Go with the Flow for More Dividends
May 02, 2019
US oil gets a lot of headlines. But right now, it’s all about natural gas.
Gas has been coming with such a huge rate of supply that it’s been putting stress on existing transport and storage infrastructure. And like crude oil, natural gas is trading at a discount due to this supply. When this happens, many producers deem natural gas a lower priority than petroleum production and either burn or flare it off to focus on crude oil.
But thankfully, companies in the infrastructure business have been moving to increase their capabilities in gathering and transporting natural gas due to a series of regulatory reforms that allow natural gas to be sold and exported to foreign markets beyond just Mexico and Canada.
To make the gas export market work, the gas needs to be processed into liquefied natural gas (LNG), which then can be loaded onto tanker ships from marine terminals.
While gas is plentiful in the US, many industrial economies in Asia and Europe have little domestic supply. This has led to periodic shortages, particularly during peak demand for gas.
In decades past, the US was also in this sort of predicament before shale field development brought bountiful natural gas to the market. And the US spent a lot of money on LNG import facilities. But now, export terminals are being ramped up, along with the pipelines to transport natural gas to the terminals.
This conversion and expansion of LNG infrastructure hasn’t been without political fights. But much of that has been resolved.
The chart below shows how LNG exports went from virtually zero in 2016 to expanding 34.29 fold today.
US Liquefied Natural Gas (LNG) Exports—Source: EIA & Bloomberg Finance, L.P.
Companies Flowing with Cash
There are several companies that are part of this LNG party that also pay ample dividends.
One of my favorites is pipeline firm Enterprise Products Partners (EPD). This passthrough owns a massive collection of natural gas and crude oil pipeline transportation and storage facilities around core US markets.
It has plenty of cash flowing through its pipes and other assets, so debt is low at only 46.20% of assets and has been used to expand its infrastructure assets. The dividend is running at a yield of 6.08% and has been increasing over the past five years by an average annual rate of 4.53%.
The stock has also been a good income and growth investment. It’s up 15.21% in the past 12 months, but it’s still presenting a good value. Because it’s a master limited partnership, it issues a K-1, so it’s best to hold the stock in a taxable account.
Dominion Energy (D) is a diversified utility that has been ramping up its LNG export terminal facilities and related pipelines. Dominion is a regular corporation with regulated utility businesses and unregulated operations including its pipeline assets and its LNG facilities in the Mid-Atlantic.
Overall revenues are up 4.59% on average over the past three years, with the unregulated segments including its LNG operations rising at an average annual rate of 18.21%. It also pays a nice dividend yielding 4.80% and is another great value at current levels. Ideally, this stock should be held in a tax-free account.
Last up is Teekay LNG Partners (TGP). The company is a passthrough that is focused on tanker shipping of LNG as well as other petroleum products.
Teekay has rising revenues, climbing by 18.00% over the trailing year. Operating margins are fat at 28.90%. And like the other companies mentioned above, debt is manageable. Debt to assets are running at only 60.70% from financing its impressive tanker fleet, making for a lower leveraged company.
The dividend distribution yield is 5.17% and, as a passthrough, it has tax benefits in reducing current tax liabilities from the payouts. It issues a K-1 and should be held in a taxable account.
While I’ve identified a collection of dividend-paying stocks in the expanding LNG market in this Digest, I have additional opportunities with even more dividend income that you can read about in my Profitable Investing advisory.