Tom Konrad, Ph.D., CFA
The portfolio, its growth and income subportfolios, and GGEIP all remain far ahead of their benchmarks. Second quarter earnings announced this month were neutral or positive for the income stocks, but somewhat disappointing for the growth companies, causing the income group to pull farther ahead of its benchmark, and the growth group to lose a little ground.
See the May update for a description of the benchmarks.
Opportunity to invest in GGEIP strategyLast month, I mentioned that I was in advanced talks with a mutual fund company to bring the Green Global Equity Income strategy to the public as a mutual fund. I met with them for the fourth time last month, but they decided to pass, in large part because my emphasis on small and relatively illiquid stocks may put a limit on how large (and hence profitable) such a mutual fund can become.
Fortunately, I've been working on alternatives, two of which are now available for small investors. My friend and colleague Jan Schalkwijk, CFA at investment advisor JPS Global Investments is now offering a version of the GGEIP strategy to his clients (new or existing) clients. If you are interested, you can contact him here. There is a also stripped-down but free version of GGEIP I launched on the Motif platform in June.
Or you can just continue to follow the income stocks in this annual model portfolio. Although this group of seven is outperforming most other versions of the strategy this year, I think that difference is mostly luck. The strategy had an excellent year in 2015 as well: The six income stocks were up 24% and GGEIP was up 12% even though their income benchmark fell 30% because of the bursting of the Yieldco bubble.
The chart above gives detailed performance for the individual stocks. Selected news driving individual stocks is discussed below.
Pattern Energy Group
12/31/15 Price: $20.91. Dec 31st Annual Dividend: $1.488 (7.1%). Beta: 1.22. Low Target: $18. High Target: $35.
8/31/16 Price: $23.80. YTD Dividend: $1.161. Expected 2016 Dividend:$1.58 (6.6%) YTD Total Return: 20.2%
Wind Yieldco Pattern Energy's revenues were at the low end of the company's projections due to generally low wind speeds, but earnings and cash available for distribution (CAFD) were strong due to good cost management and performance of the company's wind farms.
The company also announced the sale of 10 million shares of stock at $23.90, with an additional 1.5 million share underwriter's option. It intends to use the cash to fund the purchase of the 180 MW Armow Wind power facility in Ontario from its sponsor. I expect the acquisition to increase CAFD and dividends per share even after the dilutive effects of the share issue.
Enviva Partners, LP (NYSE:EVA)
12/31/15 Price: $18.15. Dec 31st Annual Dividend: $1.76 (9.7%). Low Target: $13. High Target: $26.
8/31/16 Price: $25.47. YTD Dividend: $1.495 Expected 2016 Dividend: $2.10 (8.2%) YTD Total Return: 49.9%
Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners increased its distribution to $0.525, and increased its full distributable cash flow guidance from $67-$71 million to $70-$72 million. The company reaffirmed full year distribution guidance of at least $2.10 per unit. The new guidance increases the likelihood that Enviva will distribute more than that.
The market seems to have gotten the message that this wood pellet manufacturer has fuel to burn: The stock was up 19% for the month.
Green Plains Partners, LP (NYSE:GPP)
12/31/15 Price: $16.25. Dec 31st Annual Dividend: $1.60 (9.8%). Low Target: $12. High Target: $22.
8/31/16 Price: $18.42. YTD Dividend: $1.218. Expected 2016 Dividend: $1.64 (8.9%) YTD Total Return: 21.4%
Ethanol production Yieldco Green Plains Partners increased its quarterly distribution to $0.41 per unit, and reported $0.43 in per unit income for the quarter. It's parent company, Green Plains (GPRE) produced a record volume of ethanol in the second quarter. In the first quarter, the partnership relied on minimum volume guarantees from its parent to support revenues. The recovery in ethanol volumes means that GPRE no longer needs to rely on these guarantees.
NRG Yield, A shares (NYSE:NYLD/A)
12/31/15 Price: $13.91. Dec 31st Annual Dividend: $0.86 (6.2%). Beta: 1.02. Low Target: $11. High Target: $25.
8/31/16 Price: $16.09. YTD Dividend: $0.695. Expected 2016 Dividend: $0.96 (6.0%) YTD Total Return: 27.8%
Yieldco NRG Yield (NYLD and NYLD/A) increased its quarterly dividend to $0.24 and reaffirmed its guidance that the dividend would continue to grow by 15% annually through 2018.
The Yieldco entered an agreement to acquire the 51% of the California Valley Solar Ranch Holdco it does not already own from its parent. The transaction was financed with $200 million of senior secured debt financed with a 4.68% interest rate.
Terraform Global (NASD: GLBL)
12/31/15 Price: $5.59. Dec 31st Annual Dividend: $1.10 (19.7%). Beta: 1.22. Low Target: $4. High Target: $15.
