Leon Cooperman's Three Income Picks
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, Leon Cooperman, founder and chairman of Omega Advisors, has commented on CNBC’s Squawk Box that equities are still the best place to be in right now. He also mentioned several income stocks that he was currently bullish about, including KKR Financial (NYSE: KFN), Chimera Investment Corporation (NYSE: CIM), and Atlas Pipeline Partners (NYSE: APL). Let’s take a closer look at all three companies to determine whether or not we should buy those stocks for our income portfolios.
KKR Financial is considered a specialty finance company, investing in different asset classes including bank loans, high yield securities, natural resources, special situations and private equity. The majority of its 2012 revenue, $394.1 million, or 80.2% of the total revenue, was generated from corporate loans and securities interest income. Net discount accretion ranked second with $82.6 million in 2012 revenue. The majority of its total assets, $5.95 billion, were corporate loans while cash and restricted cash were $1.13 billion. The total stockholders’ equity was nearly $1.84 billion as of December 2012.
KKR Financial is trading at $11.41 per share, with the total market cap of $2.05 billion. The market is valuing the company at nearly 1.1 times book value. KKR has been paying dividends since 2005. At the current price, the dividend yield is 7.2%.
Chimera Investment invests in different asset classes including residential mortgage-backed securities (agency backed MBS and non-agency backed MBS), and other real estate-related securities to provide to shareholders returns via dividend and capital appreciation. The agency-backed MBS are based on mortgages that are guaranteed as to principal and interest by the U.S. Government agencies or the U.S. Government sponsored entities. Thus, although these non-agency backed MBS offer juicy yields, it should be considered junk due to its higher risk of default. Dated back to 2011, the company reported that it had account issues relating to other than temporary impairment on its non-agency residential MBS, which should have been classified into the junk category. In May 2011, it also changed its auditor from Deloitte & Touche LLP to Ernst & Young LLP.
Leon Cooperman thought that the accounting issue could be resolved this year. At the current trading price of $3.10 per share, the total market cap is $3.18 billion. The market is valuing Chimera below book value, at 0.94 times P/B. Chimera pays a juicy dividend yield at 12.3%.
Atlas Pipeline, founded 1999, is a leader in natural gas gathering, processing and treating services in three areas including Anadarko, Arkoma and Permian Basis, with two main business segments: Gathering and Processing; and Transportation and Treating. The majority of its revenue, $1.14 billion, or 91.2% of the total sales, was generated from natural gas and liquid sales while Transportation and Processing ranked second, with $66.7 million in 2012 revenue. Atlas Pipeline utilized quite a lot amount of debt for its operations. As of December 2012, the company had $1.6 billion in total stockholders’ equity, nearly $3.4 million in cash and as much as $1.17 billion in debt.
In the past ten years, Atlas Pipeline has kept paying dividends, fluctuating in the range of $0.35 per share to $3.79 per share. In 2012, it paid out $2.24 per share in dividend. At the current trading price of $32.40 per share, Atlas Pipeline’s total market cap is $1.74 billion. The market is valuing the company at a 40% premium to its book value. The current dividend yield stays at 6.9%.
Foolish bottom line
Among the three companies mentioned by Leon Cooperman, I would avoid Chimera at the moment, due to the accounting issues it is facing. Even though Chimera is paying a huge dividend yield of 12.3% and it is trading below its book value, it might not be a decent pick. If Chimera overstated its book value, it would not appear to be cheap anymore. Furthermore, the accounting issue might lead the company cut its dividend in the future. KKR seems to be the best stock among the three with consistent dividends and a reasonable valuation.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!