcomm (NasdaqGS: QCOM), which makes the Snapdragon processor in the Kindle Fire HDX, as well as chips for Samsung and Apple mobile devices.
The company operates through three divisions: Qualcomm CDMA Technologies, which supplies over 63% of the company's sales, designs and sells chipsets for a variety of devices. Qualcomm Technology Licensing (33% of sales) provides licenses and rights to use some of the company's intellectual property, and the Qualcomm Wireless Initiative (4%) provides development and other services to transport and logistics companies, wireless network operators and governments.
As we wrote in a recent Spotlight article on the company for our Personal Finance newsletter, Qualcomm does face some challenges. For example, it is highly dependent on the CDMA Technologies segment for sales, and it's facing rising competition from chip giant Intel (NasdaqGS: INTC), which is moving into the mobile market to offset falling PC sales.
However, the company is still the market leader, and management expects sales of devices that use Qualcomm's chips to grow by more than 20% annually over the next few years as more consumers upgrade to smartphones from regular cellphones.
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As the third-largest school bus transportation provider in North America, Student Transportation Inc (TSX: STB, NSDQ: STB) has an intriguing story and an enticing 8.5 percent yield that has attracted substantial support from income-hungry retail investors. Nevertheless, it's worth scrutinizing how such a small company--its CAD582.5 million market capitalization puts it toward the lower-end of the small-cap range--can support such a sizable payout.
To be sure, Student Transportation has been the very model of dividend consistency, paying a monthly dividend for 104 consecutive months, since February 2005. And the company is pursuing a consolidation strategy in a highly fragmented industry, with a tailwind from an era of tighter government budgets, where cash-strapped school districts are anxious to save money by outsourcing their transportation services.
As part of its roll-up strategy, Student Transportation has steadily acquired local school bus operators--mostly in the US, where the Canadian firm derives the vast majority of its revenue--in an extended acquisition spree over the past several years, though the pace of its M&A has slowed more recently. According to data provided by both the company and Bloomberg, Student Transportation has closed 31 acquisitions since 2004, including 23 since 2008 and eight in calendar-year 2011 alone. Included in this tally is the latest set of acquisitions, announced on Sept. 17, of two school bus companies, one in New Jersey and the other in Pennsylvania.
In financing these acquisitions, Student Transportation has shrewdly taken advantage of the historically low interest rate environment, which has allowed it to issue debt relatively cheaply, as well as make successful secondary equity issuances to yield-starved investors. As of June 30, which marked the end of Student Transportation's fiscal year, the company reported USD220.2 million in long-term debt on its balance sheet.
Long-term borrowings have nearly doubled over the past five fiscal years, with long-term debt jumping to 113.2 percent of shareholders' equity at the end of June, compared to 65 percent back in 2008. However, the picture is somewhat less dramatic when viewed from the perspective of long-term debt as a percentage of total assets, which climbed to 42.9 percent from 33.2 percent in 2008. At the same time, goodwill, which is the premium paid beyond book value for the intangible assets of acquired companies, accounts for a substantial 27 percent of Student Transportation's assets.
Meanwhile, Student Transportation's weighted average of non-diluted shares outstanding has more than doubled, to 79.4 million shares from 32.2 million shares five years ago. The share count has grown via secondary issuances of 1.7 million shares in 2008, 12 million shares in 2009, and 12.25 million shares in 2012. Still, management noted that low-cost debt has enabled the company to avoid making additional secondary issuances, since the last one in March 2012.
The company's dividend reinvestment program (DRIP) has also added incrementally to the share count, including 1.3 million shares in fiscal-year 2012 and 1.5 million shares in fiscal-year 2013. Like DRIPs at other Canadian-domiciled firms, retail investors must be Canadian residents in order to be eligible to participate. Dividends are reinvested without commissions at a 3 percent discount to the average share price of the five trading days preceding the payment date.
Student Transportation has attempted to offset some of this potential dilution via a buyback program, which in Canada is referred to as a normal course issuer bid. Nevertheless, share repurchases have been relatively minimal over the past two fiscal years, at just 96,300 shares and 401,076 shares, respectively.
Fortunately, net income per share has improved to CAD0.05 in fiscal 2013 from a loss of CAD0.22 in fiscal 2008 (the company reports its results in US dollars, but per-share data is listed in Canadian dollars). The most recent result also marks a recovery from the dip to CAD0.03 in profits per share in 2011-12, after the company posted CAD0.05 in profits per share in 2010. So from an earnings-per-share (EPS) standpoint, dilution appears to have been mostly kept in check, though it does show that the company's roll-up strategy has yet to translate into sufficient growth in EPS to more than offset the rise in share count.
Furthermore, dividend coverage is definitely a concern, since the total annual payout of CAD0.56 per share is multiples of the firm's EPS. But when adding back non-cash charges, such as depreciation and amortization, to net income, the payout ratio appears to be a more manageable 69.1 percent. The company's fleet of 9,600 school buses results in a significant depreciation expense, which totaled USD41.9 million in fiscal 2013. In their earnings call, management cited a payout ratio of around 79 percent, though I wasn't able to locate their methodology for arriving at that figure.
Once we finally enter a rising-rate environment, Student Transportation won't be able to pursue acquisitions as aggressively, nor will it have the same level of support from income investors, as some will inevitably shift their attention toward fixed income. As such, management will have to reorient their focus toward organic growth. At that point, we will watch to see whether the company's scale has truly enabled it to not only support its payout, but also achieve enduring growth in earnings per share.
