I am a bit suprised there is no discussion on this board of 10,500,000 in new shares that will be offered today. After hours trade was down to $41.
The stock hit $44.30 on November 9, so it will do that again in part because the divdiend increase to $.59 was disclosed in the merger press release in June. They also had dislcosed in June, the last divdiend of $.525, so they will meet their press release last quarter, and we will hear $.59 about Jan. 12 or so.
Last time they raised money on April 12, the stock fell from $36.39 to $35.15 and then rose to $36.73 the night before ex-diviend of April 27. Well, this is different because we are about mid-way through the divdiend cycle and they did this in a awful market and the shares were dwindling from $42.30 and then to $42ish last night. We can easily expect an increase from $41 to $44 again, an increase of over 7%.
I should have known this would happen because there were a bunch of puts purchased last week and the put/call ratio was high.
I know you guys that are long will feel a bit extended, but it really is an opportunity to add to your position at a very good price. In summary, great company, wants more money to pay down expensive senior debt and the reduction in costs will only secure the dividend for the future. The fact they feel they can do this when the market for the shares of MLP's hasn't been great is a statement on how confident they are in delvering the results.
Here are the issues that you may be concerned about;
2) paying down debt
3) using the proceeds to pay the dividend, etc.
My experience with these secondaries in a variety of industries, including MREITs, is that he funds will be put to good use and the performance will continue. I wish they had described that use of the proceeds a bit better than paying down debt on a temporary basis, but it is large company with a 26B market cap. There were 139M units outstanding as of 9/30, so 10,500,000 more represents 7.2% more shares. On the back of the merger, maybe this will not go down to well with the consumer long holders, but in the end, it is just a buying opportunity that won't be around again. Moreover, we will now know the bottom price for the quarter and we have already seen $44.30.
$41 to $44 is a no brainer when the dividend has been disclosed. I am just a trader and a long term holder of shares and only have an interest in lettting anyone know of the opportunity if they are interested.
You will now not be surprised when your shares drip to $41 or perhaps a little more. If we get to $39.50, wow, that is an even better deal. I just have to decide how much to add.
When this stock sold for 17.00 no one wanted it and it yielded about 16% as i remember. so i had to sell it when it got to the low 30's. Not too smart.
but ever since i have been selling putts and cleaning up. Today i sold jan at 42 for 1.60. A net of 40.40.
i either own the stock at 40.40 less than the ipo 41.25 and collect the dividend or i get to keep the 1.60. whats wrong with this?
Nothing wrong with it. I've been doing it quite a bit myself, however I have been selling at lower strike prices (ie. further out of the money) where I expect the price will not go that low. Then I use the proceeds to buy high yield securities (MLPs, trusts).
Depending on how much of the over allotment gets taken, the dilution will be something under 2% from this issuance.
A simplified way to look at this it that whenever the net interest rate on borrowings exceeds the distribution rate, it makes sense to issue shares (to the extent that the market will bear).
Keep in mind that as a partnership, there are no tax deductions for interest expense, so there is little motivation for the company to use debt rather than equity.
I have been holding EPD for a few years. I considered selling when it ran past $44, as it felt like it had gone too far, too fast. But, given that my yield still exceeded 5%, I was comfortable holding. In hindsight, of course there would have been advantages to selling and repurchasing.
I was also concerned about triggering the capital gains tax, however.
I added to my position today by picking up quite a few shares near the close. I averaged at $41.05. My sense is that the price will pick up from here, or at least by the end of this week. Or, at least that is what I am hoping.
My belief is that the weakness in price was not a function of dilution, but a reaction to the issuance price. If EPD is willing to sell shares for $41.25, the message to the market is that nobody should expect to pay more than that. Of course, they had to price it such that the shares would clear rapidly.
I suspect that today's price action was affected by a few forces aside from the issued shares hitting the market. Presumably, the underwriters pre-sold some of their shares ahead of the official offering, and today there would have been a certain amount of filling and backfilling on the arbitrage end. To the extent that some were aware in advance of the deal, there may have been some short selling. However, I would have expected covering by the close, which did not seem to be happening in a meaningful way.
My strategy with today's purchase is to hold some of it long term, and sell some for a gain when the PPS appreciates about 10%. If they don't appreciate by 10%, I suppose that the worst case is that I collect 5%+ for a very long time. That works, too.
Great post! I wanted to suggest something about the wholesale nature of issuing 10,500,000 shares. Anytime you do someting in bulk the price will be less. There is nothing you can sell to a bulk purchaser for a retail price. I have seen this so many times before on secondaries in the MLP and MREIT space. The stock will always trend back to its retail price once this deal is done. There are always some after shocks for a few days and then we are off to the faces. The high of $44.30 will return after this issue is digested. Earnings are the next hurdle.
Always good to pay down debt at good rates.
A long term move that will make the company more sound.
I just paid down debt on a summer home at the beach - 3 1/2 percent; A home run for me.
Good luck to all
Huge volume today. Appears the secondary is selling well-price did not drop much at all. My guess is by friday the entire secondary will be sold and then we can look for the next leg up. I added to my position today-this is just too good to pass on.
The share price dropped 2.5 percent on a day in which the DJIA was up 2.5 percent. I think the share price decline was significant and might have been even greater had the economic news not come in good today. In the long term, EPD is still a great place to stay parked for a good return on investment.
i'm looking for the stock to trade at an approximate 6% yield so a price of $40 on about $2.40 of dividends in 2011 seems reasonable. the stock rallied from $32 to over $44 +(38%)in six short months. clearly got overpriced along with the market in general and was due for a pullback. appreciate the posts and opinions however. regards, mw
Ben, thanks for sharing your information and analysis. EPD has been on my watch list for some time. I noticed the drop today and in checking the website found your informative post. Knowing that there is a secondary answers all my questions about the price.