A recent article seems to apply here, barring any "surprises".
Secondary Offerings Create Buying Opportunities
by Roger S. Conrad on September 7, 2012
in Dividend Investing
It takes money to make money. That’s why it’s always surprising how negatively some investors seem to view secondary stock offerings by strong companies.
Companies offer additional equity in their business for many reasons. Strong companies, however, sell more of their shares to fund acquisitions and expansion. Sure, that means there will be more shares outstanding. But the money raised from such an offering is invested in productive enterprises that earn a return. And that return means higher revenue, cash flow, dividends and eventually a higher stock price.
Many investors, however, can’t see past the dilution part. To them, it’s always better when a company buys back its own stock because that theoretically means more earnings will be divided among fewer shares.
Because of investors’ shortsighted focus on dilution, a secondary offering almost always causes a selloff in shares of a company’s stock, regardless of how solid the underlying business is or what management says it plans to do with the proceeds. In fact, issuing companies’ share prices often fall below the secondary offering price.
A case in point is this week’s secondary offering by master limited partnership Teekay LNG Partners LP (NYSE: TGP), which owns ships that transport liquefied natural gas (LNG) worldwide. On Tuesday, the master limited partnership (MLP) announced it would offer an additional 4.6 million units to the public, an increase of 6.6 percent to its existing base.
Teekay’s unit price immediately dropped 4 percent in the aftermarket, eventually hitting a low just under $38 on Wednesday. And despite stabilizing later in the week, the unit price still trades below the official offer price of $38.43.
That’s an extraordinary shift in sentiment for an MLP that investors had previously favored because of its strong fundamentals. Teekay LNG’s distributable cash flow surged 51 percent in the second quarter from a year ago and jumped 10 percent from the first quarter. Distributable cash flow is the relevant measure of MLPs’ profits, while conventional earnings per share is both a meaningless and misleading measure.
Teekay has consistently deployed funds raised in this manner to grow its fleet of carriers, which remain in heavy demand to accommodate rising global LNG traffic. It’s also likely to have all the business it can handle in coming years, as Australia begins exporting LNG en masse from offshore projects such as Chevron’s (NYSE: CVX) Gorgon. And that’s not counting the prospective trade when North America’s shale gas riches are available to the global market once export facilities are finally constructed.
Given that record of success in deploying invested capital, one would logically expect Teekay units to rally on a stock issue. But many investors reflexively assume issuing equity is a negative, at least until the company proves it will be deployed effectively. And in a nervous market like this one, not even the strongest companies are immune from selling.
Investor reactions like this demonstrate why automatic stop losses are a bad idea for dividend-paying stocks. That’s because the downside following equity offerings is never permanent. Sooner or later, the unit price will recover as the company proves the money was well spent. For MLPs like Teekay, that usually happens following a dividend increase.
The company raised its payout by 7.1 percent effective with the May 14 payment. And with its strong second-quarter numbers–namely a solid 1.21-to-1 ratio of distributable cash flows to distributions–another hike in the dividend should be forthcoming.
Again, that’s a reason to buy, not sell. And it applies to any solid company that issues equity and is punished for it in the stock market. Put another way, you don’t have to actually participate in a secondary offering of a strong company to benefit. All you have to do is recognize the offer is a favorable development and buy shares as fearful investors run for the exits.
That’s the essence of value investing, which is the most reliable way to build wealth in stocks whether your objective is growth or dividends. And at a time when so many are following price momentum–selling falling stocks and buying rising ones–there’s rarely been a better time to use a value approach and line your pockets for years to come.
I think you've hit the nail on the head with your question. While I do not regularly trade CQP, I will definitely be playing the SPO/dividend cycle here over the next month or so. I was alerted to the opportunity by a contributor over on the AGNC message board, where a group of regular traders constantly (and fairly expertly) discuss the post-SPO rally and subsequent dividend run-up in that stock (and a select few additional mREITS) virtually every quarter. In my estimation, there are few set-ups better than the stock price pullback triggered by a SPO announcement in a quality, high-dividend stock - followed by a dividend run-up in that stock. Given the research I've done in the past severaI days, I am aware that there are those who will question the "quality" part of that description when it comes to CQP, but I would anticipate a solid positive move in this stock between now and the anticipated (but not yet declared) ex-dividend date in late October. I am particularly encouraged by the fact that in the 3 trading days since CQP's 8 million-share SPO announcement, over 7.8 million shares have traded - in a stock that had traded an average of only about 113,00 shares a day prior to the SPO. So, one may conclude that the bulk of the SPO shares have been sold, and that the biggest part of the SPO price pullback has already occurred. This is not to say the the share price can't meander and even weaken a bit more before bottoming, as evidenced by the research on CQP's last SPO shared over on the AGNC message board (look for the thread "CQP: the next 2 weeks post-offering"). Most of us who trade AGNC like this every quarter use the leverage of long Call Options to maximize our returns in the dividend runs. I know that we have been waiting for the November options to come out for CQP before getting involved. Those options are now open for trading, and I know of at least a couple of the AGNC regulars who have already started legging in to CQP November calls, BUT please note that there is not necessarily any reason to rush into these Calls. One more note - if' you're looking for additional opportunities for these kinds of plays in the next month or so, keep an eye on the AGNC board, where we're all getting ready to put some of AGNC profits to work in several energy MLPs. Hope this all helps, and best of luck to you.
here's an snippet on how fast an LNG export facility can pay for itself (and sabine pass may be the only location to receive approval for awhile)
"But the industry is capital-intensive and costs are considerable: A “typical” investment includes an outlay of over a billion dollars for liquefaction, ships at over two hundred million per vessel, and a receiving terminal at half a billion to a billion dollars. Yet even with those costs, the economic incentive is there. Currently, the North America pays just over $3 per MMBtu while the Japanese spot market price hovers around $13 per MMBtu."
Long-term contract shipments to Japan would likely be priced at less than $10 per MMBtu, according to Reuters. That’s a deep delta. Investments in supplying LNG to hungry Asian markets may yield payback periods of under five years for the first players into the game, according to recent reports by Wood MacKenzie, a global energy consulting firm based in Annapolis, Maryland.
When CQP/LNG is up and running, the payback will be very fast = lots of profit. (All of this hinges upon Obama's interference)