Cabot Dividend Investor Issue: July 10, 2024

Ride This Energy Wave to Fat Profits

We are fast approaching the dog days of summer, the hottest, most sultry days of the year. The expression “dog days” is an old one. In fact, it’s really old. The Romans used it.

It’s one of those expressions that everybody knows, but few people realize the origin of. What does summer heat have to do with dogs? It actually has nothing to do with dogs per se. The term refers to something the ancient Romans saw in the stars.

A constellation visible in that part of the world at that time was called Canis Major, Latin for “The Great Dog.” It was so named because the stars in that constellation resembled the outline of a dog. The brightest star in the constellation was called Sirius, also known as “the dog star.” It first dominated the sky in late July, corresponding to the hottest days of summer.

The Romans believed the star generated extra heat and was responsible for the oppressive heat in Rome in the late summer, and consequently named this time of the summer the “dog days.” No wonder that empire collapsed.

The expression is still used to this day even though it’s nonsense. We now know that the dog star didn’t generate extra heat. And it’s not even prevalent in the skies anymore. But it doesn’t matter. We somehow still accept and use the term, even though the phrase is ancient and was never true anyway.

That’s human nature. People and societies tend to accept prevailing sentiment without ever really questioning the actual truthfulness. Such a thing may be worthy of study in terms of societies and social norms, but who cares? This human tendency finds its way into the investment world too. And there, it creates opportunity.

There is a common misconception in the energy realm. Many people assume that the future is clean energy, and fossil fuel companies and their stocks are an anachronistic waste of money. It’s true that clean energy is the future, but so is death, hopefully not for a while though.

The fact is that this country and the world still rely heavily on fossil fuels for more than 80% of energy needs, and clean energy alternatives only represent a very small percentage of energy use. Fossil fuels will likely remain the dominant source for decades. Meanwhile, many stocks of companies that benefit have been improperly given short shrift in recent years and have strong earnings and great value.

But unlike the dog star, this energy misconception is likely to be short-lived. In fact, it’s changing already. Recent attempts by Western governments in Europe and the United States to aggressively transition toward clean energy alternatives that are not yet feasible have caused massive problems. There is a rapidly growing realization that fossil fuels are vitally important and not going anywhere for a long time, particularly natural gas.

The term “fossil fuels” includes oil, coal, and natural gas. But natural gas is head and shoulders above the others because it is cheaper, more abundant, and much cleaner burning. Natural gas is increasingly seen as a bridge to a clean energy future that can provide stability for the world’s energy needs in the interim while reducing carbon emissions.

In this issue, I highlight one of the best natural gas companies on the market. It is a newly formed company in the business of exporting abundant and cheap American natural gas overseas. It’s big business. In a short time, this company has become one of the world’s biggest natural gas exporters.

What to Do Now

This market rally keeps forging on. After a 14.5% S&P gain in the first half of this year, July has been another good month so far.

Interest rates have likely peaked. The chances of a Fed rate cut before the end of the year have increased. And the economy is still solid. Sectors rotate, headlines come and go, but as long as the main ingredients of future lower rates and a still decent economy prevail, the market should be good.

Technology was fading but it is coming alive again. Meanwhile, the rally has broadened to include previously neglected sectors. The midstream energy companies and Business Development Companies in the portfolio have come alive again and are moving toward new highs. The high dividend yields are likely attracting investors worried that the rally might be getting a little long in the tooth.

I like the midstream energy companies, including Enterprise Product Partners (EPD), ONEOK (OKE) and The Williams Companies (WMB), as well as the Business Development Companies Main Street Capital (MAIN) and FS KKR Capital Corp. (FSK) right now as the timeliest buys.

I don’t have anything bad to say about the market right now. But this consistent series of new highs just makes me nervous. Markets tend to whack you when you least expect it. Even if the rest of the year is strong, the market is bound to have a crummy month again at some point. It will only take one bad headline, one sour Fed comment, or an ugly outside event. Things are great now. But don’t get too comfortable.

To accommodate a healthy caution, it is still worth it to hang on to the underperforming REITS and utilities including Alexandria Real Estate Equity (ARE), American Tower Corporation (AMT) and NextEra Energy (NEE). These stocks should benefit when the market changes personality. In the meantime, we will continue to ride the winners as well.

