From the Las Vegas MoneyShow, Paris Hotel. This week the Investors Alley editorial team is at the annual Las Vegas MoneyShow. As I have for the past five years, I will be making presentations covering different dividend stock investment strategies. This is a good time to share my stock picks for the show’s annual Top Picks feature.
I very much enjoy going the Las Vegas MoneyShow each May. It is a great event for investors and traders looking for top notch education and exposure to new ideas and strategies. I personally feel like I learn as much from my interactions with individual investors as they get from my presentation. Okay, maybe not quite as much, since I humbly submit my presentations are very good and usually are in front of a packed room.
As a regular contributor to MoneyShow as a presenter and writer, for the last several years I have been asked to participate in their annual Top Picks survey. For the survey I submit two stocks, one is a conservative recommendation and the other is an aggressive recommendation.
Since I am a dividend focused analyst, my recommendations are always dividend income stocks. The list selections from the writers and analysts invited to participate in the MoneyShow survey are published over the first several weeks of the year. Since I am here at the MoneyShow, I thought it would be a good time to see how well my picks recommendations done through the first one-third of 2019.
My aggressive stock pick for 2019
Antero Midstream Corp. (AM) – formerly called Antero Midstream GP LP (AMGP) – is an energy midstream services company that completed a transformation restructuring in the first quarter of 2019.
AMGP came to market with a May 2017 IPO. The assets at that time were general partner incentive distribution rights (IDR) ownership interest in high growth, midstream MLP, Antero Midstream Partners “old AM”. The MLP was sponsored and controlled by Marcellus natural gas producer Antero Resources (AR).
Complicated, multi-publicly traded entity structures were the vogue in the energy sector until energy commodity prices and energy sector stock prices crashed in 2015-2016. Over the last two years (2017-2018) the MLP sector, related infrastructure stocks, and their sponsor companies have announced simplification events to hopefully make the resulting business structures and forecast results more appealing to investors. On October 10, 2018 the Antero companies announced a simplification transaction that closed in March this year.
The transaction involved AMGP acquiring all of the AM units, and then changing its name to Antero Midstream and using the AM stock symbol. The effect of the transaction was to turn the current Antero Midstream Partners into a C-Corp and the elimination of the IDRs paid to the general manager.
The merger promised a significant increase to the AMGP dividend rate. That has come to pass. In April Antero Midstream announced a new dividend rate that was 84.5% higher than the payout in February.
With its first quarter earnings release, management forecast high single digit dividend growth going forward. However, since the merger was completed in March, earnings results did not provide a clear picture of business results.
So far in 2019 the AM share price has cycled several times between $12 and $14 and is now again trading at the low end of the range, representing a bargain for income investors. I expected that the shares would move into the $20’s with the forecast big dividend boost. It hasn’t yet happened.
Currently, AM is a stock with a near 10% yield and guidance for strong dividend growth. It looks like it might take a few more quarters of earnings results and dividend increases to get the market to notice that AM should be a stock trading at double its current value.
My conservative stock pick
Starwood Property Trust, Inc. (STWD) is a finance REIT whose primary business is the origination of commercial property mortgages.
As one of the largest players in the field, Starwood Property Trust focuses on making large loans with specialized terms. This gives them a competitive advantage over banks and smaller commercial finance REITs.
Over the last several years, the company has diversified its business, branching into commercial mortgage servicing, acquiring real equity properties with long term revenue stability, and recently a portfolio of energy project finance debt. This diversification will allow Starwood Property Trust to thrive and continue to pay the big dividend in any financial environment.
In the commercial loan business, over 95% of the commercial mortgage portfolio has adjustable interest rates. This means that as the Fed increases interest rates, Starwood’s net income per share will grow. This REIT provides an excellent hedge against rising rates.
Over the last couple of years the company acquired what is now the largest commercial mortgage servicing firm. That arm of the business handles servicing, foreclosure workouts (for fees) and the packaging of smaller commercial mortgages into mortgage backed securities. This business segment would see the fees increase exponentially in the event of a recession where commercial property owners were forced to let go back to the lenders.
In addition to the finance side of the company, Starwood has acquired selected real properties, including apartments, regular office buildings, and medical office campuses. These property segment provides assets with long-life revenue streams to offset the shorter term rollover schedule of the commercial mortgage portfolio. Real assets also add depreciation to the income statement, shielding cash flow.
In mid-2018 the company acquired a $2.5 billion energy finance business from General Electric. The loan book is non-recourse to Starwood Property Trust.
Starwood Capital, the private equity manager of STWD, already had energy finance experts in house. This business segment has significant potential for growth.
This diversification of business segments by Starwood Property Trust is what separates this commercial finance REIT from its more narrowly focused peers. STWD has paid a $0.48 per share quarterly dividend since the 2014 first quarter.
My investment expectation is that the dividend is secure, and I want to earn the 8.5% to 8.8% dividend year-after-year. The share price has been strong in 2019, and even after last week’s sell-off, STWD is up 12% year-to-date, plus dividends earned.Buy the #1 stock to turn $25k into tens of thousands of dollars for life
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