Cabot Dividend Investor Issue: November 13, 2024

Profit from the Coming Energy Boom

Things have changed. The election of Donald Trump has altered the trajectory of the economy and the market.

The market’s initial reaction to the election has been overwhelmingly positive so far. Last week was the best week of this year as the S&P 500 soared about 5% in the three days following the election, although stocks have leveled off so far this week.

Investors perceive his election will deliver stronger economic growth, primarily through deregulation and tax cuts. Although interest rates spiked higher on the expectation of a stronger economy, the market views the revised prognosis as overwhelmingly bullish, so far.

This changes things. The market had been wavering between anticipation of a slower economy with lower interest rates and a strong economy with still-high rates. The strong economy scenario got a huge shot of adrenaline and interest rates are behaving accordingly.

The election reaction is initially a big positive for the “risk-on” trade. Top-performing sectors are Financials, which anticipate less regulation and possibly a more vibrant economy, and Energy, which sees a much friendlier regulatory environment and a more bullish prognosis for the U.S. and global economies. Other cyclical sectors are soaring as well and propelling the market to new highs.

The worst-performing sectors are defensive and interest rate-sensitive stocks. The economic prognosis got better but the interest rate situation got worse. The Trump policies are being viewed, at least initially, as a detriment to lower interest rates. The benchmark 10-year Treasury rate had soared in initial trading but has since pulled back to about 4.4%. The rate had been as low as 3.35% in September. Also, investor anticipation of the Fed’s aggressiveness in lowering rates over the next several quarters has so far diminished.

Of course, the initial reaction may fade somewhat after the market digests the election. Things could also reverse somewhat in the near term as investors realize these perceived changes may take some time to come to fruition. But it is still true that a new administration with drastically different policies will take control in January. Those pronounced policy changes will have a significant effect on different sectors and can’t be ignored.

The most obvious sector beneficiary of the new administration is energy. While the Biden administration had been hostile to fossil fuel production, this administration has promised to be the opposite. A mainstay of the new economic strategy is to unleash domestic fossil fuel production to its fullest extent. The regulatory environment is likely to change drastically in a way that encourages more fossil fuel production.

Of course, the “drill, baby, drill” policies may not be good for many energy company stocks. More production of oil and gas means lower prices. Lower energy prices mean lower profits for commodity-sensitive companies. But there is one area in the energy realm where the new policy approach is all good, natural gas exports.

The U.S. has recently become the world’s second-largest exporter of natural gas. Exporters ideally sell cheap American gas overseas where it fetches a much higher price. More production and cheaper domestic prices are ideal for exporters. At the same time, the new administration is likely to encourage as much natural gas exporting as possible.

Changes may be in the works already. Just since the election last week, officials at the European Union have already expressed interest in the getting natural gas from the U.S. instead of Russia. That would be a huge additional market.

In this issue, I highlight a company that runs the largest liquid natural gas (LNG) export facility in the country. It is a subsidiary of existing portfolio position Cheniere Energy (LNG), which is up 15% since the election. It pays a huge income and still sells at a reasonable price.

What to Do Now

The environment is changing in favor of economic growth and profits and away from lower interest rates. That makes the prognosis for interest rate-sensitive stocks like REITs and utilities worse and the potential for cyclical stocks better.

Investors are anticipating a stronger level of economic growth going forward as a more business-friendly government is expected to push for less regulation and lower taxes. The improved economic outlook is putting pressure on interest rates. The benchmark 10-year Treasury, which had already been moving higher, spiked after the election and is now over 4.4%, up from 3.35% in September. Also, investor anticipation of the Fed’s aggressiveness in lowering rates over the next several quarters has diminished.

Of course, all of this is just the early reaction to the election. Initial market assumptions don’t always persist beyond the initial reaction. We’ll see how the market behaves after it fully digests a Trump victory. But for right now, it’s “risk on” and lower interest rates off.

As a result, American Tower Corp. (AMT) and NextEra Energy (NEE) have been downgraded from BUY to HOLD. Alexandria Real Estate Equities (ARE) has been downgraded from a HOLD to an outright SELL. The only REIT and utility stocks still rated a BUY are Brookfield Infrastructure Partners (BIP) and Digital Realty Trust (DLR). BIP has shown strength amid the REIT selloff so far, and DLR is more connected to the growth of AI and data centers than the overall REIT sector.

At the same time, the two Business Development Companies, Main Street Capital (MAIN) and FS KKR Capital Corp. (FSK) have both been upgraded from a HOLD to a BUY. BDCs own portfolios of small companies that tend to be economically sensitive. The stocks are already reacting well to the election.