Recent Activity

June 12
NextEra Energy (NEE) - Rating change “BUY” to “HOLD”
GTC order Eli Lilly (LLY) - $580
GTC order Broadcom (AVGO) - $1000

July 10
Buy Cheniere Energy. Inc. (LNG)
SELL Marathon Petroleum Corporation (MPC)

Featured Action

The world currently uses fossil fuels for 81.5% of its energy needs. Even the U.S. still consumes fossil fuels for 79% of its energy. Most estimates indicate that fossil fuels will remain by far the world’s primary energy source until at least 2040.

However, the fossil fuel proportions are expected to move toward natural gas in the years ahead. In fact, Exxon Mobile expects natural gas to be by far the fastest-growing fossil fuel between now and 2040. At the same time, oil and coal usage are expected to decline relative to the overall energy picture.

Natural gas has consistently been a far cheaper alternative to coal and oil. It is also more abundant in a world where oil is becoming harder and harder to find and more expensive to extract. And coal is filthy, expensive, inefficient and by far the dirtiest fossil fuel. Then there’s climate change.

Governments around the world are increasingly trying to restrict greenhouse gas emissions by implementing mandates and regulations. Lower carbon emissions are increasingly becoming a huge motivator for businesses. That’s good for natural gas because it is, by far, the cleanest burning fossil fuel. There is no way to phase out fossil fuels any time soon. But inevitable fossil fuel use can be much cleaner and still reduce greenhouse gas emissions by moving toward natural gas.

A new report from Gas Exporting Countries Forum (GECF), an industry think tank based in Qatar, estimates that global natural gas demand will soar 34% between 2022 and 2050. The think tank also expects the strongest growth in the natural gas realm to be liquid natural gas (LNG), the cleanest burning natural gas type of all. But there’s something else.

GECF expects LNG to overtake long-distance pipeline trade on a global scale by 2026 and account for 64% of all traded gas by 2050. LNG demand is expected to more than double between 2022 and 2050.

Buy Cheniere Energy. Inc. (LNG)

Houston-based Cheniere Energy is primarily engaged in the liquefaction and export of natural gas. The company also markets and pipes liquid natural gas (LNG) and its facilities are located near the Gulf of Mexico in Southwest Louisiana and South Texas.

Cheniere owns and operates two major liquefaction facilities including the Sabine Pass Terminal, which it owns through its stake in Cheniere Energy Partners (CQP), and the Corpus Christi Terminal, which is currently undergoing a major expansion. The facilities provide the bulk of revenues, but it also markets natural gas through Cheniere Marketing and owns the Creole Trail Pipeline, which is connected to several large interstate pipelines for distribution throughout this country.

Here’s the deal. Because of new technologies in horizontal drilling and hydraulic fracturing (fracking), massive supplies of previously irretrievable oil and gas deposits trapped in shale rock formations throughout the country can now be accessed. As a result, this country became the world’s largest producer of natural gas more than a decade ago.

This country was able to produce far more natural gas than it could currently use. At the same time, they are starving for the stuff in other parts of the world, and the gas is cheap here and expensive there. It seemed logical to sell natural gas overseas at a huge profit. But that was easier said than done.

While natural gas can be piped across this continent, you can’t pipe it across the oceans. To export large quantities of natural gas to places like Europe and Asia, gas must be converted to liquid form, put on to tankers, and shipped. But since we didn’t have an abundance of natural gas before, there were no massive liquefaction and export facilities in this country. That’s where Cheniere came in.

Sabine Pass was the first major facility built in this country to liquify and export natural gas. Cheniere only began operations in 2016 and it’s already the largest producer of LNG in the United States and the second-largest LNG operator in the world. Cheniere has also achieved the following:

• 11% plus of all global NLG supply.
• 8% of U.S. natural gas production processed daily.
• 39 countries and regions delivered to.
• #1 supplier of LNG to Europe.
• Major supplier to Asia.

But this is just a snapshot in time, and Cheniere is still young and expanding. The Corpus Christi Terminal currently has three trains (NG liquefaction systems) and seven more are currently under construction, and most of the capacity is expected to become operational in 2025 and 2026. Capacity will continue expanding beyond next year to meet the growing demand. Cheniere was already the number one supplier of LNG to Europe in 2022 and 2023. It is expected to supply the bulk of demand growth in China in the years ahead.

The Dividend

Cheniere pays a current annual dividend of $1.74 per share which translates to a yield of 1% at the current price. The high yield comes from its subsidiary master limited partnership Cheniere Energy Partners (CQP), in which the parent company owns a large stake. CPQ operates Sabine Pass and currently pays a 7.86% yield. Although the 1% yield for LNG is small, it is growing.

The company is targeting 10% annual payout growth through the mid-2020s and the dividend is very secure with just a 20% payout ratio. It is also a shareholder-friendly company that has also approved share repurchases of $4 billion over the next two years.

