As a dividend growth investor with an eye towards the long-term I mostly ignore short-term noise. I don’t pay too much attention to macroeconomic news like interest rate changes and fiscal policy in Germany. I simply focus on what I know works: buying ownership positions in high quality companies that have a proven history of rewarding loyal shareholders with rising earnings and dividends.
However, that does not mean that I simply buy shares in wonderful businesses and completely forget about them. Quite the contrary. I actually spend a great deal of time reading up on the companies I own a piece of, not because this is completely necessary but rather because I quite enjoy it.While I certainly advocate ignoring slight quarterly misses or daily and monthly fluctuations, what I hope to garner from perusing over the results companies provide on a quarterly and annual basis is changes in the companies fundamentals, for better or worse.
Recently researching some of my holdings after some unusual market fluctuations I ran into some interesting news. One company has some significant tailwinds with great prospects over the next 3-5 years, while one company has some serious headwinds that could hamper growth over the long haul.
Oneok, Inc. (OKE) is a company I purchased shares in back in early June. I analyzed the company and pointed out that they operate in three segments, including: Oneok Partners, Distribution and Energy Services. Well, the Energy Services segment is being discontinued on April 1, 2014. And news just broke today that OKE is going to spin-off the Distribution segment, leaving the company to focus on Oneok Partners, L.P. (OKS), of which they own 100% of the General Partner and 43.4% of the outstanding Limited Partner units. The stock popped over 25% today on this news. On top of that they raised the dividend by 5.5%, from $0.36 quarterly per share to $.038 quarterly per share. A hell of a day!
OKE will plan on spinning off the natural gas distribution into a stand-alone publicly traded company. This business serves more than 2 million customers throughout Oklahoma, Texas and Kansas. OKE shareholders will retain their current ownership in OKE, and will also receive a new ownership stake in the publicly traded natural gas distribution company by way of a stock dividend. You have got to love companies that create shareholder value like this. I really like this move. I don’t always like spin-offs, as I sold my entire stake in Abbott Laboratories (ABT) and Abbvie, Inc. (ABBV) after the company spun-off the pharmaceutical business because I thought the company was better served whole as a diversified medical and pharmaceutical company. However, OKE now focusing solely on the fast-growing underlying OKS MLP and the $4.5 billion in projects bodes well for business and shareholders alike. The natural gas build-out is really taking off in this country and I think OKE stands to do well in that arena.
I currently view OKE shares as fairly valued here, but there remains significant upside with the planned upcoming spin-off. Also, the dividend growth is projected to be quite large over the next few years. OKE is targeting dividend growth of 65%-70% between 2012 and 2015. The next few years could be very kind to OKE shareholders based on the view today.
Headwind- Lorillard Inc. (LO)
Lorillard Inc. (LO) is another company I have a stake in and, as always, I like to check in to see how things are going at my company, especially now that earnings season is upon us. On Tuesday,the U.S. Food and Drug Administration (FDA), which oversees the tobacco industry, published a report that found that menthol flavored cigarettes are likely associated with greater addiction and greater nicotine dependance and a reduced ability to quit smoking.
When I last purchased shares in LO back in March of this year, I noted that the talk of potential further FDA regulation regarding menthol cigarettes was a possibility, and the talk of such was increasing in intensity and frequency. However, I pointed out that regulation would be unlikely due to potential tax revenue hits and the possibility of a black market springing up for these products. I am actually starting to view the tax argument as weaker as time goes on. It seems that the government is increasingly becoming less concerned about negative tax consequences from further regulation on tobacco companies. Regulations have been pretty heavy over the last 10+ years and volumes are down year after year. It seems fiscal policy really matters little here. Although, I do view the black market possibility as great and think that could be a big mitigating factor against an FDA ban against menthol products.
While I view shares in LO reasonably appealing today with a P/E of 14.34 and a yield of 4.94%, it remains to be seen just how serious the FDA is about further menthol regulation. This is a large concern, as Newport, the flagship brand, accounts for over 85% of the company’s revenue. Although the e-cigarette business is growing quickly and the growth of the Blu Ecigs (~40% market share) brand helped LO book a 10% rise in net income for the second quarter, the overall sales of Blu is relatively small at $57 million compared to LO’s overall sales at $1.29 billion for this last quarter. While I’m still holding my LO shares, further FDA announcements are something that I will be paying attention to. That being said, even if the FDA were to announce unfavorable actions regarding menthol cigarette manufacture and/or distribution it would likely take years to take full effect. Overall, this has the potential to be a huge headwind for the company.
How about you? Think the above analysis is accurate? Any companies that you own facing headwinds or tailwinds of their own?
Full Disclosure: Long OKE, LO
Thanks for reading.
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