Daily Archives: February 7, 2019

Dividends

Quiet Shift Reveals Huge 8.8% Cash Payout

It happened so quietly, you may not have even noticed. But the script has flipped on interest rates—and today I’m going to give you my favorite way to profit. (hint: this buy pays an 8.8% dividend—enough to hand you $8,800 a year in cash on every $100k invested—and is poised for quick 10% price upside, too!).

Let’s start at the beginning.

A Low-Key 180

I’m sure I don’t have to tell you that the big story of the last three years has been the Fed’s aggressive rate hikes. But the big story of the next three years will likely be a lack of aggressive rate hikes.

The change happened fast—at just one Fed meeting in January—and the market now expects zero hikes in 2019. Funny thing is, our best buy for this new world is a group of investments that, if you relied solely on the headlines, you’d think are some of the worst things you could own now.

I’m talking about floating-rate loans, which should rise in value as rates go up. But the Fed’s move to no hikes this year has actually created a great contrarian buying opportunity here.

Floating-Rate Loans Have Been a Wildcard

Floating-rate loans were touted as a way to profit from higher rates since the Fed started hiking in late 2015, but there’s been a problem: reality kept butting against this theory.

Floating-Rate Loans Freeze Up

Despite the rising-rate cycle kicking off in December 2015, the benchmark iShares Floating Rate Bond ETF (FLOT) went nowhere following a brief, small bump in early 2016. And investors were no doubt frustrated with the 1% gain they got in the years they held FLOT, before kissing most of that gain goodbye in the late-2018 market panic.

In short: floating-rate loans, for much of this period, didn’t work as planned.

But now is a great time for floating-rate loans, even though the Fed rate is likely to flat-line. Because just as theory didn’t translate to reality by using these loans to profit from higher rates, the theory that their value will go down in value as rates fail to rise is equally unrealistic.

That’s because the recent fall in floating-rate-loan values has nothing to do with interest rates.

The floating-rate loan market saw a huge drop in late 2018 for two reasons: 1) There was a record number of loans in the market, due to lenders choosing floating-rates over corporate bonds (thus increasing supply and limiting price growth); and 2) There was a panic as investors feared lenders would default on their loans due to bankruptcies caused by an economic crash.

The second fear is already proving to be nonsense: not only is there no crash, but employment and corporate earnings seem likely to keep improving in 2019, even after a strong 2018. The first issue, however, is also disappearing—but many people don’t know about it.

Instead of using floating-rate loans, as they did in 2018, more US companies are going back to raising cash by issuing corporate debt in the form of bonds. They are even doing this in unusual and unexpected situations. The Financial Times tells the story of TransDigm (TDG), an aircraft-component manufacturer that used corporate bonds instead of floating-rate loans to fund its $3.8-billion acquisition of aerospace-component maker Esterline.

Commenting on the deal, TwentyFour Asset Management Head of Credit David Norris told the Financial Times: “I would typically have expected a company like this, doing an acquisition, to go to the loan market. But they didn’t do that. There are opportunities right now in the high-yield bond market.”

With the decline in the number of floating-rate loans, demand for those still in existence (and the few new ones coming to market) will likely drive up prices, especially since overblown default fears have kept floating-rate loans below their pre-crash levels.

That means there’s a huge buying opportunity for savvy buyers—especially if we get our floating-rate-loan exposure through closed-end funds (CEFs).

Floating-Rate Confusion Hands Us an 8.8% Cash Payout

Since CEFs often pay huge dividends, your chance to grab 7%+ yields from floating-rate funds is now. But which funds to pick?

One of the most discounted floating-rate funds also has one of the biggest yields: the Ares Dynamic Credit Allocation Fund (ARDC) pays a massive 8.8%. It also gets “bounce-back” upside from its 13.1% discount to net asset value (NAV, or the what its underlying loan portfolio is worth). That’s well below the 7.2% discount it achieved in the past year.

As you might suspect, the fund’s name comes from its management team: Ares Management, which runs a number of funds and companies that provide credit to medium-sized businesses, including its business-development company, Ares Capital Corporation (ARCC). Ares Capital is the biggest BDC, with $12.3 billion in assets under management.

That size is important, because it means Ares has deep connections with many borrowers and knows which can pay their bills and which can’t. That has meant an impressive run-up for ARDC since interest rates started rising:

“In the Know” Management Delivers

While investors typically reward ARDC with a steadily rising market price to match its portfolio’s fundamental strength, the fund’s price return is still lagging:

A Rare Buying Opportunity

The takeaway? Now is a great time to tap ARDC for its 8.8% income stream and hold while my expected 10% capital gain from both a strengthening floating-rate-loan market and the fund’s shrinking discount start to appear.

Source: Contrarian Outlook

Uncategorized

3 Leading Renewable Energy Stocks

I want to follow up on my renewable energy article from Monday with another look at the renewable energy sector. And later I will fill you in on three renewable energy stocks leading the way that hail from Europe.

First though, let’s look at some of the raw numbers on renewable energy investment worldwide.

Clean energy investment globally actually declined 8% in 2018, according to Bloomberg New Energy Finance, to reach $332.1 billion, because of two factors – a Chinese crackdown on solar subsidies and the falling cost of wind and solar projects.

This latest data from BloombergNEF, considered to be the most definitive account of clean energy spending worldwide, shows that the biggest drop came in China, where renewable energy investment fell by a third after a new government policy slashed subsidies for solar projects beginning in June.

However, this is a case where a cursory glance at the raw numbers does not give a valid picture of what is going on in the renewable energy space. Actual additions globally of new wind and solar projects still increased year on year despite the decline in investment, because the costs of solar and wind energy projects have seen steep falls.

