Editor’s Note: Related tickers: LyondellBasell Industries NV (NYSE:LYB), Occidental Petroleum Corporation (NYSE:OXY), EV Energy Partners, L.P. (NASDAQ:EVEP), Time Warner Cable Inc (NYSE:TWC)
This long/short fund that applies macro and fundamental analyses is still in favor of equities, and its management sees a positive outlook for equities in the long run. However, according to a recent interview in Barron’s, while the fund’s management “does not say the bull market is over,” it “expect(s) the market to enter a prolonged consolidation, at around current levels.” The main reasons for this appear to be the market’s extended rally so far this year, driven by defensive noncyclical stocks, and slowing earnings growth. Still, given such a historically low yield on the 10-year Treasury, Cooperman thinks that stocks are “very, very cheap against the alternatives in financial assets.” Based on Omega Advisors’ first-quarter 13F disclosure, here is a review of the fund’s four new dividend-paying picks with yields exceeding 2%.
LyondellBasell
In the first quarter, Omega Advisors initiated a new position in a specialty chemicals (polypropylene and polyethylene) producer LyondellBasell Industries NV (NYSE:LYB). This Dutch-based company came out of its bankruptcy restructuring in April 2010, and since has had a stellar performance, as its profits climbed to a new record last year and the company joined the S&P 500 index and received an investment grade rating from Moody’s Investor Services. As an investment, LyondellBasell Industries NV (NYSE:LYB) has both value and growth characteristics. Moreover, it boasts a good income potential as its cash flow is projected to improve notably in the future. We like the stock’s valuation, as LyondellBasell Industries NV (NYSE:LYB) is trading at 9.2x forward earnings and at a price-to-sales of only 0.9. Given its pro-cyclical nature, the stock stands to benefit from the cyclical rebound in the global economies, in addition to the impetus received from the U.S. shale oil and natural gas boom.
We also like the company’s growth potential, as it will be propelled by a $1.6 billion of growth capex over the next three years, which should lead to some $1.5 billion annually in additional EBITDA at 2012 margins by 2017, according to the company’s projections. Mushrooming discretionary cash flow—to the tune of between $2.0 billion and $3.5 billion annually—is likely to translate into more special dividends and share buybacks. In fact, the company recently announced a 25% dividend hike and a rich stock repurchase plan (read more about it here). LyondellBasell Industries NV (NYSE:LYB)’s forward yield is 3% on a payout ratio of 33% of the current-year EPS estimate.
Occidental
Another Omega Advisors’ new pick in the first quarter was Occidental Petroleum Corporation (NYSE:OXY), one of the largest U.S. energy companies. The position in the stock was likely Cooperman’s play on the possibility that Occidental Petroleum Corporation (NYSE:OXY) would try to refocus its operations by divesting international assets, especially those in unstable geographies such as Yemen and Libya, and, possibly, its midstream or chemical operations. The move would unlock value and, with a focus on mainly domestic operations, would warrant an increase in Occidental’s valuation multiple. According to a recent WSJ article, the company is currently entertaining ideas of “selling its Middle Eastern business” or splitting “into three businesses: one focused on the overseas assets, another focused on oil production in California, Colorado and the Bakken oil fields, and a third focused on the company’s 1.7 million acres in Texas and New Mexico’s Permian Basin, according to UBS.”
Given the company’s focus on shareholder returns, especially its seeking to deliver “consistent dividend growth that is superior to that of (its) peers,” we think asset divestments could boost shareholder value in the near future. Currently, about 60% of the company’s production is from North America and about 60% of production is concentrated in oils. The company’s output expansion (targeted at 5%-to-8% annually), its midstream capacity enhancement through BridgeTex pipeline, and continued cost cutting bode well for the bottom line. We also like Occidental Petroleum Corporation (NYSE:OXY) as a value play, given its forward P/E of 12.4x, representing a 23% discount to the E&P industry’s average forward multiple. Likewise, the stock is trading at a price-to-book lower that its five-year valuation average. Occidental has raised dividends for 11 consecutive years, and its current yield is attractive at 2.8%, with a payout ratio of 36% of its current-year EPS estimate.