The outlook has also improved for BUY-rated stocks including midstream energy companies Enterprise Product Partners (EPD) and The Williams Companies (WMB) as well as Cheniere Energy (LNG) and homebuilder Toll Brothers (TOL).

Recent Activity

November 13
SELL Alexandria Real Estate Equities, Inc. (ARE)

American Tower (AMT) – Rating change – “BUY” to “HOLD”

FS KKR Capital Corp. (FSK) – Rating change – “HOLD” to “BUY”

Main Street Capital Corporation (MAIN) – Rating change – “HOLD” to “BUY”

NextEra Energy (NEE) – Rating change – “BUY” to “HOLD”

Buy Cheniere Energy Partners, L.P. (CQP)

Featured Action

Buy Cheniere Energy Partners, L.P. (CQP)

Yield: 7.0%

Things are changing. The election of Donald Trump alters the dynamic going forward. Policies will be far more accommodative.

Cheniere Energy Partners owns and operates the first and largest U.S. liquid natural gas (LNG) export facility, Sabine Pass, in Cameron Parish, Louisiana. It also owns regasification facilities and the Creole Trail Pipeline, which connects to several large interstate pipelines throughout the country.

Cheniere Energy Partners is a subsidiary of parent company Cheniere Energy (LNG), which is a position in the Cabot Dividend Investor portfolio. CQP is a Master Limited Partnership (MLP) established to pass on a high level of income to unitholders in the form of distributions. While LNG pays a yield of just 0.9%, CQP pays 7.0%. The high income balances the yield in the two positions. CQP owns the Sabine Pass export facility and passes on most of the earnings in the form of income.

Although it only represents a portion of Cheniere Energy, the basic principle is the same. It is just that this portion of the company is structured to provide a high income to unitholders. The growth in liquid natural gas should be strong going forward.

Because of new technologies in horizontal drilling and hydraulic fracturing (fracking), massive supplies of previously irretrievable oil and gas deposits trapped in shale rock formations throughout the country could now be accessed. As a result, this country became the world’s largest producer of natural gas more than a decade ago.

This country was able to produce far more natural gas than it could currently use. At the same time, they are starving for the stuff in other parts of the world, and the gas was dirt cheap here and expensive there. It seemed logical to sell natural gas overseas at a huge profit. But that was easier said than done.

While natural gas can be piped across this continent, you can’t pipe it across the oceans. To export large quantities of natural gas to places like Europe and Asia, gas must be converted to liquid form, put onto tankers, and shipped. But since we didn’t have an abundance of natural gas before, there were no massive liquefaction and export facilities in this country. That’s where Cheniere came in.

Sabine Pass was the first major facility built in this country to liquify and export natural gas. Cheniere only began operations in 2016 and it’s already the largest producer of LNG in the United States and the second-largest LNG operator in the world.

But this is just a snapshot in time, and Cheniere is still young and expanding. Cheniere was already the number one supplier of LNG to Europe in 2022 and 2023. It is expected to supply the bulk of demand growth in China in the years ahead. The Sabine Pass facility is targeting a significant expansion to begin in 2026. The facility currently operates six trains (gas liquefaction systems) with production of 30 million tonnes per annum (mtpa) and plans to build three more.

As an MLP, Cheniere pays no tax at the corporate level provided it passes on the bulk of earnings to unitholders in the form of distributions. There is a K-1 form generated at tax time, but you get a higher level of income from money that would have been lost to taxes with a regular company. The distribution was reduced early this year to free up money for expansion and is currently $3.24 per year in quarterly increments of $0.81 per unit for a current yield of 7.0%. The distribution is well covered with cash flow backed by strong contracts from investment-grade-rated customers.

Ordinarily, high income stocks tend to have low total returns. But CQP bucks that trend with total returns of 47% over the past three years and 66% over the last five.

Cheniere Energy Partners, L.P. (CQP)
Security type: Master Limited Partnership
Sector: Energy
Price: $49.80
52-week range: $45.51 - $62.34
Yield: 7.0%
Profile: CQP owns and operates the natural gas liquefaction facility know as Sabine Pass for parent company Cheniere Energy, the largest U.S. producer of liquified natural gas (LNG) for export overseas.

Positives

• Access to abundant and cheap U.S. natural gas for export at a higher price.
• Global LNG market is growing, and Cheniere is aggressively expanding capacity.
• Cheniere was first and has a leg up on the competition.

Risks

• Qatar produces LNG at a lower cost.
• Much anticipated growth in exports is anticipated to China and it could be jeopardized if relations sour.

