Boardwalk is a Buy
This week's issue of Barron's featured its semi-annual Roundtable of All Star investors. This issue is always one of my favorites because it contains some fantastic information from some of the greatest investment minds around like Bill Gross, Marc Faber, and Scott Black (and a few duds as well like Abby Joseph Cohen).
In this post, I have decided to feature an excellent quote from Barron's recent interview with Mr. Black and to talk about one of his recent stock recommendations that I currently own in real life and CAPS. First the quote:
The economy will recover in the fourth quarter because there has been so much fiscal and monetary stimulus. But the recovery won't be strong because of our structural problems. Given the unfunded liabilities of Medicaid and Medicare, and ongoing deficits, the U.S. is going broke. In the short term I'm not worried about inflation. Nor do I see a run on the dollar because it is still the reserve currency for the world. There will be a run on the dollar in the long term, however, if we keep printing money. The Fed has expanded its balance sheet to $2.12 trillion of obligations, up from $930 billion a year ago.
While Black is slightly more optimistic about the economic recovery than I am, he and I have the same thoughts on where the U.S. economy is headed. That the massive economic contraction that we have experienced over the past two years will eventually end, but growth will be much slower than many expect going forward. Furthermore, numerous times in the past I have stated that I believe that the U.S. dollar will gradually lose value over time...but that it will not immediately fall off of a cliff.
Now onto Mr. Black's stock recommendation, Boardwalk Pipeline Partners (BWP).
I have personally owned BWP since its collapse during the fall of last year. A number of things attracted me to the company, including its attractive yield (currently over 9%) and the fact that it has easy access to capital through its relationship with Loews Corp. The well-capitalized Loews owns 73% of BWP's outstanding shares and it has been providing the company with access to capital at a time when the credit markets are tight.
Here's what Black has to say about BWP:
It pays a dividend of $1.94 a share and yields about 9.2%. Historically, MLPs have yielded about three percentage points above the 10-year Treasury yield, which is now 3.94%. Book value, excluding goodwill, is $17.12. The stock sells for 1.2 times tangible book value, which isn't expensive. The company has all new plant and equipment. It operates three major pipelines running more than 14,200 miles in the Southwest and Southeast.
My earnings forecast is lower than the Street's. Revenue will rise 20% this year; to $942 million. Margins of 35.2% get you to $332 million in operating income. Interest expense is $137 million, and profit before taxes, $195 million. Earnings, fully diluted, will be at $1.10 a share. The debt-coverage ratio is excellent at about 3.9 times. In the past few years, revenue has grown by 11.9%, compounded, while the dividend has risen about 10.5% a year. Plus, Boardwalk has good bank lines of credit.
The stock could rally to 28. That's 33% appreciation plus a 9% yield - or an expected total return of 42%.
As someone who is becoming increasingly uncomfortable with the valuation of many stocks relative to where I believe earnings will be over the next several years, I love the idea of a well-capitalized company whose stock will pay me 9% even in an environment where economic growth in America is flat. A 9% yield sure beats the heck out of the interest rates that one can get on savings accounts, CDs, and most bonds right now.
I was already sold on the stock before reading the above quote and I like it even more now that a great investor who has a more conservative earnings forecast than the consensus estimate can make such a compelling case to own it.