Proof of a market-crushing investment strategy?
In a blog post yesterday, I talked about an interestnig article that I read which stated that dividend-paying IPOs are often attractive investments:Secrets of Dividend Paying IPOs - Wall Street’s Hot New Odd Couple
Something I have noticed is that the "hot" money from hedge funds, etc... usually chases after trendy IPOs, like those in the tech sector. This leaves a number of IPOs in less sexy dividend-paying companies relatively unnoticed. As the article mentions, many of these stocks pay dividends, or distributions, in excess of 7%, 8%, or even 9%. Typically dividend yields don't begin to show up on stock screens and in places like Yahoo Finance until companies have actually paid a few out. This leaves a window where savvy investors can pick up shares before they skyrocket as a result of yield hounds.
The more I look at this theory, the more it looks like it works. One would think that nothing could be this simple and we have been in a bullish market lately, but I have found several examples of excellent short-term returns that resulted from buying stock in dividend-paying IPOs, particularly new MLPs, when gonig through the list of companies that have recently gone public.
Check out the charts for:
Inergy Midstream, L.P. (NRGM)
Rentech Nitrogen Partners, L.P. (RNF)
Mid-Con Energy Partners, LP (MCEP)
In theory, the stocks of new MLP IPOs that have strong parent companies should perform even better than this. None of these companies have particularly strong parents, one is a money-losing producer of magic energy, one is aprivate equity firm, and one is a poorly performing propane distributor.
Though Inergy's terrible performance might actually benefit its newly created Limited Partnership in that its poor performance might encourage Inergy to accelerate its dropdowns to the new, Inergy Midstream, enabling it to grow quickly.
OK, I am now officially fascinated with this theory. I plan on looking into it further in the future to see if it will continue to work. If anyone has the time, please feel free to back-test the dividend-paying IPO outperformance theory for several years and let me know the results :).
One flaw with this might be the energy-centric nature of many of the companies that have the qualities that we are looking for. These companies would likely be hurt in a time of falling energy prices, though natural gas has been demolished and it didn't hurt the aforementioned companies' performance any.
That is one of the reasons that I liked UAN so much when it came out. You don't see nearly as many fertilizer MLPs out there as energy ones, even though the same market forces might have an impact upon both fertilizer and energy prices.
A bear market probably wouldn't be great for either. Having said that, if a company has well-covered dividend yield or distribution of 7%, 8%, 9%, 10%+ when it initially begins trading investors might be attracted to that once it begins to show up in charts, on screens, etc..., even in at time of falling stock prices. I suppose that rising interest rates would hurt this sort of investment as well, but I highly doubt that we have to worry about that one any time soon.
One sector to avoid would definitely be tankers. I have seen way too many people get burned by chasing yield in tanker stocks, even rising yields don't stem the bleeding in this notoriously cyclical segment of the market. As a general rule, I avoid takers in almost all situations, much like the airline industry. I'm sure that someone can make a ton of money by investing in tankers at the right time, but it's not going to be me.
Looking ahead, Foresight Energy Partners LP (FELP) looks like the only offering that is scheduled for the near future that fits the criteria of a dividend-paying IPO. I'm not wild about investing in coal, I much prefer pipelines or even E&P in the MLP space. I suppose that I would invest in just about anything that didn't offend me morally at the right price (this is a change from my previous moral-less investing past...goodbye cigarettes). I'll have to take a closer look at this one.
Does anyone else know of any dividend-paying IPOs that have recently come out or are scheduled to in the future. I saw yesterday that Marathon Oil (MRO) is considering spinning-off its pipeline assets. That has the potential to be a good one.
Oh, one more that I recently saw is Roundy's Supermarkets. The company expects to have an IPO in the near future in the $10 to $12 range. At $11/share, the company's scheduled quarterly dividend payment of $0.23 would give it a hefty yield of 8.36%. I like supermarkets as investments almost as much as I like tankers and airlines if you get my idea, but one wouldn't think that a yield like that would last. Either the company will implode and have to cut its distribution, or investors will bid the price of the stock up until it has a lower yield. Roundy's has a whopping $820 million in debt that it is currently trying to refinance. If it is successful in refinancing a portion and using the proceeds from the IPO to pay down another chunk it would be in much better financial shape. Again, I generally don't like to invest in supermarkets, but this is another stock to keep an eye one in a sector that isn't energy.
Anyhow, that's all the time that I have for now. I'm off to pick up the kids from school and play Skylanders (man Activision really knocked the cover off the ball with that one).
Have a great weekend everyone!