Chasing Yield Is Fraught With Risk

In addition to the above, our couple notices that ARCC investors have been ‘rewarded’ with a historical dividend track record that certainly has not been favorable. To make matters worse, investors have also not fared well from an appreciation in stock price other than if an investment in ARCC was initiated at the height of the Financial Crisis.

This couple decides ARCC is definitely not a suitable investment.

NuStar Energy L.P.

  • Market Cap: $2.8B
  • Average Daily Volume: 507 Thousand shares
  • Dividend Yield: 14.71%
  • Additional metrics can be found here

NuStar (NS) is a publicly held limited partnership engaged in the transportation of petroleum products and anhydrous ammonia, and the terminalling, storage, and marketing of petroleum products. It conducts operations through its subsidiaries, primarily NuStar Logistics, L.P. and NuStar Pipeline Operating Partnership L.P.

NS operates through 3 three business segments: pipeline, storage, and fuels marketing.

This couple reviews NuStar’s most recent quarterly financial statement (Q3 10-Q as at September 30, 2017) and notices that a considerable amount of Goodwill and Intangible Assets are reflected; combined they represent ~30% of NuStar’s assets.

They also notice that NuStar also has a considerable amount of long-term debt. In reading the notes which accompany the financial statements they see on page 44 of 61 in the Q3 10-Q that the following credit ratings have been assigned to NuStar’s long-term debt.

NuStar Credit Ratings

These credit ratings are classified as non-investment grade speculative by all 3 ratings agencies.

Given that this couple is looking for a steady stream of income that will hopefully keep pace with, or will exceed, the rate of inflation they have a quick look at NuStar’s distribution history. What they find is that it is less than impressive; there has been no increase in the quarterly distribution since 2011.

They also notice on the September 30, 2017, Balance Sheet (page 3 of 61) a dramatic increase in the ‘Partners’ Equity’.  What they find is that NuStar completed the acquisition of Navigator Energy Services, LLC for approximately $1.5B on May 4, 2017. In order to fund the purchase, it issued:

  • 14,375,000 common units for net proceeds of $657.5 million;
  • $550.0 million of 5.625% senior notes for net proceeds of $543.3 million;
  • issued 15,400,000 of 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (Series B Preferred Units) for net proceeds of $371.8 million.

After looking at the less than stellar dividend track record, this couple has a quick look at NuStar’s stock chart to see if there has at least been some consistency in the growth of NuStar’s stock price. What they see are wild fluctuations which certainly does not give them comfort.

They do a bit further digging and notice that NuStar’s share count has increased over time (and not just for the Navigator acquisition). A little bit more research reveals that like all partnerships that pay out substantially all of their cash flow, NuStar must rely on external funding sources for growth or acquisitions.

This couple decides NS is definitely not a suitable investment.

Retail Properties of America, Inc.

  • Market Cap: $2.99B
  • Average Daily Volume: 1.81 Million shares
  • Dividend Yield: 5.07%
  • Additional metrics can be found here.

Retail Properties of America, Inc.  (RPAI ) is a real estate investment trust (REIT) that owns and operates high quality, strategically located shopping centers in the United States. As at the company’s most recent fiscal year end (December 31, 2016), it owned 156 retail properties representing 25,832,000 square feet of gross leasable area.  Its retail operating portfolio included:

  • Neighborhood and community centers
  • Power centers;
  • Lifestyle centers and multi-tenant retail-focused mixed-use properties;
  • Single-user retail properties.

As at September 30, 2017 (Q3 2017) RPAI reported that:

  • Total same-store portfolio percent leased, including leases signed but not commenced was 94.2% at September 30, 2017, down 50 basis points (bps) from 94.7% at June 30, 2017, and down 100 bps from 95.2% at September 30, 2016;
  • Retail portfolio percent leased, including leases signed but not commenced was 92.7% at September 30, 2017, down 100 bps from 93.7% at June 30, 2017, and down 180 bps from 94.5% at September 30, 2016.

Those results are certainly not encouraging!

In addition, the company’s website indicates it continues to optimize its portfolio by disposing of assets in non-strategic markets as a key component of its strategy.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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