Portfolio Recap

AGNC Investment Corporation (AGNC – yield 14.9%) – The mortgage REIT had been pulling back since the earnings report in mid-October but has been rebounding this month and is already up over 4% in November. The price had been running up toward the high and the earnings report hit the stock. Costs were higher and the net spread shrank from last quarter. However, those represent short-term issues while the longer-term trend of lower rates should be very good for the stock as costs decline and the book value increases. AGNC still earned $0.63 per share, easily covering the $0.36 in quarterly dividends. Also, book value increased by 5% over the quarter. Although the outlook is very positive, results need to catch up. BUY

AGNC Investment Corp. (AGNC)
Next ex-div date: November 30, 2024, est.

Brookfield Infrastructure Partners (BIP – yield 4.7%) Earnings – This infrastructure company reported solid earnings last week with 7% funds from operations (FFOs) growth over last year’s quarter. Brookfield also completed $2 billion in capital recycling; whereby older assets are swapped for new higher-margin investments. Management also spoke confidently about future earnings as the investment pipeline and AI-related assets (cell towers and data centers) are driving growth. Solid results offset higher costs from interest rates, and the stock is about even since the report. This report was better than most REITs and utilities because Brookfield has been better able to overcome the higher interest rate costs. (This security generates a K-1 form at tax time.) BUY

Brookfield Infrastructure Partners (BIP)
Next ex-div date: November 29, 2024

Enterprise Product Partners (EPD – yield 6.9%) – The good times are rolling. Energy stocks have been on fire since the election and midstream energy companies are benefiting. The anticipation of a much more fossil fuel-friendly administration is being seen as an unambiguous positive for the whole sector. We’ll see how long the strong momentum lasts. EPD had been wallowing around since early spring, but it has soared to a 52-week high and the highest price in more than nine years. Earnings were solid and the high distribution is very safe. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD)
Next ex-div date: January 30, 2025

Rating change – “HOLD” to “BUY”

FS KKR Capital Corp. (FSK – yield 13.3) – This Business Development Company (BDC) is a strong beneficiary of the Trump victory. The perception of high economic growth going forward is exactly what FSK needed to make a new high. It has a portfolio of smaller companies that tend to be economically sensitive. The prognosis just got better going forward. When a security has a payout and yield of this size it usually pulls back after the quarterly dividend gets priced out of the stock. It held up nicely after the September dividend, but we’ll see about the December one.

FSK was downgraded to HOLD months ago as fears of a slowing economy and recession grew because of a series of lower-than-expected jobs reports. The fears waned and investors began to expect a “no landing” economy. And that optimistic economic scenario got a huge shot of adrenaline with the election. Meanwhile, this stock is still below the highs made before the financial crisis. Let’s move it back to Buy. BUY

FS KKR Capital Corp. (FSK)
Next ex-div date: December 4, 2024

Rating change – “HOLD” to “BUY”

Main Street Capital Corporation (MAIN – yield 5.5%) – As a BDC, this story is very similar to that of FSK. Main’s portfolio of companies not only makes high-interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC. MAIN broke out to new all-time highs this year and just made a new one. But the improved economic outlook leaves room for further appreciation. At the same time, not only does it yield 5.5% based on the regularly scheduled monthly dividend, but the yield is 7.9% if you include the supplemental dividends, which have been coming regularly for the last several years. MAIN should be a beneficiary of the changing dynamic. BUY

Main Street Capital Corp. (MAIN)
Next ex-div date: December 6, 2024

ONEOK Inc. (OKE – yield 3.6%) – As I mentioned with EPD, the energy sector is riding high and investors expect a much more accommodative regulatory environment regarding fossil fuels and a strong level of economic growth and energy demand. But this midstream energy company stock was riding high before the prognosis changed for the better. A huge recent catalyst is the recent acquisitions of Enlink Midstream (ENLC) and Medallion Midstream which are expected to close in the fourth quarter and be accretive to earnings right away. I still love OKE, but I won’t upgrade it to a BUY on price. It has already returned over 61% YTD and more than 350% since the pandemic. HOLD

ONEOK Inc. (OKE)
Next ex-div date: February 1, 2025, est.

