At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
A cavalcade of upgrades
Canadian oil trust Enerplus (NYSE: ERF ) may not be the best company on earth, but it's certainly one of the more popular. Recently, CIBC World Markets felt compelled to raise its price target on the stock, despite rating it an "underperform." Meanwhile, no fewer than three big investment banks -- Barclays, Credit Suisse, and local Canuck banker National Bank Financial -- have all published actual upgrades.
Yesterday, the Enerplus fan club got even bigger as analyst Raymond James entered the list.
Everybody loves Raymond…and Raymond loves Enerplus
According to Raymond James, you see, Enerplus is now positioned to outperform the S&P 500. Why? The obvious catalyst is Enerplus' announcement on Monday that it has finalized an agreement to liquidate its stake in oil-sands miner Laricina Energy -- scoring an after-tax profit of about $141 million.
This is important for at least three reasons. First, it shows that management at Enerplus is delivering on its promises. CEO Gordon Kerr is on record saying he "plans to monetize non-core assets within our portfolio to fund the growth opportunities we have captured and preserve our balance sheet flexibility." The Laricina sale shows he's doing just that.
Second (and also third), the move to monetization is important because, as I pointed out last month, Enerplus really needs the money. At last report, Enerplus was carrying more than $1.1 billion in debt on its books but had barely $7 million in the bank -- too little to cover even a single month of the company's $214 million annual dividend commitment.
Worse, free cash flow at the firm ran to a negative figure of -$685 million over the past 12 months (a trend at Enerplus more than two years in the making). Since the company clearly wasn't bringing in money from its business, it had to raise the cash by selling assets. Now that it has some cash handy, management promises to begin paying down "outstanding bank indebtedness." It will also have more cash available to support the dividend.
What does it mean to you?
The fact that Enerplus is using asset sales to stave off the need to reduce its dividend (reduce its dividend again, that is; it's already had to cut the divvy in half) elicited sighs of relief from investors yesterday -- sighs echoing those heard south of the border when, in June, America's Chesapeake Energy (NYSE: CHK ) unloaded its pipeline assets in a similar bid to raise cash. I'd say this is the right reaction. If these companies' moves signal the start of a trend toward greater fiscal sanity in the industry, this could be good news for investors in other players in the Canadian oil sands-box.
For example, investors in Enerplus peers Pengrowth Energy (NYSE: PGH ) and Penn West Petroleum (NYSE: PWE ) have been worrying for months about how large dividend cuts at their own companies will ultimately loom. Penn West is said to be contemplating $1 billion in asset sales to help fund its dividend obligations.
None of these companies carries a debt load anywhere near as burdensome as that which Chesapeake loaded upon itself. None have P/E ratios anywhere nearly as cheap as Chesapeake's, either. Instead, Enerplus, Pengrowth, and Penn West rely on their generous dividend payouts to attract investors to their cause.
Liquidating assets and lightening up the balance sheet just might be the right way to stretch out those dividends' lifespans and give investors a reason to stick around awhile longer. However, there are other dividend-paying companies you might have a greater interest in. Read our new report and find out which three Dow stocks dividend investors need to own. The report's free to download today, but it won't be for long -- so click quick.