Explaining Income Equities

/0 Comments/in , , , , , , , , , , /by

Beginning this quarter, we are adding a new blog post to cover the income-oriented stock and ETF ideas we have been increasingly using in client portfolios.  Not all clients use these investments, but we have broadened their use, so we thought it would be useful to produce summary commentary each quarter.

Up until 2020, most of the high-dividend paying stocks and equity ETFs had been purchased as bond substitutes.  Even prior to COVID, interest rates were at historically low levels that we found unattractive for long-term investment.  Northlake used stocks like Verizon (VZ), MGM Growth Properties (MGP), and Lamar Advertising (LAMR), and ETFs such as iShares Select Dividend (DVY).  These stocks and others served clients very well for many years.

Post the market collapse in March due to COVID, interest rates on money market funds have remained near 0% and the Ten Year US Treasury bond yield fell well below 1%.  Northlake made the decision to invest conservatively in 2020 due to the unusual risk surrounding COVID and the election.  We sold a lot of securities, and when we decided to begin reinvesting we saw high-dividend paying stocks and ETFs as a conservative alternative given our continuing concerns about the market.

Aside from credit quality, the primary risk for these investments is a sharp rise in interest rates.  Given the Federal Reserve and other global central banks clear guidance that they will keep interest rates low until the economy has moved well beyond the pandemic, we see little risk of significantly higher interest rates in the next few years.  A spike in inflation caused by excess monetary and fiscal stimulus could push rates higher, but we feel disinflationary trends from technology and the maturity of the U.S., Japan, and European economies makes sustained higher inflation unlikely.

Since the March stock market low, we have added to client holdings in DVY and Verizon and continue to own Lamar Advertising.  We substituted VICI Properties (VICI) for MGP and other high-dividend payers that we sold in March.  VICI was also added for a broader group of clients.  We also added two preferred stocks to our high-dividend portfolio, GCI Liberty (GLIBP) and Qurate Retail (QRTEP).  Each of these preferred stocks is part of Liberty Media, which we know well and have followed closely for 30 years.

VICI is a real estate investment trust closely tied to Caesars Entertainment.  The company acts as Caesars financing arm when real estate is sold but Caesars continue to manage and operate the property.  For example, VICI owns Caesars Palace, and Caesars Entertainment pays VICI under a long-term lease for the right to operate and manage the property.  VICI owns around 30 different casino gaming properties around the country.  Most are operated by Caesars Entertainment, but several other casino operators also have leases with VICI. There are two key aspects to our investment thesis on VICI.  First, despite the COVID lockdowns last spring, VICI received 100% of the rent payments it was due across its entire portfolio.  This speaks to the quality of the company’s cash flow used to pay dividends.  If COVID could not hurt VICI, it is hard to see a scenario that would impact the dividend.  Second, there remain many quality gaming properties throughout the United States still owned by the operators.  VICI has more opportunities with Caesars and we expect continued diversification to other operators.  VICI shares yield 5% and we think the company can sustain mid-single digit growth in dividends through rent escalators and more property acquisitions.  Northlake expects an attractive total return of 10% annually in a low interest rate environment with many unusual economic and market risks.

GLIBP and QRTEP are more like bonds given the fixed nature of their payments and maturity dates.  We see both stocks as a way for client accounts with a need for conservative investments to earn current yields well above money market and bond interest rates.

GLIBP is tied closely to Liberty Broadband (LDRDA) and Charter Communications (CHTR).  The primary support for GLIBP’s dividend payment is the GCI Liberty and LBRDA ownership of Charter Communications ownership of about 30% of CHTR.  CHTR is the second largest cable broadband company in the US and produces growing and stable free cash flow.  GLIBP pays an annual dividend of $1.75 for a current dividend yield of 6%.  The preferred matures in 2038.  Shares were purchased around $25 and now trade at $28.

QRTEP pays an $8.00 annual dividend which equates to a current yield over 8%.  The preferred matures in 2031.  Qurate Retail owns and operates QVC, HSN, and Zulily.  QVC and HSN have morphed from pure home shopping TV networks to ecommerce retailers with over half of current business done online.  We believe the 8% yield outweighs the risk of competition from Amazon and other ecommerce giants.  Qurate is growing, and the business produces very high free cash flow to support the QRTEP dividend.  Shares were purchased in the low-to-mid $90s and now trade at $99.

GLIBP, QRTEP, VICI, LAMR, VZ, and DVY are held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov. 