The Williams Companies, Inc. (WMB – yield 3.3%) Earnings – This midstream energy company stock also hit a new high after thriving in the post-election environment. Williams reported earnings this week that beat expectation and guided to the upper half of 2024 estimates. The company also forecast an average of 7.6% annual earnings growth for the next three years compared to an estimated 3% earnings growth for the oil and gas industry over the same time. But those numbers are pre-Trump. Although WMB has returned a whopping 66% YTD, the price is still below the all-time high and should go higher. BUY

Williams Companies, Inc. (WMB)
Next ex-div date: December 13, 2024

AbbVie (ABBV – yield 3.7%) – ABBV crashed over 12% on Monday after it reported that its Schizophrenia drug flopped in phase II trials. The company had high hopes for the drug. AbbVie acquired Cerevel Therapeutics for $8.7 billion in August and this drug was a big part of the reason for the purchase. Ouch. Of course, the newly acquired company has other promising drugs in the pipeline, but it’s a big disappointment, especially after a soft earnings report. But that’s the life of a pharma company. Trial disappointments occur periodically with every pharma company. The main story is still strong. The company is overcoming the Humira patent expiration and should return to robust growth next year. HOLD

AbbVie Inc. (ABBV)
Next ex-div date: January 15, 2025, est.

Rating change – “BUY” to “HOLD”

American Tower Corporation (AMT – yield 3.3%) – I’m very disappointed with this cell tower REIT. Sure, REITs have been taking it on the chin a bit after the election, and interest rates have spiked higher. But AMT is down 20% since the high in September after it had been riding high. And it should be somewhat insulated from sector weakness because it deals in cell towers and mobile data growth, look at DLR for heaven’s sake. Earnings were weak because of a temporary lull in demand. It’s still a growth business, so I will wait a little longer to see if AMT can turn things around. But it’s on thin ice, hence the downgrade. HOLD

American Tower Corporation (AMT)
Next ex-div date: January 10, 2025, est.

Broadcom Inc. (AVGO – yield 1.2%) – This infrastructure technology Goliath isn’t far from the high but is still at the same price it was near the beginning of the summer. It also hasn’t been a great earnings quarter for technology so far. The market seemed more worried about the cost side of artificial intelligence with the major investments. However, the more AI-exposed companies like Nvidia (NVDA) still haven’t reported. It could still turn out to be a big quarter for AI stocks. The price movement since October has been encouraging. The longer-term situation is great, and we will have to wait and see if AVGO gets a near-term boost. BUY

Broadcom Inc. (AVGO)
Next ex-div date: December 19, 2024, est.

Cheniere Energy, Inc. (LNG – yield 0.9%) – Here’s a stock that is benefiting bigly from the Trump election. The liquid natural gas (LNG) exporter is up over 15% since the election last week. Energy stocks have rallied. Cheniere reported strong earnings last week. Consensus expectation is for Cheniere to grow revenue at an average of 11% over the next three years compared to forecast revenue growth of 3% for the oil and gas industry over the same period. The longer-term trajectory should be higher as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter.

The regulatory environment should be a lot friendlier as the new administration will encourage LNG exports. But there’s something else too. Officials at the European Union expressed interest in getting LNG from the U.S. instead of Russia. That would be a big increase in the LNG export market, and although it wouldn’t happen soon, it’s a big boost to the future possibilities of the export market. BUY

Cheniere Energy. Inc. (LNG)
Next ex-div date: November 8, 2024

Constellation Energy Corporation (CEG – yield 0.6%) – CEG had a big 16% down move between late October and early November. Although earnings were stellar, nuclear energy stocks plunged after the Federal Regulatory Commission shot down Amazon’s (AMZN) recently announced nuclear deal with Talen Energy (TLN). The decision is a sign that attempts by tech companies to hook up data centers directly to sources of power could face obstacles from regulators. Constellation’s Microsoft (MSFT) deal wasn’t mentioned, but the news has a chilling effect on the potential for more deals going forward. CEG has rallied since the election, likely on the expectation of a more accommodative regulatory environment going forward. HOLD

Constellation Energy Corporation (CEG)
Next ex-div date: November 15, 2024

Digital Realty Trust, Inc. (DLR – yield 2.7%) – What higher interest rates? What REIT selloff? DLR is too busy kicking butt and taking names. Earnings were solid, and the company indicated that data center demand is booming because of AI. DLR is up over 10% since the report and near the high. The REIT is also up over 38% YTD. The main story is that data center properties are a high-growth business. Tech companies are forecast to invest $1 trillion in data centers over the next five years to accommodate AI. BUY

Digital Realty Trust, Inc. (DLR)
Next ex-div date: December 13, 2024

Eli Lilly and Company (LLY – yield 0.6%) – The superstar drug company finally laid an egg with its earnings report. Sales of its new weight-loss drug Zepbound were far lower than expected. The company also slashed earnings guidance for the year and lowered the high end of revenue guidance. It may be the end of the hype period for the weight-loss drug and we need to see what the more normalized market will be going forward. It’s also unclear if approvals for new applications can offset the reduced revenue expectations. We will have to wait and see. But a company that is still up 38% YTD and 204% over the last three years has finally stumbled a bit. It is still expected to grow earnings 70% per year over the next five years and has more high-potential drugs in the pipeline. BUY

