Jonathan Moreland is publisher of InsiderInsights.com, a Web site that analyzes insider trading, and a weekly newsletter. He writes a column that appears on this page as part of his business relationship with TheStreet.com.
At a time when yields on fixed income securities are low and overall equity dividends are minuscule, it's important to keep an eye out for yield plays. We occasionally see heavy insider buying at some limited partnerships that spurs us to dig deeper. Recently, another purchase at Enbridge Energy Partners ( EEP) by company president Dan Tutcher caught my eye. He purchased more than $400,000 worth of shares, which is curious considering that the company is toiling in the depressed energy sector. Tutcher likely believes what many feel: that the energy sector is being hit hard by a series of external factors such as the slowing economy and a warm winter, but that longer-term, the industry fundamentals remain solid. Tutcher bought stock ahead of a merely adequate fourth quarter, when Enbridge generated in-line EPS of 26 cents, so his buying was not predicated on an expected near-term strength in the business. In fact, management lowered guidance for 2002, but did note that the company's dividend is on track to continue growing at a nice clip. After another recent hike in the dividend, Enbridge now pays out $3.60 a share annually, which translates into a hefty 7.9% yield. I expect energy prices to rebound later in 2002 and into 2003, and for management to pull off a few accretive acquisitions in the months to come. This should also boost the stock, so investors may be looking at a total return of closer to 15% to 20% this year. With a seemingly safe yield helping remove downside worries, we view Enbridge as a decent low-risk, medium-return addition to our Recommended List.
After rising nicely, health care REIT LTC Properties ( LTC), which I first presented to RealMoney subscribers on Jan. 7, sold off two weeks ago, stopping me out for a 12% gain from my entry point. I watched as it continued down, and after reviewing the facts, I've bought back in. The weakness coincided with the release of President Bush's budget, in which he proposed cutting back on reimbursements to Medicare, and also with the release of LTC's fourth-quarter results. The Bush budget should not have caused the concern obviously reflected by the drop in share price. As Wendy Simpson, CFO of LTC, explains: "Most of our nursing homes are 90% in the Medicaid reimbursement program, not Medicare. If there is a reduction in 10% of their business, this should not affect their ability to pay us rent." An institutional investor we spoke with concurs: "The long-term care industry has almost completed the restructuring of balance sheets, including those now operating under bankruptcy protection. They are in a much better position to pay their rents to LTC Properties." More pointedly, however, this investor doesn't think there is any way Congress will be willing to cut funding to Medicare in an election year. I have to agree. But if it wasn't the Bush budget, why would LTC's Q4 results, which announced the good news that its common shares would have their dividend reinstated, have caused the weakness? After all, the reinstatement of the dividend is an important indication that the health of LTC's nursing home and long-term care clients is improving. It was the main premise for my putting the firm on the Recommended List to begin with. But it seems the big disappointment with LTC's announcement is that the dividend is neither as large nor as definite as some expected. Fair enough. For while the 10-cent-per-share payment for this quarter would equate to a reasonable 6% yield if annualized, the company has been mum about if the dividend is, in fact, going to be paid out in later quarters. My take is that the company is being conservative with guidance, and that even if they said the dividend was back to stay it would be meaningless. If business for LTC's renters continues to improve, the dividend can be expected to continue. If it doesn't, it won't. After discussions with several institutions, I believe management isn't silly enough to reinstate and cancel the dividend on a whim.
A $10 Stock?
Most investors and analysts I spoke to believe that LTC's common could well be a $10 stock if present trends continue, based partially on the belief that LTC is more likely to increase its common's dividend than cancel it again. But LTC does have risks, of course, and I've set my initial stop loss in this recent position at $5.95 in case of some nasty surprise -- the stock closed trading last Friday at $6.85. Heck, the SEC just announced an investigation into some off balance sheet items at Sunrise Assisted Living ( SRZ). Sunrise is only a small client of LTC's, so this shouldn't be a major problem. But if accounting shenanigans popped up at LTC clients like Sun Healthcare Group ( SHGE), Assisted Living Concepts ( ALFCQ), and Alterra Healthcare ( ALI), I will likely be stopped out. Also, LTC's fourth quarter did have a big wart in our minds: a $2.5 million charge for the repricing of loans to some executives that had to borrow money to buy much higher-priced LTC shares several years ago. I hate seeing things like this, since it shows that the earlier insider purchases were a farce. They would have profited handsomely if the shares went up, but with the repricing of loans, they didn't have any real downside risk. The transactions in the late 1990s were a perquisite, not an honest show of faith in the company. This is another lesson why investors always have to determine the terms behind insider transactions. The latest purchases that brought LTC to our attention late last year were open market, and not undertaken with loans. We would have been much more impressed, however, if insiders were not thrown this latest bone. The good news is that LTC felt comfortable enough to reinstate a dividend in a quarter with this charge. Being one-time in nature, that bodes well for continued or increased dividends down the road. In the end, LTC's common shares don't have tremendous volume, so it didn't take much supply to make it sell off. And I think those that bailed are more likely to be proven hasty than prescient. The economy and LTC's leasees may not show robust growth immediately, but my bet is the worst is over and LTC's prospects and dividend are much more likely to improve than not.