A growing dividend is representative of more than just a rising payout. Stocks of companies that can consistently grow the dividend tend to perform very well over time. While LNG has performed on par with the energy sector over the past year, with a 16% total return, it has blown away the performance of the energy sector and the S&P 500 over the past three- and five-year periods, with returns of 104% and 160% respectively.

The future looks bright as Cheniere is aggressively building additional capacity to meet the growing LNG demand. Countries around the world have invested heavily in infrastructure for import capacity over the past several years and natural gas will continue to be the fastest-growing fossil fuel source and the bridge between a clean energy future and today’s current fossil fuel dominance.

Cheniere has an abundance of low-cost natural gas at its disposal. The current average $600 to $700 cost per ton of capacity is among the lowest on the global cost curve.

Cheniere Energy, Inc. (LNG)
Security type: Common Stock
Sector: Energy
Price: $174
52-week range: $148.57 - $183.46
Yield: 1.0%
Profile: Cheniere is the largest U.S. producer of liquified natural gas (LNG) for export overseas.

Positives

• Access to abundant and cheap U.S. natural gas for export at a higher price.
• Global LNG market is growing, and Cheniere is aggressively expanding capacity.
• Cheniere was first and has a leg up on the competition.

Risks

• Qatar produces LNG at a lower cost.
• Much anticipated growth in exports is anticipated to China and it could be jeopardized if relations sour.

Cheniere Energy. Inc. (LNG)
Next ex-div date: August 9, 2024

Portfolio Recap

Brookfield Infrastructure Partners (BIP – yield 5.7%) – This is a great company that had stellar performance for years before interest rates rose to decade highs, making it more expensive to borrow and expand. The stock just can’t seem to get any real traction. It held up great until last summer. It rose off the October market low but is still at the same price it was last December. The operational performance has been sound. Brookfield reported strong earnings, and the stock rallied strongly off the early April dip. The company also raised the quarterly dividend by 6%. I expect BIPC to continue to be bouncy until rates make a sustained mover lower. (This security generates a K-1 form at tax time.) BUY

Brookfield Infrastructure Partners (BIP)
Next ex-div date: August 31, 2024, est.

Enterprise Product Partners (EPD – yield 7.1%) – This midstream energy partnership moves like a turtle. But the trend is clear. It has been trending higher, albeit in a slow and sometimes bouncy fashion, for nearly four years. It’s up for the year and, although EPD is still below the April high, it has come back to within pennies recently. As technology slows down and investors look to alternatives, the high yield and inflation protection make midstream energy companies an excellent choice. Earnings again showed Enterprise is solid operationally and that huge distribution yield is safe. I expect EPD to continue to pay the massive distribution and trend higher at a snail’s pace. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD)
Next ex-div date: July 30, 2024, est.

FS KKR Capital Corp. (FSK – yield 13.9%) – The massive-yielding BDC pulled back last month after the quarterly payout went ex-dividend. When a yield is this high and this important to the stock, the ex-date has a noticeable impact. But after the BDC absorbed the ex-dividend, it has been crawling back toward the high. So far, FSK is delivering as advertised. It continues to pay the massive dividend and the price has appreciated since it was added to the portfolio. BUY

FS KKR Capital Corp. (FSK)
Next ex-div date: September 12, 2024, est.

Main Street Capital Corporation (MAIN – yield 5.5%) – Some of the best income stocks are rallying again as the rally has broadened. This Business Development Company pulled back somewhat after making a high in early May, but it moved higher again in June and just made a new 52-week high. It’s still in an uptrend that began last fall and has been steady for weeks. MAIN paid the regular monthly dividend of $0.72 per share in the second quarter, marking a 6.7% increase year over year, as well as a $0.30 supplemental dividend. The current yield is reflected above as 5.5% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.0%. BUY

Main Street Capital Corp. (MAIN)
Next ex-div date: August 8, 2024

ONEOK Inc. (OKE – yield 4.8%) – This amazing midstream energy company has returned to within pennies of the all-time high, after a brief period of weakness. Earnings are rock solid with inflation protection and recession resilience. The high yield should be at a premium in a likely more sideways market going forward. It is a more volatile stock than the other midstream companies that have been in the portfolio. That has been a good thing in a strong energy market. The high yield and strong track record should continue to attract investors, especially if market performance flattens out. BUY

ONEOK Inc. (OKE)
Next ex-div date: July 30, 2024, est.