8/31/16 Price: $3.62. YTD Dividend: $0.275. Expected 2016 Dividend: $0.60 (17.2%). YTD Total Return: -27.8%
Yieldco Terraform Global's delayed financial filings due to the bankruptcy of its former sponsor, SunEdison (SUNEQ), put it into technical default with some of its bondholders. The company successfully negotiated a waiver extending the deadline for filing the delayed reports until December 6th.
It was also reported that Indian company Greenko would pay $100 million for SunEdison's Indian assets along with the assumption of outstanding debt, including some nonoperational assets which SunEdison had agreed to transfer to Terraform Global upon completion in exchange for an advance payment prior to its bankruptcy. It is not clear how the continuing dispute between the Yieldco and SunEdison over the use of the advance payment will affect this deal.
Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/15 Price: $18.92. Dec 31st Annual
Dividend: $1.20 (6.3%). Beta: 1.22. Low
Target: $17. High Target: $27.
8/31/16 Price: $23.98. YTD Dividend: $0.60. Expected 2016 Dividend: $1.25 (5.2%). YTD Total Return: 30.4%
Clean energy financier and REIT Hannon Armstrong reported increased second quarter core earnings to $0.32 per share, easily enough to continue to support the current dividend of $0.30 per share and an expected increase to at least $0.34 per share in December.
Hannon Armstrong has a target of paying out 100% of core earnings
in dividends and a policy of increasing the dividend once per year
in the fourth quarter. Since Core Earnings have historically
always increased or held constant from quarter to quarter, they
typically lag the dividend in the first two quarters, but exceed
them in the second half of the year.
I expect this year to be different. Results in the first
half of the year were boosted by a larger securitizations (selling
assets to third parties rather than keeping them on the
books.) While producing strong earnings in the quarter when
they happen, securitizations produce no ongoing income.
After raising $91 million in equity in June, the company will
again return to placing more transactions on the balance sheet, a
change which I expect to reduce core earnings in the third quarter
before returning to growth in the fourth quarter.
I expect my anticipated decline in third quarter earnings in
early November to catch some investors by surprise.
Investors looking to buy the stock should wait until then.
Investors considering taking some gains may want to sell before
the November announcement.
Renewables Inc. (TSX:RNW,
12/31/15 Price: C$10.37. Dec 31st Annual Dividend: C$0.84 (8.1%). Low Target: C$10. High Target: C$15.
8/31/16 Price: C$14.08. YTD Dividend: C$0.586 Expected 2016 Dividend: C$0.88 (6.3%) YTD Total Return (US$): 50.4%
Canadian listed Yieldco TransAlta Renewables reported
results "tracking toward the upper end of the guidance we
provided for 2016." The company's major South Hedland
project continues on budget and on schedule for completion in
mid-2017. The company anticipates a further dividend
increase when it is delivered.
Renewable Energy Group
12/31/15 Price: $9.29. Annual Dividend: $0. Beta: 1.01. Low Target: $7. High Target: $25.
8/31/16 Price: $8.97. YTD Total Return: -3.4%
Advanced biofuel producer Renewable Energy Group reported strong market demand for biomass based diesel and increased sales, which were limited only by production capacity. But per share earnings of $0.16 fell short of analyst's expectations, causing the stock to pull back.
Federal and state support remains strong, and analysts have been
raising current year earnings estimates. I believe the
current pullback provides an excellent opportunity for short term
gains before the end of the year.
MiX Telematics Limited
12/31/15 Price: $4.22 / R2.80. Dec 31st Annual Dividend: R0.08 (2.9%). Beta: -0.13. Low Target: $4. High Target: $15.
8/31/16 Price: $4.99 / R2.90. YTD Dividend: R0.06/$0.101 Expected 2016 Dividend: R0.08 (2.8%) YTD Total Return: 21.0%
Software as a service fleet management provider MiX Telematics rose in its native currency, the South African Rand, but these gains were erased by the strong dollar.
Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25. Annual Dividend: $0. Beta: 1.1. Low Target: $5. High Target: $15.
8/31/16 Price: $4.78. YTD Total Return: -19.2%
Energy service contractor Ameresco continued to report strong growth in revenue, earnings, and cash flow. While the past few years have been disappointing, I believe that the company has returned to sustainable growth and expect the stock to continue to recover.
While more sensitive to a weakening economy, the three growth stocks remain extremely cheap, especially REGI and MIXT. These low valuations limit their downside should the broad market fall, while allowing for large gains if they catch investors' attention.
Disclosure: Long HASI, AMRC, MIXT,, RNW/TRSWF, PEGI, EVA, GPP, NYLD/A, REGI, GLBL, TERP, GPRE
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.