EPD - Insiders Are Loading Up On 2 Dividend Stocks

2023-06-14 07:35:00 ET

Summary

• Higher insider ownership indicates stronger shareholder alignment.
• We value our dividend income and like it more when management demonstrates that they care about it.
• Two safe yields where insiders are your ally; Enterprise Products and B. Riley Financial.

Co-authored with "Hidden Opportunities"

We hear a lot about wealthy investors and fund managers scooping up shares of certain companies. The investor community seeks this information to build confidence in their picks. After all, everyone is placing their bets, and it helps to know a few other big players on your side.

Almost everyone makes their trades with a similar amount of information about the company, except its management. A company's leadership team is a unique investor with control over its execution and next steps. It is fair to say they know more about their enterprise and its potential than anyone else. Key insiders like the Chief Executive Officer, the Chief Financial Officer, and a few others are essentially steering the ship that we are all cruising in; it is only logical that they can see the rocks and the stormy seas further ahead.

"Insiders might sell their shares for several reasons, but they buy them for only one: they think the price will rise" - Peter Lynch

When insiders buy discounted stock, there is a tangible confidence that the company offers a strong value proposition and deserves a deeper look. As income investors, insider buying provides additional confidence in the sustainability and reliability of the dividend income. We will discuss two big yield picks with income safety, strong business fundamentals, and significant insider buying.

Pick #1: EPD - Yield 7.5%

Enterprise Products Partners, LP ( EPD ) is one of North America's largest midstream energy companies. The partnership is asset-rich with over 50,000 miles of pipeline, 260 MMBbls of liquid storage, 20 deep water docks, 29 natural gas processing plants, and 25 fractionators. EPD is engaged in transporting, storing, and processing essential energy commodities such as natural gas liquids ('NGL'), crude oil, natural gas, petrochemicals, and refined products.

EPD's business is highly oriented towards NGLs, as seen from the Q1 operating margin mix. NGLs represent critical feedstock for plastics, making EPD less of an energy company and providing it more of a manufacturing and materials focus. Data Source: 10-Q

Note: EPD is a Master Limited Partnership that issues a Schedule K-1 to shareholders for tax purposes.

EPD is an excellent blue-chip investment and a must-have for income investors for the following reasons:

• Shareholder-friendly capital allocation priorities:

EPD has a solid track record for distribution growth, with 24 years of continuous payment increases. The partnership's distribution comes at a modest adjusted FCF payout ratio of 75%, and at the end of Q1 2023, the company reported a 1.9x TTM distribution coverage. With ~$3.8 billion worth of projects going into service in FY 2023, EPD will see growing FCF and adequate cushion to continue raising the distribution. The company is well-positioned to join the Dividend Aristocrat Club in 2024.

In addition to the growing distributions, EPD is pursuing a $2 billion share repurchase plan with ~37% utilized as of the first quarter.

• Management is a significant insider:

It is not surprising that EPD is an excellent distribution steward and prioritizes capital allocation methods that benefit shareholders. Company insiders maintain a high 32% ownership in EPD, making management highly motivated to align their decision-making with the interests of shareholders.

• Industry-leading leverage levels:

Maintenance and operation of midstream assets are capital-intensive. But EPD has done a terrific job in maintaining industry-low leverage levels. The partnership ended Q1 2023 with an industry-low 3x leverage ratio and maintains a strong balance sheet, rated A- by Fitch. EPD's weighted-average life of debt is ~20 years at a 4.6% rate. 97% of the total debt is fixed-rate, making the company relatively immune to this high-interest rate environment. In addition, EPD maintains a $4 billion liquidity profile, providing adequate flexibility with its cash flows.

EPD investors needn't worry about the growing use of EVs, windmills, solar panels, and other such infrastructure. 96% of manufactured goods contain petrochemical feedstock, making EPD a custodian of vital infrastructure assets. This 7.5% yielding blue-chip midstream partnership is a true buy-and-hold-forever investment.

Pick #2: RILY Preferreds & Bonds - Yields Up to 9%

B. Riley Financial ( RILY ) is a financial services firm that provides full-service, collaborative solutions at every stage of the business life cycle and in all market conditions. And it literally means every stage - along with wealth management, consulting, appraisal, valuation and M&A support, they also perform distressed lending, forensic support in case of fraud, and asset disposition and liquidation in bankruptcy proceedings. Source

Insiders own 34% of RILY common stock, indicating strong decision-making alignment with the interests of shareholders.

RILY common stock has almost returned to the price levels before the rather baseless Wolfpack Research short attack in early February. However, the company's fixed-income securities continue to present generational buying opportunities. Source

Baby Bonds

• 5.0% Senior Notes Due 12/31/2026 ( RILYG )
• 5.5% Senior Notes Due 3/31/2026 ( RILYK )
• 6.375% Senior Notes Due 2/28/2025 ( RILYM )
• 6.5% Senior Notes Due 9/30/26 ( RILYN )
• 6.75% Senior Notes Due 5/31/2024 ( RILYO )
• 6.0% Senior Notes Due 1/31/2028 ( RILYT )
• 5.25% Senior Notes Due 8/31/2028 ( RILYZ )

Preferred Stock

• 6.875% Series A Cumulative Perpetual Preferred ( RILYP )
• 7.375% Series B Cumulative Perpetual Preferred ( RILYL )

RILY ended Q1 2023 with $210 million cash and cash equivalents on its balance sheet, placing the firm in a comfortable liquidity position to continue its strategic objectives and shareholder returns.

Looking at TTM numbers, RILY's $8 million on preferred dividends, $158.2 million interest expenses, and $138.4 million common dividend payments were adequately covered by the company's Operating Adj EBITDA of $362.4 million for the period.

The company's bonds and preferreds enjoy solid income protection from RILY's growing and cash-flow-rich business. RILYT offers ~40% upside to par from current prices and pays a steady and sizable 8.4% yield. This bond matures in 2028, and the discount provides a steady inflation-beating income stream for the next five years and a healthy capital upside upon maturity. RILYZ offers the highest upside to par (~52%) but is also the furthest away from maturity.

RILY preferreds are attractively discounted as well, and pay the patient investor ~9% qualified dividend and with ~25% upside to par.

Market mispricing creates generational buying opportunities. With RILY preferreds and baby bonds, you can lock in large dependable income for the foreseeable future and get paid handsomely when they get redeemed or mature.

Conclusion

Buying when insiders do doesn't guarantee success; no strategy will. But investing alongside owners with skin in the game significantly improves your odds.

At High Dividend Opportunities, our team owns every security we discuss and closely follows the industry to provide timely updates to our subscribers. We have skin in the game in the +42 portfolio picks with an overall +9% yield and are buying the discounts with both hands.

To increase the reliability and stability of our income stream, we are investing in those that eat their own cooking and are actively buying at current prices. Enterprise Products Partners and B. Riley Financial present spectacular businesses with solid long-term income prospects. Up to 9% yields from these well-managed companies where insiders are loading up. I sleep well at night knowing my investments are managed by those with significant skin in the game; what about you?

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