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Investment Opportunities

Think Twice Before Chasing These Four Yields

The bear was roused from hibernation and instantly set to work mauling investors.

The Dow Jones Industrial Average, Nasdaq and S&P 500 are plummeting.

On Monday, the indexes were at their lows and 30% off their highs set on February 12.

A 30% loss in a year is significant.

A 30% drop over four months is the expectation for a bear market.

A 30% step off a cliff in 33 days is historic.

In periods of market panic, many income investors go hunting for big, mouthwatering yields.

So in today’s Making the Grade, I look at some that either should be avoided or could face potential cuts.

Another “OPEC-alypse”

COVID-19 is the black swan that drove a knife into the old bull’s heart. The virus has brought the U.S. economy to a standstill.

Everything is under pressure. But some industries more so than others.

For instance, this period of time has been nicknamed the “9/11 for cruise lines.” Shares of Carnival Corp. (NYSE: CCL), Norwegian Cruise Line (NYSE: NCLH) and Royal Caribbean Cruises (NYSE: RCL) are down more than 65% year to date.

And there’s an asset getting smacked by a double whammy of bad news.

Crude oil has been obliterated.

Chart - Crude Oil

The price of oil has collapsed 54% from its high of $64.80 on January 7.

We started 2020 with an oversupplied market, which is why I predicted crude oil would slip to $40 per barrel.

But as COVID-19 shuts down entire countries, it’s taking tens of thousands of barrels per day (bpd) of demand offline.

That alone borders on catastrophic.

But throw in Saudi Arabia and Russia opening the spigots to grab market share and push U.S. shale producers to bankruptcy, and the outlook for crude approaches apocalyptic.

Despite how bad it’s already been for crude, it’s likely to get worse.

Saudi Arabia is launching another “OPEC-alypse,” promising to flood the market with an additional 2.6 million bpd.

And The United Arab Emirates is planning to pump an additional 1 million bpd.

Those two alone will add 3.6 million bpd in supply!

Then Russia is increasing its production by 200,000 to 300,000 bpd, with the possibility of increasing output by 500,000 bpd.

But this is just the first volley in the price war between OPEC, Russia and the U.S.

Think Twice Before Chasing These Yields

During the oil crash of 2014 to 2016, this is the exact play Saudi Arabia used.

What followed was mass bankruptcies and hundreds of billions of dollars in canceled projects.

I think $30 per barrel is here for the foreseeable future. And some whispers are for prices to head as low as $15 per barrel.

Those are prices Saudi Arabia can withstand. But U.S. frackers will go belly up.

Oil field service companies will fold. Offshore well drillers will go under. And there are juicy dividend yields in the energy sector that are in serious jeopardy.

Here are the ones to avoid…

Chart - Energy Sector

Oil refiner and nitrogen fertilizer manufacturer CVR Energy (NYSE: CVI) expected to see first quarter revenue collapse 25.7% before the crude sell-off.

Shares are down 52.7% so far in 2020, hitting 52-week lows last week.

And that gives it a massive 15.38% dividend yield.

But CVR earned $0.44 per share in the fourth quarter while doling out a dividend of $0.80 per share.

During the last crude crash, the company slashed its dividend from $5 per share annually in 2014 to $2 per share in 2015, 2016 and 2017.

Global liquefied natural gas shipper GasLog Ltd. (NYSE: GLOG) has seen its shares shed more than 60% of their value this year.

Today they’re under $4. The company’s annual dividend of $0.60 offers an eye-opening 15.54% yield.

In 2018 and 2019, GasLog paid out dividends of $0.99 and $0.98, respectively, per share. But those included two special dividend payments.

For the first and second quarters, earnings per share are projected to fall. And GasLog’s total debt-to-equity ratio is a staggering 203.19 as it’s saddled with more than $3 billion in debt. That’s 10 times its current market cap.

Next, we have SFL Corporation‘s(NYSE: SFL) 12.76% yield.

The company operates a fleet of 11 tankers, 22 dry bulk ships, 50 liners and three offshore drilling rigs.

Following the oil crash of 2014 to 2016, SFL’s dividend fell from a peak of $1.80 per year to the $1.40 it’s at currently.

SFL is earning $0.22 per share now, well below its quarterly dividend of $0.35 per share. And though the company enjoyed positive free cash flow of $69.5 million in the fourth quarter, this plummeted to massive losses during the last crude collapse.

Lastly, energy infrastructure company The Williams Companies (NYSE: WMB) has suffered a difficult 2020. Shares have dropped nearly 40%, sending its dividend yield skyrocketing above 10%.

In the fourth quarter, it had a dividend coverage ratio of 1.8 after reporting a record year in volumes and transportation capacity.

And though Williams has paid a dividend since 1974, it has reduced the payout before.

In 2016, following the collapse in crude to under $30 per barrel, Williams’ quarterly payout slipped from $0.64 to $0.20.

Time to Make a Shopping List

During times like this, investors should be building their shopping lists of stocks they’d like to own.

On Monday, the major indexes fell to their lowest levels in nearly three years. The Dow is trading at June 2017 prices.

Thousands of companies are on sale. And dividend yields are skyrocketing.

For income investors and long-term holders, this sell-off is providing attractive buying opportunities. But the four companies named above are a microcosm of challenges the energy sector will face to keep paying those dividends.

We’ve seen these companies pull back their payouts before. And they may do so again as Saudi Arabia uses its favorite play to bankrupt American energy.

Here’s to high returns,

Matthew


About

Matthew’s expertise ranges from classic industries such as oil and mining to cutting-edge markets like small cap tech, cannabis, 3D printing and cloud computing. With almost two decades of financial experience under his belt, Matthew’s knack for finding market trends never fails to surprise us, which is why we keep a close eye on his free e-letter, Profit Trends.

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