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Linn Energy, LLC Message Board

  • mymindsmadeup mymindsmadeup Aug 14, 2013 8:59 PM Flag

    payout ratio

    One of the criticisms for this stock appears to be the pay out rate is higher than the income at a recent 0.85. The payout was $2.90 when the stock was at around $38/share or +/-7.5%. Since the price has dropped to $23.5+/- one gets +/-12% with the pay out ratio still at 0.85. Would the stock be hurt ... after the recent ,$14/share drop ... if the dividend was lowered to $2.46 or +/-10% balancing the pay out ratio to 1.00. Later is earnings go up promise to keep the payout ratio at 1.0. At this point the finances would be on a more acceptable footing.

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    • I agree if meeting a coverage ratio of 1.0 is a long-term issue that a modest reduction would be reasonable and good for the stock in the long run. At the same time, they did report record July production on the call and an expectation of 8% to 10% production growth for the 2H13 with a payout ratio up to 0,95 by q413. Even without BRY, if they can move to 1.0 by early to mid-2014 on their own, there would seem to be no reason to cut the distribution IMO. Obviously, with BRY, they believe it would add sufficient DCF to, at minimum, cover the current distribution.

    • If not for the potential BRY merger, I think a distribution cut could be a good thing. The DCF situation is no secret. Unfortunately, cutting the distribution now will just make the merger even harder to sell to the BRY shareholders. Depending how you feel about the merger at this point, that could be good or bad.

      I think this could be similar to situation mReits faced about 18 months ago. Most everyone could see earnings were not keeping pace with the dividends so prices began to drag. When the cuts were finally announced there was a slight drop on the news, but it fully recovered within days before pushing on to new all time highs a few months later. A lower, more sustainable, dividend pushed prices up, not down.

      The uncertainty over the size of the cut, or in some cases, management's almost willful refusal to discuss the obvious, often does more damage than the cut itself. Its like catching your kid with his hand in the cookie jar and chocolate on his face, his/her denials can make the situation bigger than it has to be.

    • LINE states in their quarterly report that the Distributable Cash Flow (DCF) is to be used by investors to calculate the coverage of the dividend (DIV). If the DCF is less than the DIV then LINE borrows money to cover the DIV. IF the DCF exceeds the DIV then LINE can raise the DIV.

      The current DIV is $0.7248 per quarter paid as $0.2416 per month.
      The current DCF is $0.65 per quarter.
      This means that LINE is borrowing $0.0748 per quarter to pay the current DIV rate.

      To maintain the current DIV the Berry Petroleum merger must add $0.0748 to the DCF or LINE must increase non-hedged production to generate this amount. Otherwise LINE will have to cut the DIV.

      This explains the big drop in share price after LINE reported for the quarter.

      This cut would not be too bad a deal as it would give us a chance to buy if there was a sharp drop.
      I think the drop in share price would be short lived and the price would then rise for a DIV yield of about 8% or to a $32.50 per share price.

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