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While MLPs have become almost synonymous with the energy industry in recent years, the tax shelter also harbors a number of real estate and financial partnerships. Continuing last week's survey of the more exotic MLPs, we'll take a look at a timber company, an infrastructure play and several private equity firms. (Note that this is merely a brief overview of these partnerships and should not be considered as an endorsement).
Pope Resources (Nasdaq: POPE) is a land and timber owner in the Pacific Northwest. Assets include 113,000 acres of productive fee timberland, and a 20 percent stake in an additional 61,000 timberland acres. The partnership also owns 2,900 acres of development property, most near Seattle.
The partnership consists of three segments. Eighty-one percent of 2012 revenue was derived from Fee Timber. In 2012 this category included 191,000 acres of timberland in western Washington state, northwest Oregon and northern California, and 80,000 acres owned by timber funds.
The Timberland Management and Consulting segment is the group's primary growth vehicle. Assets include three private equity timber funds with $231 million in assets under management and $134 million of committed capital.
The third segment is Real Estate, accounting for 15 percent of 2012 revenue. This consists of 2,900 acres of commercial and residential development in West Puget Sound.
Pope provides a way to invest in timber, but units are thinly traded. Further, at present they yield only 3.3 percent, which won't be especially attractive should interest rates continue to climb.
Until recently you could also get some exposure to timber through Brookfield Infrastructure Partners (NYSE, TSX: BIP). But during the second quarter, BIP sold its low-yielding timber assets to free up capital for its utilities, transport and energy businesses. BIP's business model is to operate high-yielding assets in these core sectors around the globe.
BIP's Utility Platform generates 43 percent of the partnership's cash flow through ownership of nearly 10,000 kilometers of transmission lines and 2.5 million gas and electricity connections across North and South America, Europe, and Australia.
The Transport Platform is responsible for 37 percent of cash flow, and consists of 28 ports, 3,200 km of toll roads and 5,100 km of rail operations in Europe, South America and Australia. The Energy Platform contributes the remaining 20 percent of cash flow and is comprised of natural gas pipelines and storage systems in the US and Australia.
Some 90 percent of BIP's cash flow comes from regulated businesses or long-term contracts, and the partnership is geographically diversified with 17 percent of cash flow derived from North America, 19 percent from Europe, 28 percent from South America and 36 percent from Australasia.
BIP aims to pay out 60 to 70 percent of its funds from operations (FFO). Based on the most recent cash distributions of $0.43 per unit, the annual yield is 4.6 percent.
Shifting gears to an entirely different type of MLP, the Carlyle Group (Nasdaq: CG) is a leading private equity investor and asset manager with more than $180 billion under management. Carlyle serves more than 1,550 investors from 74 countries, and its 118 funds span four segments -- Corporate Private Equity, Real Assets, Global Market Strategies and Global Solutions -- and seven geographic regions.
Carlyle's distribution policy has been to return 75 percent to 85 percent of after tax distributable earnings to unitholders. Those earnings are partially derived as fees, and are partially from carry funds that have a particular life cycle. For these funds, Carlyle goes through a cycle of fundraising, investing, appreciation, and then selling. Two examples of companies that have gone through the complete cycle with Carlyle are Hertz Global Holdings (NYSE: HTZ) and Dunkin' Brands Group (Nasdaq: DNKN).
Carlyle went public in May 2012, and units are up 14 percent since. Over the past year, Carlyle has made quarterly distributions of $0.16, $0.16, $0.85, and $0.16 per unit, for an annualized yield of 5.3 percent.
AllianceBernstein Holding (NYSE: AB) is a financial services firm that provides research and investment management in 23 countries. The partnership also provides services to its sponsored mutual funds. AB caters to private clients and institutional investors alike, and presently has $436 billion under management. Over the past year the partnership has distributed $1.55 per unit to unitholders, for an effective yield of 7.4 percent.
Kohlberg Kravis Roberts (NYSE: KKR) is a $5.6 billion partnership with three business segments: Private Markets, Public Markets, and Capital Markets & Principal Activities. KKR has $83 billion of under management in its Private Market (65 percent of assets) and Public Market (35 percent) segments, and $4.6 billion of investments in the Capital Markets & Principal Activities segment.
Initially formed in 1976, KKR has completed more than 200 private equity investments with a total transaction value of more than $470 billion. The firm has grown by expanding globally and into new businesses, such as fixed income, hedge funds, capital markets, infrastructure, natural resources and real estate. KKR has completed a number of high-profile transactions over the years, including the landmark 1989 leveraged buyout of RJR Nabisco.
KKR units have rallied in 2013, gaining 32 percent year-to-date. In the past 12 months, the partnership has distributed $1.63, a yield of 8.1 percent at the current unit price.With a market cap of $13.7 billion, the Blackstone Group (NYSE: BX) is the largest of the financial services limited partnerships. Blackstone is the world's largest independent alternative asset manager, with business segments consisting of Private Equity, Real Estate, Hedge Funds, Credit, and Mutual Funds, and a total of $230 billion of assets under management. Blackstone's Financial Advisory segment is comprised of financial and advisory services, restructuring and reorganization advisory services and Park Hill Group, which provides fund placement services for alternative investment funds.
The partnership's global investments span a diverse group of industries, including energy and natural resources, healthcare, financial services and hospitality. The partnership has made major investments in such household names as Hilton Worldwide, Caesars Entertainment (Nasdaq: CZR), The Weather Channel and Deutsche Telekom (OTC: DTEGY).
Net income was up 30 percent in 2012 to a record $2 billion, with strong performance in Real Estate, Private Equity, Credit and Hedge Fund Solutions. Like KKR, BX has rallied over the past year, with units gaining 59 percent in 12 months. Based on the past year's distribution of $1.05 per unit, the current yield is 4.3 percent.
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