The Williams Companies, Inc. (WMB – yield 4.5%) – This midstream company stock is within mere pennies of the 52-week high. WMB tends to be the least volatile of the three midstream energy companies in the portfolio. It didn’t fall in price as much during the more trying months and, as the environment for the subsector has improved, it’s back to new highs while the other stocks are still catching up. Williams reported excellent earnings. The midstream company soundly beat estimates on both net income and earnings per share and guided to the upper half of 2024 guidance. WMB is still in an uptrend that began in the middle of February. BUY

Williams Companies, Inc. (WMB)
Next ex-div date: September 7, 2024, est.

AbbVie (ABBV – yield 3.7%) –This stock continues to be very bouncy, but the trend is higher. It’s up slightly YTD. But that’s not bad considering this should be the last tough year in a while. The company is struggling with shrinking revenues as it lost the Humira patent in the U.S. But after this year things should improve dramatically. Management says it expects the company to return to revenue growth later this year and robust growth next year. The company has one of the best pipelines and new drugs in the industry, which will be the key driver of the stock before long. BUY

AbbVie Inc. (ABBV)
Next ex-div date: July 15, 2024

American Tower Corporation (AMT – yield 3.3%) – AMT had a good month in May and pulled back a little in June. But the price remains right near the early June high. As with ARE, better interest rate news should be good for this cell tower REIT. It too has been bouncing around with interest rates. But AMT is still far from the 52-week high. American Tower rallied strongly after the REIT beat estimates on both revenue and earnings with 9.8% adjusted funds from operations per share growth over last year’s quarter. The REIT also raised guidance for 2024. It’s a solid REIT with stronger growth than most of its peers but interest rates will be the biggest determinant of performance in the near term. BUY

American Tower Corporation (AMT)
Next ex-div date: September 14, 2024, est.

Broadcom Inc. (AVGO – yield 1.2%) – It’s been a wild ride lately. The AI stock had a torrid run after the company reported strong earnings and announced a 10-for-1 stock split, effective July 15. AVGO spiked about 40% in the first half of June. Then it gave back about 14% later in the month. But it has since gained back most of the decline. The recent volatility is a small price to pay for a stock that is up a staggering 62% YTD. This stock is a big-time winner. But it’s still not that expensive from a valuation standpoint. I expect continued stellar performance for a while. HOLD

Broadcom Inc. (AVGO)
Next ex-div date: September 20, 2024, est.

Digital Realty Trust, Inc. (DLR – yield 3.2%) – This data center REIT has been terrific. DLR has moved to within pennies of the 52-week high but is somehow still well below the all-time high set in 2021. It has returned over 35% since it was added to the portfolio about a year ago. The S&P is up 26% over the same period. Yeah, DLR’s performance has only beaten the overall market by 9% in that year. But real estate has been the worst performing of the eleven S&P 500 sectors over that year with a dismal 1.55% return. Digital is in a class by itself with its data center properties that are in a big growth phase as companies expand their networks to accommodate artificial intelligence. BUY

Digital Realty Trust, Inc. (DLR)
Next ex-div date: September 14, 2024, est.

Eli Lilly and Company (LLY – yield 0.6%) – I just don’t know what to say. LLY hit another new all-time high this week. Being the best drug company at a time when the population is aging at warp speed is a good thing. LLY performs like a hot AI stock. It’s up 55% already this year and 534% since being added to the portfolio a little less than four years ago. The catalyst for the latest surge is good news from its Alzheimer’s drug Donanemab. Between the need for the drug, the prior approval of Novo Nordisk’s (NVO) inferior drug, and the recent rave from the FDA panel, it is now a near certainty the drug will gain FDA approval, and probably soon. HOLD

Eli Lilly and Company (LLY)
Next ex-div date: August 15, 2024

McKesson Corporation (MCK – yield 0.4%) – This supply chain pharmaceutical giant has pulled back from the high over the past couple of weeks. It’s no big deal. That’s normal behavior for this stock that has been trending higher since March of 2023. Everything continues to look solid. McKesson indicated earnings growth of 14% to 17% for this year. MCK is up 25% YTD. The pharmaceutical supply chain Goliath dominates a market that grows all by itself because of the aging population. BUY

McKesson Corporation (MCK)
Next ex-div date: September 3, 2024, est.

Rating change – “HOLD” to “SELL”

Marathon Petroleum Corporation (MPC – yield 1.9%) – Marathon is a great refiner and energy company stock. The performance has been head and shoulders above the rest. The company is cash-rich and wildly profitable. But apparently, that and $3 get you a medium coffee at Dunkin’ Donuts. Refiner stocks are a wild commodity-driven beast. When times are good, they are really good. When times are bad, they can get frog ugly. That’s just how they roll. MPC was hot stuff earlier this year. It was up 45% between the beginning of this year and April 5. Since then, it’s down 23%.

