An Undervalued High Dividend Stock With Lucrative Cash Secured Puts

by Robert Hauver
We first wrote an earlier article about Northern Tier Energy LP, (NTI), back in early April, when the big question was whether or not this MLP would continue to pay its huge quarterly dividend. This older article also details NTI’s business model, which we like.
In February, NTI paid out a $1.27 dividend, which equated to an 18.55% forward dividend yield, making it one of the highest yielding dividend paying stocks in the market, and putting at the top of the Energy table in our High Dividend Stocks By Sector Tables.
Well, we’re happy to report that, thanks to a big blowout quarter, in which NTI reported an adjusted net income of $108.2 million, that was 20 times its Q1 2012 adjusted net income, NTI is keeping the faith, with another huge distribution, which goes ex-dividend on May 21,2013:
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“The Board of Directors of Northern Tier Energy GP LLC, the general partner of Northern Tier Energy LP, has approved a first quarter distribution of $1.23 per unit that will be paid in cash on May 30, 2013 to common unit holders of record as of the close of business on May 23, 2013.” Cash available for distribution totaled $113.2 million for the first quarter 2013.” (Source: NTI website)

This continuing huge dividend payout raises the same question it did in the 1st quarter of 2013: Will NTI keep making these big quarterly distributions, or will it trim its payouts in the next few quarters?
Fortunately, NTI also has high options yields, which give you some alternatives. We currently have a very attractive September $25.00 put listed for NTI in our Cash Secured Puts Table. This put will pay you $2.60 now, and expires in roughly 4 months, which gives you a 30%-plus annualized yield.
To put this into perspective, even if NTI matches its current $1.23/unit May payout in the next quarterly payout, in August, you’d receive $2.46 in distributions, (possibly), vs. $2.60, for sure, right now, by selling the September $25.00 put. The other benefit of this trade is that it gives you a $22.40 breakeven, which is 16% below NTI’s current price/share.
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The traditional, simpler approach is to buy NTI outright, and hold onto the shares long-term, using the dividend stream for income, and to ride out the potential ups and downs of NTI’s future share price and distributions.
We’ve adopted a combo of 2 strategies for NTI, since we believe in its business model: 1. Buy and hold for income and potential price appreciation 2. Sell cash secured puts, in order to gain additional income, and lower our ultimate breakeven cost.

NTI also has Covered Calls, which we list in our Covered Calls Table, where you can also see details on over 30 other covered calls trades.
However, the problem with adopting a short-term Covered Call trade for NTI is the uncertainty surrounding its next quarterly distribution – will it be $1.23 again, or will they cut the next distribution?
The biggest short term obstacle in NTI’s path is that they’ll be doing a scheduled shutdown of their refinery in the 2nd quarter for about 25 days. But there’s a silver lining- they’re doing the shutdown in order to expand their refining capacity. Yes, the 2nd quarter will show lower earnings, BUT, long term, the shutdown is a positive for NTI and its shareholders, due to the expanded capacity.
Institutional investors also believe in NTI’s future growth, as do analysts, who are projecting big EPS growth for 2013 and 2014, making NTI look undervalued on a PEG basis:
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Disclaimer: This article was written for informational purposes only and is not intended as investment advice.
Disclosure: The author was long NTI shares and short NTI put options at the time of this writing.

Can This High Dividend Stock Maintain Its 18% Dividend Yield?

by Robert Hauver

Looking for high dividend stocks? Our search for interesting dividend stocks has uncovered a refining/retailing/pipeline stock with one of the highest dividend yields in the market: Northern Tier Energy, (NTI), is a combination refining/retailing company, based in St. Paul, Minnesota, near the booming Bakken shale play in the Midwest.

NTI’s ability to source Bakken light sweet crude and Western Canadian heavy crude, gives it a big advantage as a refiner, since both of these sources are cheaper than West Texas Intermediate crude. NTI owns one of only two refineries in Minnesota and one of four refineries in the Upper Great Plains area within the PADD II region.

In addition to refining, NTI also has a ready sales outlet for its refined products, as it owns 166 convenience stores under the SuperAmerica brand and also supports 68 franchised convenience stores, mainly in Wisconsin and Minnesota. NTI also owns various storage and transportation assets, including a light products terminal, a heavy products terminal, storage tanks, rail loading/unloading facilities and a Mississippi river dock.

The refining business also includes a 17% interest in the Minnesota Pipe Line Company, which owns and operates the Minnesota Pipeline, a 455,000 bpd crude oil pipeline system that transports crude oil (primarily from Western Canada and North Dakota) for approximately 300 miles from the Enbridge pipeline hub at Clearbrook, Minnesota to the refinery. The Minnesota Pipeline has historically transported the majority of the crude oil used and processed in the refinery. (Source: NTI website)

Dividends: Since its IPO in July 2012, NTI has paid 2 distributions: $1.48 on 11/29/12, and $1.27 on 2/28/13. Projecting their most recent $1.27 distribution forward for 3 more quarters gives NTI a very high dividend yield of 18.55%!

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Here’s the million $ question: Will NTI maintain this level of dividends? The following may offer a clue for the upcoming May distribution:

In the 1st quarter of 2013, the avg. retail gasoline price was $3.55, better than 4th quarter 2012. If you use 37% as a projected ratio of distribution paid to avg. retail gasoline price, this would indicate a potential May payout of $1.31. Of course, this is a very rough estimate, and it could be derailed by other factors – NTI’s refining margins may have shrunk in the 1st quarter, or mgt. may decide to utilize more of its cash for infrastructure expansion investments. NTI stated in a recent investor presentation that it “plans to invest in logistics operations targeting trucking, terminal and pipeline assets.”

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Given this uncertainty, and NTI’s big 88% rise since its IPO, what should you do?
Options: Here’s what we did, (so far). We sold puts below NTI’s share price, to lower our breakeven, in case the stock price falls, if NTI cuts its May distribution. This trade projects the same quarterly distribution of $1.27 in May and August. Coincidentally, the Sept. 2013 $25.00 put pays $2.50, which nearly matches this projected payout. (Note: put sellers don’t receive dividends.) You can find more details on this and over 30 other put trades in our free Cash Secured Puts Table.

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Covered Calls: Alternatively, you could buy NTI and sell covered calls to hedge your bet. This would pay you less option $ up front, but allow you to participate in future distributions and potential price gains.
This trade, from our Covered Calls Table, offers a $1.60 call premium, plus the potential for $2.61 in price gains, ($30 call strike minus $27.39 share price). You’ll also receive NTI’s next distributions, unless NTI rises above $30 before the ex-dividend dates, and your shares get assigned/sold. NTI should announce its next distribution sometime around May 13th.
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Earnings: NTI looks very undervalued on a 2013 PEG basis, but analysts are projecting much less growth for 2014. However, given its ability to pay very attractive distributions thus far in its short history, even if NTI just keeps its yield in the “double-digit realm”, its dividend yield should continue to attract investors, and support its share price in the future.
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Financials: NTI’s ratios look better than its peers so far. It does carry more debt, but it has sufficient Interest Coverage and a strong Current Ratio:
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Disclaimer: This article was written for informational purposes only and is not intended as investment advice.
Disclosure: The author was short NTI put options at the time of this writing.