Angus McCrone, chief editor of BNEF, explained: “It’s not really a slowdown at all. Every year investment in clean energy has to run faster to stand still, because of the reduction in costs.” Renewable energy investment will fall again in 2019, he predicts, even though the amount of new capacity added will increase slightly because the reduction in costs will continue.

Costs Continue to Fall

There is no doubt that the costs of renewables — led by solar and wind power — are now materially cheaper than they ever have been. These costs have fallen to the point at which the International Energy Agency, in its latest short term outlook, sees prices falling to between $20 and $50 per megawatt hour. That means wind and solar can compete with other fuels, even if some of the costs of providing back up to cover the intermittency of renewable supplies are included. In a growing number of markets, neither subsidies nor protected market shares will be necessary.

Even here in the U.S., the cost of new wind and solar power generation has fallen below the cost of running existing coal-fired plants in many parts of the country. New estimates published in November by the investment bank Lazard show that it can often be profitable for U.S. utilities to shut working coal plants and replace their output with wind and solar power.

According to Lazard, the all-in cost of electricity from a new wind farm in the U.S. is $29-$56 per megawatt hour (MWh) before any subsidies — such as the federal Production Tax Credit, which is being phased out by 2024. The marginal cost of operating a coal plant is $27-$45 per MWh.

So there are times and places where building a wind farm, even without any subsidy, would make sense. Add in the PTC, which can cut the cost of wind power to as little as $14 per MWh, and the case becomes even stronger. This turns into a win-win situation, with higher returns for the utility companies and lower bills for their customers.

Here in the U.S., the outlook for wind power is brighter than that for solar power at the moment because of tariffs placed on solar panels by the Trump Administration.

Installations of new solar power capacity in the U.S. slowed in the third quarter of 2018 to the weakest rate since 2015. The projects most affected were the large utility-scale projects, which are much more sensitive to the cost of solar panels.

These tariffs came into effect last February at an initial rate of 30% with the intent of protecting domestic panel manufacturers. But the Solar Energy Industries Association, which represents developers and installers as well as manufacturers, said the tariffs had put a brake on investment and had cost more than 20,000 jobs.

It is this apparent anti-renewable energy sentiment from the Trump Administration that has me looking to Europe for the best-performing companies and stocks in the sector. I particularly like the wind power-related companies in Europe. Here are just three of them…

Three European Wind Power Stocks You Can Buy Here in the U.S.

Europe is home to some of the world’s best wind turbine companies, which is good news since the prospects for the wind business remain sound. Installations worldwide are expected to reach 72 gigawatts per year by 2025 – a 5% compound annual growth rate. My two favorite are:

Vestas Wind Systems (OTC: VWDRY) and Siemens Gamesa Renewable Energy (OTC: GCTAY). Vestas’ stock here in the U.S. is much more liquid than Gamesa’s, but both companies are doing very well.

Gamesa was an independent Spanish wind company that combined its wind assets with Germany’s industrial powerhouse Siemens to form a top-notch company.

In its recently reported quarter, results were much better than expected, sending the stock soaring from a beaten-down low (there were doubters as to the wisdom of the merger). Revenue increased in the quarter by 6% year-on-year, to 2.26 billion euros, driven by the offshore wind business and by its services business. Wind turbine volume increased by 7%, to 2,129 megawatts of energy, due to the strong contribution by the offshore segment, which sold 609 megawatts (+76% year-on-year).

Net profit amounted to 18 million euros, contrasting with the 35 million euro loss reported in the same period of the previous fiscal year.

Siemens Gamesa logged orders worth 11.5 billion euros in the last twelve months (+3% year-on-year), driven particularly by a 28% increase in onshore orders (6.8 billion euros). Order intake in the first quarter amounted to 2.5 billion euros, with solid performance by onshore wind turbines (1.8 billion euros, +7% year-on-year).

The order book stands at 23 billion euros (+8% year-on-year), of which 15.7 billion euros worth are orders to be filled after the 2019 fiscal year. This lends greater visibility to its future growth and covers 92% of the revenue target for the current year. The offshore wind business is projected to attain 27% annual growth, from 2 gigawatts of installations in 2018 to 12 gigawatts in 2025.

Vestas will announce earnings on February 7th, but it has already pre-announced good news. Based on preliminary reporting, Vestas upgraded its expectations for 2018 free cash flow to approximately 400 million euros. That compares to its prior expectation of a minimum of 100 million euros.

The company said the marked improvement was primarily driven by a strong order intake and indeed the company’s order book is at a record high, with over 10 gigawatts of orders in 2018. One example of a major order it won here in the U.S. was announced in December to supply 100 of its V120-2.2 megawatt turbines for a wind project.

Another major wind power-related company is Denmark’s Orsted A/S (OTC: DNNGY), which has transformed itself from a hydrocarbon energy company into a renewable energy company.

It last earnings report, in November, blew away analysts estimates (pardon the pun) with a 31% rise in earnings from offshore wind generation. And the company raised its guidance for 2019.

Orsted also said its green energy generation had increased substantially, with renewables now accounting for 71% of its heat and power output, up from 60% in the year ago period. It recently expanded its reach into onshore wind in the U.S. with the purchase of Lincoln Clean Energy and it also bought a U.S. offshore wind developer, Deepwater Wind.

Most of these stocks have done well, despite 2018 being a very poor year for stocks. The returns over the past year for these three companies’ ADRs are: Siemens Gamesa – 1%, Vestas – 25% and Orsted – 25%. The only laggard has been Gamesa, but it is up 35% over the past three months.

I expect the outperformance from these stocks to continue in 2019.