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More Changes to MY Portfolio October 2, 2013

Posted by shaferfinancial in Uncategorized.
Tags: , , , , , ,

This is apparently the year for changes for me. Magellan Midstream Partners [MMP] has been a stock I have owned since 2009. I bought it when the values of all stocks, including MMP, were undervalued. The yield when I purchased it was around 8.8-9%. Since I purchased the stock price has more than tripled. The price has gotten so high as to push the yield to 3.7%. Generally, I purchase these types of stocks for the dividend, and the dividend has gone up quite a bit [$.355 per share to $.5325]. I believe the dividend will continue to rise, although not as fast as the last 4 years. I think this is still a good stock to own. But, there is no doubt in my mind that it is overpriced.  

So I sold my entire position at $55.35. I had another stock on my buy list that had a dividend yield of over 10%. So I took the funds from the MMP sale and bought Ship Finance International [SFL] at between $15.30 and $15.35. In essence I tripled my dividend income from this position. I also had some funds from selling some of my Health Care REIT [HCN] position, which I put into SFL. 

On first blush one would thing that this is a very risky stock to own because of the 10.4% dividend yield. But, I believe that to be inaccurate. SFL is another company associated with Frederick Halvorson, the Norwegian Billionaire. It makes it money by purchasing large ships and doing long term leases with companies that use them. Originally, it was dominated by leases to another Halvorson company, but has since built and leased many ships to other companies. So, the risk of any particular company not being able to make its lease payments is significantly lower. Many of the ships are leased out to the largest companies in the world.  It has a mix of ship types ranging from suezmax to car containers. It currently has 8 off shore oil vessels of which 3 are leased to SeaDrill, another of my holdings.

Of the leases, 68% have over 10 years left and another 27% from 5-10 years. That means stable income to support the dividend. The one company that is in some financial peril that leases, Frontline, if default occurs the vessels have scrap value that would cover the remaining financing on those ships. I believe that is what has scared investors and driven the price down.

The company has 4 container ships currently being built to be delivered in 2014 and 2015. It also acquired another company, West Linus, for $600M. So there is expected growth.

They do use leverage in their business model. But most of their financing is long term in nature and available to them. They currently have a positive net cash flow of over $100M after interest and loan amortization from 2012 projects.

The company does aggressively pay a dividend due to  Halvorson family majority ownership which dictates aggressive dividends. I like that. But, the downside is that you could have some quarters that they have to decrease dividend due to performance.

I feel confident that the business model can maintain the dividend over the next 10-20 years. Because of the return of profits to stockholders with the dividends, I do not expect the stock price to appreciate. But, I will take the dividends and reinvest into the company creating increasing value in that way.

Bottom line, there is more risk here than in either MMP or HCN, but not significantly more. I am getting paid handsomely to assume the risk. I am very comfortable with these changes.



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