Eli Lilly and Company (LLY)
Next ex-div date: November 15, 2024

McKesson Corporation (MCK – yield 0.5%) Earnings – This healthcare mega-trend supply chain pharmaceutical stock is back in business after a good earnings report. The stock was flying earlier in the year and then sucked wind for a quarter after an earnings disappointment. But the company beat expectations with 21% revenue growth and 13% earnings growth this quarter. It also raised guidance for 2025. MCK is up 23% in the month of November and back near the high. It looks like the stock is back in business and ready to continue showing that its customer base grows all by itself because of the aging population. BUY

McKesson Corporation (MCK)
Next ex-div date: December 2, 2024

Qualcomm Inc. (QCOM – yield 2.0%) Earnings – This semiconductor giant reported earnings last week that surpassed expectations with year-over-year revenue growth of 19% and earnings growth of 80%. The strong quarter was fueled by a wave of launches of flagship Chinese smartphones. The new quarter is off to a strong start as well with automotive sales expected to rise 50%. Despite the good news, the stock has fallen back to pre-earnings levels after an initial spike. The market wants to see strong U.S. smartphone sales from an AI upgrade cycle. But that doesn’t appear to be happening yet, although analysts think it is a strong possibility next year. BUY

Qualcomm Inc. (QCOM)
Next ex-div date: December 5, 2024

Toll Brothers, Inc. (TOL – yield 0.6%) – The luxury homebuilder had been pulling back since the middle of October because of rising mortgage rates. But it has spiked 7.4% higher since the election last Tuesday. The expectation of a stronger economy is outweighing the spike in mortgage rates as investors anticipate more homebuying activity going forward. The main event for TOL over time is the fact that there is a short supply and massive pent-up demand for new homes. Sure, the market and the stock can always bounce around in the near term because of mortgage rates and other things, but the central reason to buy this stock just got better. BUY

Toll Brothers, Inc. (TOL)
Next ex-div date: January 10, 2025, est.

UnitedHealth Group Inc. (UNH – yield 1.3%) – The health insurance behemoth stock is back in business and has just hit a new high. UnitedHealth keeps gobbling up more of the trillions flowing through the healthcare system because its tremendous size allows it to offer better value at cheaper prices. It may be down for a while, but it will never stay down for those reasons. Even after a soft earnings report and a pullback in defensive stocks, it finds a way to thrive. BUY

UnitedHealth Group Inc. (UNH)
Next ex-div date: December 9, 2024

Rating change – “HOLD” to “SELL”

Alexandria Real Estate Equities, Inc. (ARE – yield 4.7%) – Enough is enough. Sure, REITs have been having a hard time with the interest rate spike after the election. But ARE has underperformed in good times and bad. It wasn’t doing much when the REIT sector was on fire. Now that fortunes have turned, it’s down more than the sector. REITs could be in for an extended rough patch, and I don’t want to endure that with ARE. I like the properties and the business model. But at a certain point, you just can’t fight the market. It will be sold from the portfolio today. SELL

Alexandria Real Estate Equities, Inc. (ARE)
Next ex-div date: December 31, 2024, est.

Rating change – “BUY” to “HOLD”

NextEra Energy (NEE – yield 2.6%) – This combination regulated, and clean energy utility pulled back after the earnings report in late October, but it has been moving higher over the past several days. Revenues were below estimates but strong earnings beat expectations. The company expects to deliver 10% average earnings growth over the next several years. It also stands to benefit from the increased electricity demand from AI and data centers, despite the recent pull back in that trade. The higher growth expectations are probably not good for substantially lower rates soon. It could be tough sledding for utility stock for a while. Until the outlook changes, NEE is downgraded to HOLD. HOLD

NextEra Energy Inc. (NEE)
Next ex-div date: November 22, 2024

USB Depository Shares (USB-PS – yield 5.2%) – The environment is still very good for fixed income despite the recent change in interest rate expectations. These securities love falling interest rates. And interest rates are at least not likely to trend higher and may even move lower in the quarters ahead. Everything looks good for this high-yielding fixed-income security. It’s been through the worst bond market ever, and the price and total return is buoyant. The position has returned about 30%. BUY

U.S. Bancorp Depository Shares (USB-PS)
Next ex-div date: January 15, 2025

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.9%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates. The long-term bond ETF doesn’t have the upside leverage that USB-PS does. But the trend is likely to serve this security well over the next year. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT)
Next ex-div date: December 1, 2024, est.

Dividend Calendar

Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates are estimated.

The next Cabot Dividend Investor issue will be published on December 11, 2024.

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