3 Breakout Stocks for Primary Dividends Profits

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1 3 Breakout Stocks for Primary Dividends Profits

2 Introduction By Tim Plaehn My objective with 30 Day Dividends is to provide you with stock market research and recommendations with the goal of generating short to intermediate term gains based on stock market reactions to dividend events. With this report I have focused on three themes that will play out in next six months to a year, and I cover three stock market investments that will provide attractive, distribution driven total returns. Here are the three themes that will power the returns of the stock market investments covered in this report. o Year End Special Dividend: The tax rules under which they operate require REITs to pay out at least 90% of net income as dividends to shareholders. In this report I reveal one REIT that makes a practice of paying small quarterly dividends, and then catches up with a big payout in December. This is a very stealthy bonus dividend not known by most investors. I give you a couple of ways to play this stock fora nice gain between now and the end of the year. o Energy Infrastructure Target: The collapse in energy prices resulted in an energy sector bear market. It also weeded out the financially strongest energy infrastructure companies from those that actually suffered severe financial difficulties in the new energy price environment. The strong companies are now looking to acquire distressed assets on the cheap. I discuss the stock I think is most ripe for a takeover bid, giving a nice short-term gain in the share value. o Highest Projected Dividend Growth Rate: For the yield on a growing dividend stock to stay level, the share price must increase by the rate of the dividend growth. The market does not always (almost never!) factor future dividend growth into the current share price. Then as the dividend does increase the market gets a clue and drives up the share value. In this report I discuss a stock that will grow its dividend by 30% or more per year for the next several years.

3 Targa Resources (NYSE: TRGP) Since the fall of 2014, the energy sector has gone through a gut wrenching bear market. The decline in the prices of crude oil and natural gas exposed financial weaknesses in many companies, which were not visible in the era of $90 to $100 crude oil. Now, almost two years after the price of crude oil started its steep decline, companies in the energy infrastructure businesses pipelines, transport, processing, storage and terminals have mostly stabilized their financial positions and are trying to figure out where their industry will go from here. For the strongest, most financially secure energy infrastructure called midstream companies, acquiring businesses that were less successful in navigating the energy bear market is an attractive way to add revenue, generating assets on the cheap. From 2011 through most of 2014, Targa Resources Corp (NYSE: TRGP) was a high flyer in the midstream energy space. From its December 2010 IPO through early 2015, Targa Resources grew its quarterly dividend by an average of 30% per year. From the IPO through the early October 2014 peak in its value, TRGP generated a 61.6% average annual return for investors. That works out to a greater than 620% total return in just less than four years. Then the energy bear market hit, and it hit Targa Resources especially hard. From a peak share value of over $140 in 2014, TRGP at one point traded for less than $15 per share in early Ouch!

4 However, through this great disruption, Targa Resources has managed to keep the ship afloat, so to speak. The company stopped growing its dividend in late 2015 but has not reduced the payout to investors. To simplify its finances and reduce expenses, Targa Resources Corp. absorbed its controlled MLP, Targa Resources Partners. The company has reduced its debt leverage, increased the percentage of revenue that is fee-based vs. dependent on commodity prices, and maintained an above 1.0 times cash flow coverage of the dividend. At this point, Targa Resources is financially stable, but there is no visibility on when the company could return to a position of revenue and dividend growth. Despite its recent rally stock price is still relatively low considering its history and revenue potential. Targa Resources Corp. is an attractive acquisition candidate for some of the larger companies in the midstream energy sector. Targa operates two primary lines of business. It has extensive natural gas and natural gas liquids (NGLs) gathering and processing assets in the premier energy regions of Texas and Oklahoma. These assets offer significant financial leverage on higher prices for natural gas and NGLs. The second business line is downstream processing and marketing primarily of NGLs. These assets include a large fractionation footprint at Mont Belvieu and Lake Charles near Houston, Texas, the second largest LPG export terminal on the Houston Ship Channel, a transport fleet of 693 railcars, 79 transport tractors, 21 NGL barges, and above and underground storage terminals across the country. The majority of these downstream assets cannot be duplicated and are of very high value. Targa Resources has a $10.25 billion market cap and total enterprise value of about $15.2 billion. The TRGP dividend yield is 6.42% and it pays about 5% on longterm debt. This gives the company a blended cost of capital of about 6%. A larger buyer with a lower cost of capital could acquire Targa and see an immediate earnings boost. The real benefit for an acquirer comes with the integration of the Targa assets and significant profit upside as NGL prices start to increase. Some potential suitors for Targa Resources include $57 billion market value Enterprise Products Partners LP (NYSE:EPD), $22 billion value Williams Companies Inc. (NYSE:WMB), and $12 billion MPLX LP (NYSE:MPLX). To summarize, here are the reasons to pick up shares of TRGP for short to intermediate term gains. At a current $56 per share, TRGP yields a safe 6.42%, a nice wage to earn while waiting. An acquirer will want to make a move soon, before the TRGP value moves much higher. A buyout proposal could result in a quick 10% to 20% gain on your shares. A continued recovery in natural gas and NGL prices will make TRGP much more profitable and could push the share price above $70. The timing on this is unclear, but seems inevitable.

