It’s Finally Time to Buy This Dividend Dynamo

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s hard to be enthused by a stock market sell-off.  To see vast amounts of wealth disappear usually is met with equal amounts of antacids.  Unless of course you have some cash on the sidelines that you’ve been dying to invest and that’s exactly where I find myself. 

At the end of May I launched a virtual portfolio that I dubbed the “No Drip, No Mess” Portfolio to openly test my portfolio theory and management ideas.  The first addition to that portfolio was a written put of Linn Energy (NASDAQ: LINE).  That put ended up expiring worthless as shares of Linn headed higher.  I’d been waiting for a pullback ever since so that I could repeat the trade and hopefully finally add Linn to my virtual portfolio. 

Now that fiscal cliff fears have gripped the market I finally have another shot to add this dividend paying dynamo to my portfolio.  This time however I’m turning to their recently spun off LinnCo (NASDAQ: LNCO) instead.  With LinnCo’s sole mission being to invest in shares of Linn Energy it makes the two functionally equivalent so when you add in the fact that there is a bit of an arbitrage between them that favors LinnCo it seemingly makes it worth the switch. 

So far this year Linn has made a couple of significant deals other than the LinnCo IPO.  They’ve been on quite the shopping spree having made two separate billion dollar purchases of BP (NYSE: BP) onshore oil and gas fields.  Both fields produce excellent current cash flow with upside from future drilling.  In one of the deals they picked up a very much underutilized processing plant which again leads to some more upside.  Both deals were made possible in part due to the cash needs at BP as they continue to repair their balance sheet after their Gulf disaster.

While the BP deals were both coups for the company, their enhanced oil recovery joint venture agreement with Anadarko (NYSE: APC) could be the deal that over time produces the best long term results.  Tertiary recovery projects attempt to produce more oil out of older fields and these mature production fields are Linn’s sweet spot.  This is a technology that they can learn from Anadarko and then apply to some of their existing assets as well as those they acquire in the future.  The deal with Anadarko is a great first step for the company. 

A final and very important development this year is their focus on drilling in the Hogshooter play of the Granite Wash.  The oil focused play is producing exceptional results for Linn and they plan to continue drilling.  Their total Granite Wash acreage holds more than 600 future drilling locations so they’ll be busy for several years.  The organic upside from these projects have the potential to add a lot of value to Linn over the coming years. 

All of these growth activities, both organic and acquired, are delivering increasing cash flow that Linn’s able to distribute back to investors.  When it all comes down to it, that’s what an investment in Linn is all about, getting that cash flow returned.  In this case investors in LinnCo can expect a quarterly dividend of $0.71 a share vs. the same $0.725 that Linn Energy unit holders receive.  Given the discount in shares that still equates to a near 8% yield which is slightly higher than what Linn Energy offers.    

For me the plan is not to buy shares of LinnCo outright.  I want to be patient in case the market continues to fall while this whole fiscal cliff situation is resolved.  Instead, I’m planning to write a put option on LinnCo to start.  In this case I’ll be turning to the February $35 puts which lately can be written from around $150.  That’s a 4.3% yield in three months and a very nice starting point if I am assigned the shares.   

With writing puts the biggest risk is always not being assigned and seeing shares of the company move much higher.  That’s a risk I’m willing to take because as much as I like Linn, the valuation isn’t a screaming bargain.  I’d characterize this as buying a good company at a fair price and if nothing else I can earn half a year’s worth of dividend income on one put write which in my view is well worth it. 

latimerburned owns shares of Linn Energy, LLC. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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