All Quiet On Liberty Front For Now

/0 Comments/in , , /by

It was a quiet quarter for the Liberty Media family of companies owned in Northlake client portfolios.  We could get some fresh news on these event driven stocks later this week when Liberty hosts its annual analyst meeting in New York.  We will be attending this year.

Liberty Media (LMCA) remains tied to its 60% stake in Sirius Satellite Radio (SIRI).  SIRI shares have performed and are trading near 52 week highs after another good quarter of subscriber and financial growth.  At some point, SIRI and LMCA will merge or spilt, an event we feel will be bullish for LMCA shares.  While we wait, SIRI continues to be on a good growth path with better competitive position than the market appreciates.

Liberty Broadband (LBRDA) is a lead investor in Charter Communications.  Charter is trying to get regulatory approval to merge with Time Warner Cable.  We believe the odds are good despite rejection of Comcast’s attempt to merge with Time Warner Cable.  A merger would be very bullish for LBRDA, so we are patiently waiting on the FCC.  We think a close in the spring of 2016 is a good target.

Liberty Global (LBTYK) is an operating company and the largest cable company in Europe.  The company’s third quarter report showed signs of the acceleration we are expecting in subscriber, revenue, and cash flow growth.  Management guidance for further acceleration in the fourth quarter gives us confidence that much higher share prices lay ahead for LBTYK.

Liberty Global LiLAC (LILAK) was recently spun out of LBTYK.  LILAK has cable assets in Puerto Rico and Chile.  The spin was designed to separate Europe from Latin America and create vehicle for LILAK to consolidate the fragmented cable and telecommunications industry in Latin America.  LILAK announced it is in merger discussion with Cable and Wireless earlier this month.  We should know the outcome of these discussions by Thanksgiving.  A merger is highly accretive for LILAK and would be a big bullish catalyst for the shares.

LMCA/LMCK, LBRDA/LBRDK, LBTYK, and LILAK  are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov LMCA/LMCK, LBRDA/LBRDK, LBTYK, and LILAK are net long positions in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies

Fairly Quiet at Liberty Media and Liberty Broadband

/0 Comments/in , /by

It was quarter at Liberty Media (LMCA/LMCK) and Liberty Broadband (LBRDA/LBRDK).  This was no surprise at Media as the slimmed down company is mostly now just a holding company for its 58% stake in Sirius XM Satellite Radio (SIRI).  SIRI had already reported a strong first quarter, including raising full year guidance on a number of key metrics.  The idea behind splitting Liberty into separate Media and Broadband companies was to eliminate the complexity discount and the competition for capital between two different businesses (SIRI for Media and Charter Communications for Broadband).  Thus far, this has not worked for Media, where the discount to net asset value has actually widened somewhat.  As a result, investors were listening closely to Media CEO Greg Maffei for hints at any actions the company might take.  Media has begun to accelerate its share repurchases, something investors would like to more of.  There was nothing new about possibly spinning off SIRI in a tax efficient transaction as Media once did with a similarly large position in DirecTV.  The idea of SIRI buying LMCA shares rather than its own to effectively buy back its own shares at a discount was discussed.  Interestingly, John Malone, who controls all the Liberty entities, seems to be in favor.  In the end, little new is happening at Liberty Media.  The shares will ride higher if SIRI shares lead the way.  Fortunately, SIRI continues to perform very well.

It is probably unfair to 2015 has been uneventful for Broadband.  As the controlling shareholder in Charter Communications, Broadband had a big stake in the now scrapped merger of Comcast and Time Warner Cable.  Charter was a major player in that merger, acquiring and swapping cable systems with Comcast.  Broadband is now a pivotal player as Charter is clearly looking to acquire Time Warner Cable itself.  Before Comcast entered the action, Charter was conducting a hostile takeover of the Time Warner Cable.  Charter is playing nice this time around.  Broadband will have a critical role if a deal is stuck as Broadband needs to maintain its 25% stake in Charter to avoid tax and regulatory complications.  Northlake likes the cable industry and, in particular, likes and trusts John Malone to realize value at Charter through Liberty Broadband.  A friendly merger between Charter and Time Warner Cable offers 20%+ upside for Charter shares.  Broadband shares should follow accordingly.

LMCA, LMCK, LBRDA, and LBRDK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  LMCA, LMCK, LBRDA, and LBRDK are net long positions in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.