EV Energy
EV Energy Partners, L.P. (NASDAQ:EVEP) was another pick in Omega Advisors’ portfolio last quarter. The position represents an upstream MLP with a market capitalization of about $1.8 billion. EV Energy’s stock price has declined by nearly 27% since the beginning of the year, amidst the uncertainty over the sale and monetization of the MLP’s 104,000 net acres in the Utica shale. In fact, last year, EV Energy Partners, L.P. (NASDAQ:EVEP) and EnerVest (a controlling member of EV Energy’s general partner), started a marketing process for 335,000 operated acres (104,000 net to EV Energy), but the sale negotiations “stalled over unacceptable terms.” The outlook is now uncertain, as new estimates emerge that the Utica play holds much higher reserves of the currently less-profitable natural gas than oil. The Ohio Department of Natural Resources recently reported that “oil production will be incidental to gas production in much of the Utica/Point Pleasant play,” based on the first full year of production. The report crushed expectations that the play would be oil rich like the Bakken or the Eagle Ford shale formations.
However, EV Energy Partners, L.P. (NASDAQ:EVEP) is investing some $335 million-to-$395 million in two Utica-based midstream ventures, Utica East Ohio and Cardinal Gas Services, which, along with EV Energy’s Utica overriding royalty interest (ORRI), will help boost future distributable cash flow (DCF) growth. A contribution of these assets to EV Energy’s DCF could be as high as 40% within five years. However, challenges will abound in the near term. Even though EV Energy Partners, L.P. (NASDAQ:EVEP) holds some 905 Bcfe in total proved reserves—out of which 67% is gas—the partnership’s average daily production has stopped growing, after several years of robust average daily output growth. Its cash distribution has also been marginally expanding since 2009, with the distribution coverage resting around 1.07x in 2012. This year, due to a projected decline in DCF, the coverage ratio will sink below parity. Hence, the stock looks like a risky bet at present that would appear more appropriate when the picture of the Utica assets monetization improves. EV Energy Partners, L.P. (NASDAQ:EVEP) yields 7.5%.
Time Warner Cable
Time Warner Cable Inc (NYSE:TWC), the second largest U.S. cable provider, also made the list of Omega Advisors’ new first-quarter picks. The company has strong free-cash-flow growth and is returning increasing amounts of cash to its shareholders through higher dividends and share buybacks. Despite some headwinds in terms of lower residential video subscribers, its residential services revenue is increasing—in the previous quarter it was driven by higher average revenue per subscriber in the high-speed data services. Its business services revenue is growing smartly (25% year-over-year in Q1 2013). Future growth will be driven by both higher net-subscriber counts and average revenue per user, as the company plans to scale back on its discounts and promotions.
Still, Time Warner Cable Inc (NYSE:TWC) will continue to face challenges from rising programming costs and the customer migration to the Internet video streaming service providers and lower-cost alternative competitors such as Netflix and phone companies such as Verizon Communications and AT&T. (However, in a push to penetrate into the online video streaming market so as to gain ad revenue, the company is bidding for Hulu, owned by News Corp. and Disney.) Compared to its archrival Comcast, the Time Warner Cable Inc (NYSE:TWC) stock also has a lower long-term EPS CAGR, which justifies a lower multiple for Time Warner Cable at 14.2x forward earnings versus Comcast’s 16.6x.
We like Time Warner Cable Inc (NYSE:TWC)’s capital deployment strategy focused on boosting shareholder returns through a combination of higher dividends and share repurchases. Its dividend grew by 62.5% cumulatively since the beginning of 2010, so its payout ratio is 40% of the current-year EPS estimate. Given the company’s projection of a $2.3 billion in free cash flow in 2013—which translates into $7.9 per share—the dividend payout ratio stands at a lower 33%, leaving much more room for future dividend growth. Moreover, as regards share buybacks, Time Warner Cable’s stock buybacks totaled $660 million in the first quarter, with some $1.6 billion remaining under the repurchase authorization as of March 31, 2013. With a potential Hulu acquisition, Time Warner Cable Inc (NYSE:TWC) would look like a much stronger growth play. Time Warner Cable shares are yielding 2.7%.
Final thoughts
Following the best hedge funds can pay off in the long run, and Leon Cooperman is easily among the smart money’s top tier. Time Warner Cable Inc (NYSE:TWC), EV Energy Partners, L.P. (NASDAQ:EVEP), Occidental Petroleum Corporation (NYSE:OXY), and LyondellBasell Industries NV (NYSE:LYB) all pay dividends in some form or another for yield-seeking investors, and the support of a mammoth investor only adds to their allure.
Disclosure: none
