Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, we'll turn our attention back to the energy sector and focus on a company that's set to benefit in a big way from the upcoming energy boom, Boardwalk Pipeline Partners (NYSE:BWP).
Up from the ground came quite a bubble
Natural gas might seem like the future of American energy consumption -- and considering its natural abundance in the shale regions of the continental U.S. and the fact that it burns cleaner, it rightfully deserves to be so -- but investors did everything in their power recently to try and wreck that future last year. Between a milder-than-normal winter in the U.S. on the East Coast and an overabundance of natural gas being drilled in shale regions of the domestic continent, natural gas prices plummeted under $2 per thousand cubic feet.
This set in motion a series of events that threatened to weaken the usually stable cash flow of natural gas and natural gas liquid pipeline, transmission, and storage companies like Boardwalk. For one, it caused a big production shift by some of the nation's largest natural producers. Chesapeake Energy (OTC:CHKA.Q) sold off nearly $7 billion in assets in September, including valuable Permian Basin assets, just to help it cover its upcoming year's expenditures, and to ensure it had the working capital to lower nat-gas production while boosting its liquids output. With Chesapeake being the No. 2 nat-gas producer in the U.S., you can imagine what sort of worry it put the midstream sector into.
The other big concern for midstream companies leading into the past couple of years had been infrastructure. Literally, U.S. drillers were pumping so much in assets out of the ground that it was getting bottlenecked in pipelines leading to Cushing, Okla., one of the few energy hubs of the United States. This oversupply is one of the many reasons that perpetuated exploration and production companies such as Continental Resources (NYSE:CLR) to bypass traditional transmission methods to Cushing, and turn to transporting its oil by rail to terminals in Louisiana. Sure, it also helped that a huge gap between Brent crude and West Texas Intermediate existed until recently that allowed Continental to reap a nice reward even with shipping costs added in, but it was also a lack of adequate infrastructure that helped lead Continental to make the choice to ship 65% of its oil in the Bakken by rail.
Coming of age
But here's the good news: Midstream companies are on their way back, and they're stronger than ever.
One of the biggest beneficiaries of the closing gap between Brent crude and West Texas Intermediate are midstream providers. With that spread having been reduced from a peak of $27 per barrel to roughly $2 per barrel (a negligible difference), the impetus to ship by rail has abated and drillers are once again looking to midstream companies to supply Cushing, Okla., with their product.
This could be good for Boardwalk in a number of scenarios. First, you already have direct pipeline connections to the Barnett, Haynesville, Woodford, Fayetteville, and Eagle Ford shale formations. The increased production in these regions, with natural gas prices having doubled from their lows seen last year and the Obama administration heavily pushing a reliance on domestic production, is only bound to increase transmission and storage demand.
On the other hand, if another bottleneck occurs in Cushing, Boardwalk has an out, as its pipelines extend from the Gulf Coast region (so either directly from some of the aforementioned shale formations or a terminal in the Gulf) all the way up into the Ohio River valley. No drilling bottleneck is going to keep Boardwalk down!
From a logistics standpoint, midstream companies are also set to benefit from the biggest infrastructure upgrade we've ever seen. As my Foolish colleague and oil and gas guru Aimee Duffy noted last year, somewhere between $130 billion and $210 billion will be spent on expanding natural gas infrastructure in just the next 20 years!
Boardwalk is doing what it can right now to put that expansion in motion by announcing a joint venture with Williams (NYSE:WMB) in late May known as the Bluegrass pipeline. With a targeted in-service date of late 2015, the Bluegrass pipeline will transport natural gas liquids from the Marcellus and Utica shale regions to the U.S. Gulf Coast and northeastern United States. The ultimate goal here would be to encourage more NGL production by drillers and justify more storage and transmission need for NGLs. The best part is the newly constructed pipeline would be built in addition to existing infrastructure, which is why it may take just a hair over two years to bring into service!
Show me the money, Boardwalk
But, let's face it; the real reason we're taking a look at Boardwalk Pipeline Partners today is the delectable dividend income that it can put in your pocket.
In addition to representing a company that stands on the precipice of an energy boom, midstream companies also offers some of the most predictable cash flow in the business. Energy demand can ebb and flow a tad as consumer demand peaks and troughs, weather patterns change, and pipeline or storage infrastructure needs upgrading; but on the whole, operating cash flow, minus a few hiccups every couple of years, is extremely stable. And we also know that predictable cash flow leads to healthy dividends.
As you can see, Boardwalk boosted its dividend quite dramatically since it first began paying a quarterly stipend in 2006. In fact, Boardwalk, until the most recent five quarters, had increased its distribution for 25 consecutive quarters!
Now compare this with an extremely popular and much larger midstream company in Enbridge Energy Partners (NYSE:EEP). The payouts between the two companies are actually quite similar, with Enbridge yielding 6.7% and Boardwalk yielding 6.6%. However, profit margins are considerably higher for Boardwalk, and its annual dividend growth history is certainly more appealing. Enbridge shareholders have seen their payout grow by an average of 2.4% per year since 2006 while Boardwalk, even excluding its very first payout, which would skew the results, grew its yield by an average of 5.8% per year. Furthermore, trailing-12-month operating cash flow as a percentage debt is higher for Boardwalk as compared with Enbridge, signaling the stability of its debt relative to its cash-generating capabilities. I have absolutely nothing against Enbridge Energy Partners, but Boardwalk is statistically the better-looking midstream MLP!
This looks like a pretty open-and-shut case of a company that's perfectly positioned to take advantage of the upcoming energy boom. Boardwalk has its infrastructure set up in key shale regions to avoid many of the gluts that previously weighed down the sector, it's forged a valuable Northeast-to-Gulf Coast partnership with Williams, and it's just relatively inexpensive compared with some of its peers. It's especially attractive if you consider that reinvesting the dividend proceeds could result in a doubling of your money in less than 11 years if the stock price stays at the same level it's at now or heads higher. I like those odds!