Focus on Liquidity for Bigger Dividend Income & Growth
June 13, 2019
While many in the US petroleum market focus on crude oil, the bigger growth story is taking place in the natural gas market.
With massive oil and gas reserves accessible through unconventional drilling methods like fracking, the United States has gone from a net importer of natural gas to a potentially massive exporter in just a few short years.
But to make the gas export market work, it needs to be processed into liquified natural gas (LNG), which can then be loaded onto tanker ships from marine terminals and sent off to a global market eager for LNG.
Gas supplies are limited in many industrial economies in Asia and Europe. This has led to periodic shortages, particularly during peak demand for gas. Even in nations where there are ample reserves, like Australia, the lack of infrastructure to transport it is leading the Aussies to import LNG.
This conversion and expansion of LNG infrastructure in the US hasn’t been without political fights. But much of that is being worked out on either the local and state level or the federal level.
You can see the opportunity in the chart of US LNG exports below, which have increased 34-fold since 2016.
US LNG Exports—Source: Bloomberg Finance, L.P.
Companies Flowing with Cash
There are several companies that are part of this flow of cash from LNG that also pay ample dividends along the way.
I’ll start with one of my favorite pipelines, Enterprise Products Partners (EPD). This passthrough owns a massive collection of natural gas and crude oil gathering, pipeline transportation and storage facilities around core US markets.
Revenues are up over the trailing year by 24.90%. Operating margins are running at 13.50%, which is delivering a return on shareholders’ equity of 18.00%.
It has plenty of cash flowing through its pipes and other assets so that debt is low at only 46.20% of assets. That cash has also 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%.
And the stock has been a good income and growth investment, with the past 12 months seeing a return of 15.21%. Yet, the stock is still a good value at only 2.64 times book value and 1.80 times its trailing sales. It issues a K-1, so it is best bought in a taxable account.
Next is a diversified utility that has been ramping up its LNG export terminal facilities and related pipelines. Dominion Energy (D) 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%. The return on equity including both regulated and unregulated is running at 13.10%. And it has a nice dividend yielding 4.80%. It is also a value, as the stock is priced at 2.60 times book and 3.80 times sales. 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 for the other companies mentioned above, debt is manageable. With debt to assets running at only 60.70% from financing its impressive tanker fleet, it makes for a lower leveraged company.
The dividend distribution yields 5.17% and, as a passthrough, it has tax benefits in reducing current tax liabilities from the payouts. It issues a K-1, so it should be held in a taxable account.
While I’ve made the case for capitalizing on the rapidly developing US LNG market for bigger dividends and growth, I have additional opportunities for even more income that you can read about in my Profitable Investing advisory.