{"id":11750,"date":"2023-05-21T14:10:49","date_gmt":"2023-05-21T18:10:49","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/a-recession-is-near-your-income-matters\/"},"modified":"2023-05-21T14:10:50","modified_gmt":"2023-05-21T18:10:50","slug":"a-recession-is-near-your-income-matters","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=11750","title":{"rendered":"A Recession Is Near, Your Income Matters"},"content":{"rendered":"
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Co-authored with “Hidden Opportunities.”<\/em><\/p>\n

The U.S. economy continues to slow down as the Federal Reserve continues its inflation containment efforts. While rates have been rising aggressively for 12 months, the cumulative impact of the Fed\u2019s rate hikes has yet to be fully felt.<\/span><\/p>\n

When borrowing costs rise, capital becomes more expensive, and companies work hard to optimize their costs, starting with headcount. The tech leaders who were blindly di-worsifying into buzzwords and meme plays, and speculating with cryptocurrency \u201cassets\u201d are slashing the workforce and are refocusing on profitability. Layoffs are making the headlines frequently, not just in the tech sector but across other parts of the economy. Retailers, manufacturers, media companies, and the financial industry have all announced cuts. Highly people-oriented firms like Accenture and Deloitte have also begun cutting down a significant portion of their workforce to preserve profitability and brace for slow growth.<\/p>\n

For people in the workforce, we can\u2019t say how safe your job is. But we can tell you that profitability will continue to be a priority for U.S. companies, and dividends will hit new peaks in 2023.<\/p>\n

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Janus Henderson<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Growing dividends and share buybacks during uncertain economic conditions indicate the alignment toward shareholder value creation. Janus Henderson expects payouts to strike new all-time highs in 2023, with Oil and Gas producers and financial sector companies to account for half of the dividend growth. We’ll discuss two big dividends from these highly shareholder-oriented sectors.<\/p>\n

Pick #1: DMLP – Yield 13.5%<\/h2>\n

Dorchester Minerals, L.P.<\/strong> (DMLP) acquires, owns, and administers Royalty Properties, which consist of producing and non-producing mineral royalty, overriding royalty, net profits, and leasehold interests located in 592 counties in 28 states. The partnership earns a fee based on the volume and price of crude oil and natural gas extracted from its reserves.<\/p>\n

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DMLP 10-Q<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

DMLP<\/strong> has 26 full-time employees and is designed to make maximum distributions to shareholders. Common shareholders receive 96% of funds available for distribution, and the general partner collects a fixed 4%. Being a royalty firm, DMLP uniquely differentiates itself on the fact that its distributions constitute a very high percentage of its top line (not the bottom line as with every other company). During FY 2022, the company distributed 80% of its revenues. The partnership\u2019s recent $0.9897\/share quarterly distribution, along with the payments made during the past three quarters, calculates to a 13.5% yield. Notably, Q1 distributions include royalty income from the sale of oil and gas between November 2022 and January 2023.<\/p>\n

The partnership ended Q1 with $45 million in cash and cash equivalents on its balance sheet. Most importantly, DMLP utilizes no debt in its business, and its partnership agreement prohibits the firm from incurring indebtedness above $50,000. This provides adequate protection against rising interest rates. A review of DMLP\u2019s 10-Q confirms no debt aside from modest accounts payable and operating lease liabilities.<\/p>\n

Note that DMLP issues a Schedule K-1 at tax time.<\/em> Since the partnership\u2019s revenues fluctuate with commodity price and volume, its distributions are variable.<\/p>\n

Why was the Q1 distribution higher than most investors expected?<\/h4>\n

We always invite good news with open arms, but it is prudent to examine if it is too good to be true.<\/p>\n

During Q1, DMLP reported a 173% YoY increase in Net Profit Interest (“NPI”) revenue. These levels were substantially higher than past quarters. NPI is a highly underrated and rare form of royalty agreement that provides a payout of an operation’s net profits to the parties of the agreement. E&P companies reporting record profits as a result of lean operations and higher commodity prices comes as a direct benefit to DMLP shareholders.<\/p>\n

Notably, for Q1, the higher NPI levels are attributed to higher suspense release (revenues that have been held by a purchaser or lessee, often attributable to multiple months of production) on new wells in the Permian Basin. Out of the $24.6 million distributed to shareholders, $17 million was NPI-based, resulting in a noticeable boost to the quarterly distribution.<\/p>\n

The Energy Sector Is Already Priced At Recession Levels<\/h4>\n

The energy sector is the cheapest of all 11 U.S. market sectors, with a current P\/E ratio of 6.7<\/strong>. Looking at the forward P\/E, the industry is already priced at recession levels. Source.<\/em><\/p>\n

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Yardeni Research<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

A recession fear is almost always going to send energy prices plunging. But an objective review of past recessions shows that demand doesn\u2019t necessarily decline. Having learned from the oil shock during the global pandemic, U.S. Exploration & Production firms are better positioned to control their production levels to mitigate the demand projections.<\/p>\n

DMLP has demonstrated that its business model and its shareholder-oriented-ness have stood through the test of energy price volatility. An investment made in this royalty firm during the ill-timed January 2008 would have outperformed the S&P 500 (SPY) while paying handsome distributions to shareholders.<\/p>\n

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Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

With the Chinese economy reopening, the tough sanctions on Russian energy exports, and the likelihood of a mild recession, we expect energy prices to remain above-average levels for the foreseeable future despite interim fear-driven volatility.<\/p>\n

DMLP is an excellent addition to a long-term income portfolio to benefit from sticky demand.<\/p>\n

Pick #2: ATH Preferreds – Yields up to 8%<\/h2>\n

Athene Holding Ltd<\/strong> is an insurance company that specializes in retirement products. Athene is one of two principal subsidiaries of Apollo Global Management, Inc. (APO), one of the largest asset-management firms globally. Athene\u2019s balance sheet carries an A+ credit rating from S&P Global. Source.<\/em><\/p>\n

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Athene Corporate Overview – April 2023<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Athene is a market leader in fixed annuities, one of the hottest retirement products in this high-interest-rate environment. During Q1 2023, total annuity sales hit new records and reached $92.9 billion (a 47% YoY increase), according to LIMRA (an industry-funded researcher tracking the products since the 1980s). Source.<\/em><\/p>\n

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Insurance Newsnet<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Athene maintains a disciplined capital investment strategy, with 94% of its assets held in cash or fixed-income securities. Additionally, ~96% of the company\u2019s fixed-income portfolio is invested in investment-grade assets.<\/p>\n

Athene maintains robust statutory capitalization with $2.3 billion in Excess Equity Capital, well above regulatory requirements. The insurance company spent $141 million on preferred dividends and $98 million on interest expenses toward its long-term debt in FY 2022. These were adequately covered by the $6.2 billion in net cash from Athene\u2019s operating activities. Additionally, Athene ended FY 2022 with 740 million in cash and cash equivalents.<\/p>\n

Athene has five classes of preferred securities that carry investment-grade ratings. These preferreds pay qualified dividends and present an attractive upside from current price levels.<\/p>\n