5 Sunstone Hotel Investors Inc. (NYSE: SHO) Hotel/lodging REITs operate in a unique sub-group of the commercial real estate sector. While most REITs own properties that throw off steady rent payments, providing revenue and dividend payment visibility for years in the future, the fortunes of the lodging industry swing with the demand for hotel rooms. This means the financial results from this group of REITs is more dependent on growth rate of the overall economy. What you will also find is that most lodging REITs pay dividends that are a relatively low percentage of the free cash flow funds from operations or FFO in REIT jargon compared to other REIT sectors. Sunstone Hotel Investors Inc. (NYSE: SHO) is a lodging REIT that has a very conservative approach to dividend payments. Since it restarted dividend payments for the 2013 third quarter, Sunstone has paid a $0.05 quarterly dividend for 3 years. This was until December of 2016 when it increased to a whopping $0.53! The company has been growing profits at a very nice clip over the last several years. For the first half of 2016, the company reported net income of $0.25 per share and FFO per share of $0.59. Sunstone has been able to pay a large, one-time dividend at the end of the last two years. At the end of 2014, investors received a special $0.36 per share dividend at the end of the year. At the end of 2015, the extra dividend was a whopping $1.26 per share! From the company's results through the first half of 2016, I am forecasting a special payout of $0.80 to $1.00 per share.

6 The potential for a special, end-of-the year dividend leads to a repeatable share price trend that we can trade for a nice profit. This is a solid stock with high potential for growth despite its recent uptick. It has an excellent balance sheet and an equally excellent future ahead for Tallgrass Energy GP LP (NYSE: TEGP) Investing for dividend growth is a simple strategy but one that few investors understand or pay attention to. Logically, a stock with a steadily growing dividend should have a share value that moves up in parallel to the dividend growth rate. In practice, the market focuses on many other factors that can result in a share price gaining value faster than the dividend growth or lagging behind. When the share price of a stock with a fast-growing dividend lags, that the dividend growth to earn profits on a shorter-term trade arises. Since its May 2013 IPO, Tallgrass Energy Partners LP (NYSE: TEP) has stayed at the top of the MLP universe as measured by distribution growth rates. The quarterly distribution increases have ranged from 30% to 60% when compared to the year earlier payments to investors. The Tallgrass Energy management has always been conservative when giving future growth guidance and then has announced actual results that far exceeded those growth projections. Currently, Tallgrass management and the Wall Street analysts are forecasting 20% annual distribution growth from TEP for at least the next three years. In May 2015, the Tallgrass grouped added another publicly traded entity with the IPO of Tallgrass Energy GP LP (NYSE: TEGP). TEGP owns the TEP general partner interests, the general partner incentive distribution rights (IDRs) and 20 million TEP units. In the typical structure of an MLP with GP IDRs, the payments to the general partner will grow at a faster rate than the distribution growth of the distributions

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8 paid to the limited partner (LP) unit owners. In this particular GP MLP combo, the TEGP dividends will grow at roughly double the rate of growth of the TEP distributions. The math is simple here. If the TEP distribution grows by 20% a year, the TEGP dividends will grow by 40%. That's a 10% increase every quarter! For the first three full quarters since its IPO, the TEGP dividend has been increased by an average of 19% over the previous quarter's rate. Which brings us to the trade potential for TEGP. The TEGP share price has been trading below and around $25 since early October Over that period, the quarterly dividend has increased by 75% (compound 19% three times and you get 70%). A year ago, TEGP carried a 2.5% yield. Now at $25 per share it yields over 4%. For a variety of investor belief reasons, the share price has not kept up with the dividend growth. At some point the market will figure out that TEGP is the highest dividend growth rate stock in the entire U.S. stock market and the share price will take off. Based on a comparison of similar high distribution growth rate energy midstream companies, a fair value for TEGP is above $32 per share. Recommendation: Buy TEGP in the mid $20's with a target of $32 to $35 per share.

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