Equity Risk Premium Strategy
Barbarian Capital posted a superb chart on Twitter, showing the average dividend yield on the big three tobacco companies (PM, MO, and BTI; weighted by their market capitalizations) minus the yield on the ten year treasury.
This is just the dividend yield. The payout ratio for PM and MO is about 75%, so the earnings yield is even higher. You can see the "vaping panic" that took place starting at the end of 2018. But Altria's gross profit and operating income keep rising:
This looks like revenue growth for a utility, not a distressed company. And the bond market agrees. In February, Altria issued 30 year debt that is trading at a 4.6% yield. The U.S. 30 year bond is now yielding 2.45%. Altria's 6.8% dividend yield is 220 bps above its 30 year debt. And the cigarette business is a real asset (inflation protected), and the debt is not.
I am interested in combining the sector rotation growth strategy with an equity risk premium strategy, where we look for companies (i) in an industries that have been through an under-investment cycle and (ii) with equity yields significantly higher than their debt yields.
We have hit on some promising ideas that combine (i & ii) so far in tobacco, pipelines, mineral ownership, and telecom/utilities:
- Big Tobacco (MO, PM, BTI) - 200ish spreads
- Magellan Midstream Partners, L.P. (MMP) - 516 bps spread between dividend yield and yield on 2050 maturity
- Verizon Communications Inc. (VZ) - 90 bps (4.5% yield on the stock and 3.6% on a 40 year maturity)
- Dorchester Minerals LP (DMLP) - has no debt and yields 9%
- Suncor Energy Inc. - 2040 maturity yields 4%
- Hotel REITs - these can borrow more cheaply than their earnings yields
- Enterprise Products Partners L.P. (EPD) - 8% yield
- Southwest Gas Holdings, Inc. (SWX) - 3.5% yield, 2022 maturity yields 20 bps
- Enbridge Inc. (ENB) - 7.25% yield, they have a 2080 maturity that yields about 5.5%
Another interesting example of equity risk premium is banks. Via government insured deposits, they can borrow for almost the same rates as the government. (They can borrow unsecured and un-guaranteed for 4%.)
2 comments:
Sold SWX up about 5.5%. I don't like this:
On April 8, 2021, Southwest Gas Holdings, Inc. (the “Company”) entered into a Sales Agency Agreement (the “Sales Agreement”), with BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC as sales agents (the “Agents”), in connection with the commencement of a new “at-the-market” equity offering program (the “ATM Program”). Pursuant to the terms and conditions of the Sales Agreement, the Company may, from time to time, issue and sell through or to the Agents, shares of its common stock, $1.00 par value per share (“Common Stock”), having an aggregate offering price of up to $500,000,000 (collectively, the “Shares”).
That's more than 10% of outstanding!
I like the companies that *aren't* issuing shares.
Source:
https://www.sec.gov/Archives/edgar/data/1692115/000119312521110333/d35657d8k.htm
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