I haven’t posted any content over the last couple of weeks because I’ve been incredibly busy moving into my new house, so blogging and investing had to take a bit of a temporary backseat while I got everything sorted out. I’m all settled in now, though, and I’m ready to get back on track with dividend investing. Like I mentioned previously, I won’t be investing as much for a while as I prioritize building up an emergency fund, since I’m lacking a bit in that regard (let’s face it, saving up for an emergency fund is boring as shit).
With that being said, after spending two weeks laser focused purely on housing stuff, I was starting to experience withdrawal symptoms since my investing needs weren’t being met. I mean, how can one go for so long without buying equity!? Blasphemy, I know. But fear not, my sexy reader. I quickly remedied that issue by adding to my position in one of the very first stocks I ever invested in. On 7/24/2015 I purchased 16 shares of Spectra Energy at $29.56/share, for a total investment of $472.96.
When deciding whether or not to buy a stock, I perform both a quantitative and qualitative analysis. Let’s start by getting a quick overview of the company.
Spectra Energy is one of the largest natural gas midstream companies in North America, born from the spin-off of Duke Energy Corporation’s natural gas businesses back in 2007. The company operates over 19000 miles of transmission pipelines and is responsible for transporting close to 12% of the totality of gas consumed in North America. Spectra Energy acts as the general partner with a majority limited partner stake in the MLP Spectra Energy Partners, and it owns 50% of DCP Midstream, a joint venture with the company Phillips 66, which was created as a spin-off of energy giant ConocoPhillips’ downstream and midstream assets.
Spectra Energy is very similar in its structure to how Kinder Morgan was before it purchased all its underlying MLPs, and the two companies are basically competitors in the natural gas space (though Kinder Morgan’s business expands beyond just natural gas of course, while Spectra Energy is a pure play on natural gas). Spectra Energy is an excellently managed, stable company, and it boasts a plethora of approved projects through 2019 and even beyond. And as midstream company focused on the transportation and storage of raw materials rather than their distribution, it isn’t as susceptible to the volatility of commodities prices. Its revenue is more volume-based than value-based, if that makes sense.
And last but not least, the company’s name sounds really badass. ‘Spectra Energy’ makes me think of some sort of Ghost Pokemon attack.
I’m not gonna lie guys, it’s Saturday night, and I reaaaaally don’t feel like crunching all the numbers and pumping out charts like I usually do for my stock analyses. I’ve been devouring episode after episode of Falling Skies over the past week after an evening of boredom recently led me to discover this addicting TV show. And I’d like to continue my unapologetic, gratuitous binge-watching spree on this fine evening. So I’ll just give you a quick insight into Spectra Energy’s numbers because I am dying to go watch more of this alien-themed Walking Dead series. As usual, all data used to calculate stuff is pulled from Morningstar. Here we go:
The company sports a fat yield in the vicinity of 5%. Over the last 8 years, its price has appreciated at a compound annual growth rate of about 8%, while its dividend has increased at a compound annual growth rate of roughly 7%. This gives it a Chowder number of 12%, which is nice. Management is committed to producing shareholder value and has already outlined its dividend plan thru 2017, which sees the dividend increasing from $1.48 where it sits at today to $1.76 two years from now. This would imply a compound annual growth rate just north of 9%, which is awesome.
Financially, the company is doing well. Its revenue has increased from $4.7 billion in 2007 to $5.9 billion in 2014. Its debt-to-equity ratio rests at a reasonable 1.56, white its interest coverage ratio lies at a healthy 3.45. And the company boasts a strong ROE of 11.5, which is higher than the industry average of 7.2.
The payout ratio is currently at 102%…WTF!?! How does the company plan on increasing the dividend when the earnings clearly can’t cover it?! Liars! Well, hold up one second, Yosemite Sam. Due to the company’s unique structure involving its partnership with the MLP Spectra Energy Partners, looking at the payout ratio based on earnings doesn’t give an accurate picture. Instead, the payout ratio based on FFO (funds from operations) will be what we are looking for. According to the Wall Street Journal, the FFO stood at $2.765 billion in 2014. Divide that by 672 million shares outstanding, and you get an FFO/share of around $4.1, which translates into a payout ratio of 36% given the current dividend of $1.48. So there’s nothing to worry about, nothing is rotten in the state of Denmark. Marcellus can go suck a fat ****.
For valuation, I used a DDM (dividend discount model) with a dividend growth rate of 6.5% and discount rate of 10%. Even though, as I stated it above, the projected dividend growth rate thru 2017 is at 9% given management’s expected dividend payouts, I’d rather not rely on future speculation. Since the company’s CAGR has been at 7% over the last 8 years, I’d rather use a number closer to that, with a small margin of error for extra precaution. So 6.5% seems reasonable. This gives me a fair value of $45.03, which means that I purchased the stock at a crazy 35% discount! And Morningstar rates Spectra Energy at a fair value of $46, so it’s nice to know that my estimation is in line with theirs. Woot!
Time to go watch Falling Skies (shameless affiliate link because I want to be rich).
Peace out, homies.
Had you ever heard of SE? Do you watch Falling Skies? Tell me in the comments!
Disclosure: long SE