When it gave up a lot of the early-year surge, I didn’t fret. Refiners are notoriously volatile. MPC then stopped declining and leveled off for months. It seemed to be pausing and deciding in which direction its next move would be. It has decided and moved below the recent low this week. I don’t want to fight the tape, especially with a stock that can be volatile. I’m out. SELL

Marathon Petroleum Corporation (MPC)
Next ex-div date: August 15, 2024, est.

Qualcomm Inc. (QCOM – yield 1.7%) – After a big dip in June following a huge surge in the spring, QCOM appears to have bottomed out and is crawling back. QCOM soared 39% from May 1 to June 18^th. But it fell 15% after that. Not to worry, it’s still up 48% YTD. The recent stock performance reflects profit-taking in the AI space after a big surge from the last round of earnings reports. But QCOM should continue to deliver as several analysts see a major smartphone upgrade cycle for AI next year. Qualcomm is at the leading edge of chips that enable AI for smartphones and should benefit mightily. BUY

Qualcomm Inc. (QCOM)
Next ex-div date: August 30, 2024, est.

UnitedHealth Group Inc. (UNH – yield 1.7%) – Everything points to UNH being a great stock except the performance since it has been in the portfolio. Since it was added in April of 2023 it has returned -4%. The S&P is up 38% over the same period. Meanwhile, other healthcare stocks in the portfolio are killing it. MCK is up 64% and LLY is up 151% over the same UNH holding period. I’m tempted to dump it but every time I look at the profits, the industry, and the track record I talk myself into keeping it. UnitedHealth reported impressive earnings last quarter and issued strong guidance. The stock has blown away the returns of the S&P over the last five- and ten-year periods. BUY

UnitedHealth Group Inc. (UNH)
Next ex-div date: September 17, 2024, est.

Visa Inc. (V – yield 0.8%) – The payment processing global Goliath again reported stellar earnings. It reported a 10% jump in revenue and a 20% increase in adjusted earnings per share over last year’s quarter. It is still thriving from cross-border transactions and benefits from the recent economic news. Visa also reported upbeat guidance for the rest of this year. But somehow it has been floundering since March. The stock is putting me to sleep. Although performance has leveled off, V should be solid if the economy holds up. I’ll wait a little longer. HOLD

Visa Inc. (V)
Next ex-div date: August 16, 2024, est.

Alexandria Real Estate Equities, Inc. (ARE – yield 4.5%) – This is a great niche REIT that owns and operates innovation campuses where life science and technology companies lease space for research and development. ARE had been an excellent performer until inflation and rising interest rates. It’s had a rough couple of years but has shown upside potential during times when it looks like interest rates will fall. This is a solid REIT that reported strong earnings and raised the dividend again this quarter. ARE will likely bounce around somewhat at the mercy of the interest rate narrative and not significantly surge higher until rates muster a sustained move downward. BUY

Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: September 28, 2024, est.

NextEra Energy (NEE – yield 3.0%) – After a huge run higher from March until the end of May, NEE is having a comeuppance in June. After a 40% run higher, the stock pulled back 11% in June. The story hasn’t changed. It’s just that the rally had to run out of gas at some point. The quite long-in-the-tooth rally is the main reason NEE was downgraded to a HOLD last month. But NextEra posted solid earnings in the recent quarter, which also added to the stock’s revitalization. NEE had been a superstar performer before inflation and rising interest rates. I expect solid performance over the longer term. HOLD

NextEra Energy Inc. (NEE)
Next ex-div date: September 3, 2024, est.

USB Depository Shares (USB-PS – yield 5.7%) – This preferred stock has just weathered a strong interest rate storm and has still returned about 15% since being added to the portfolio. I believe it is unlikely that rates eclipse the high of this cycle. Rates have fallen since April and may be a harbinger of things to come. BUY

U.S. Bancorp Depository Shares (USB-PS)
Next ex-div date: July 15, 2024

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.0%) – Ditto for VCLT. It doesn’t like rising rates. But that’s okay unless rates rise to new levels beyond what has been seen in this cycle. I believe that VCLT is still well positioned after the worst two years for fixed income ever. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT)
Next ex-div date: August 1, 2024, est.

Dividend Calendar

Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates are estimated.

The next Cabot Dividend Investor issue will be published on August 14, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.