In early December 2014, I unveiled my Dividend Death Watch, a list of energy stocks and master limited partnerships (MLPs) with dividend sustainability issues.
Well, the axe has already fallen…
Last week, Linn Energy LLC (LINE) and Breitburn Energy Partners LP (BBEP) each cut their distributions by over 50% … and more cuts are sure to follow.
Hopefully, the unfolding energy bust will convince investors that chasing yield ends in tears.
As I've said all along, we're looking for dividend growth, not high yields. And the faster the dividend growth, the better.
With that in mind, let's take a look at two companies that recently gave their dividend payouts huge boosts, even though few have noticed.
Natural Monopolies
Last year, utilities were the best-performing U.S. sector. The strong showing by this regulated, low-growth group surprised many.
However, the investing environment continues to favor these natural monopolies in early 2015, as interest rates fall further and the stock market enters a period of heightened volatility.
Some utility stocks have become expensive, though. For example, Duke Energy (DUK) trades at an enterprise-value-to-EBITDA (EV/EBITDA) ratio of 13.2x and a price-to-sales (P/S) ratio of 2.4x. These are lofty valuation multiples, especially for a utility.
By comparison, the utility stocks in the S&P 1500 SuperComposite have an average EV/EBITDA ratio of 10.5x and an average P/S ratio of 1.8x. Thus, we must be careful when looking for opportunities in this sector.
One of the cheapest utilities is AES Corp. (AES), which operates coal, diesel, hydropower, gas, oil, wind, and biomass power plants.
With an EV/EBITDA ratio of 8.0x and a P/S ratio of 0.6x, AES is valued at a significant discount to the average utility.
Now, AES' stock is cheap primarily due to its international exposure. The firm operates in 19 countries around the world, and therefore is subject to foreign exchange and local political risks. However, this diversification should be viewed as beneficial, and the fact that the company recently doubled its dividend payout shows that management is very confident in the underlying businesses.
