Linn and LinnCo: Lifelong Income

09/19/2014 10:00 am EST

Focus: MLPS

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of Capitalist Times, looks for vehicles with growth components and shares several dividend-paying stocks that—at the moment—other people aren’t interested in buying for one reason or another.

Steven Halpern:  Our guest today is Roger Conrad, editor of Capitalist Times.  How are you doing, Roger?  

Roger Conrad:  Real good, Steve.

Steven Halpern:  Today we’re going to talk about the latest edition to your Lifelong Income Portfolio, but before we look at that specific stock, could you tell our listeners a little about your portfolio construction and the specifics about how a company qualifies to be a member of your Lifelong Income Portfolio?

Roger Conrad:  Certainly, well, first of all, we strive for diversification and balance, so I want to own a lot of different types of income producing securities.  I’m very focused on stocks right now.  

I think it’s basically a seller’s market for bonds, meaning that if any company trying to issue bonds is able to pay very low interest rates—very good for earnings, very good for dividend growth, but not so good for buying bonds—so we’re focused on, mostly on stocks.  

We want stocks that can give us a growth component, as well as paying a nice yield, because we’ve found that if you don’t have growth, you don’t really have income for very long, so putting all those things together, we scoured the investment universe.  

We’ve been, basically, Capitalist Times has been around since last summer and we’ve had some pretty good fortune looking where, again, looking for those growth components and one place is just looking for dividend paying stocks that other people aren’t so interested in buying for one reason or another.  

That’s really where the value is, we’re five and a half years into, really, a historic bull market and a lot of valuations have gotten very high, but we’ve found, if you look where others aren’t, there are still some very good values out there.

Steven Halpern:  The latest edition to your Lifelong Income Portfolio is LinnCo, LLC (LNCO) which was created out of a related company, Linn Energy (LINE).  Could you explain the relationship between these two outfits?

Roger Conrad:  Yeah, certainly, this company, Linn Energy, is a master limited partnership that produces oil and gas.  It’s the largest of that group, but when they launched LinnCo, the reason they launched LinnCo was because they wanted to get a different kind of investor.  

In other words, have a security that would be, basically, a play on the same company, the same assets, same dividend, but would pay a dividend in an ordinary dividend or a qualified dividend rather than as the master limited partnership does, a dividend that’s part return of capital and so forth, so that’s what LinnCo does.  

Technically, it owns a piece of Linn Energy, so shareholders get the same cash disbursement, but it’s—rather than being part return of capital and so forth, a partnership dividend—it’s actually a common stock dividend, so we picked that one up instead of the partnership.  


We already have a couple partnerships in that portfolio, but we saw that as maybe a little bit more flexible version of that Linn Energy piece that investors could buy and hold regardless of what sort of a count they had or what their objectives might be.

Steven Halpern:  Now, could you walk us through some of the reasons that you decided now is the right time to add LinnCo to the income portfolio.

Roger Conrad:  Well, I mentioned that we look for investments or stocks, particularly that are out of favor or that others have been ignoring, so this is a good one.  

In fact, this whole group—which is master limited partnerships that produce energy—they’re actually a lot more conservative than they look, because they lock in prices for energy in advance, so their earnings don’t fluctuate so much with energy prices, but right now we’ve had a little bit of a pullback in oil and gas prices, so those are—that whole group—is cheap.  

Linn is actually a little bit cheaper than some of the others because it had come under attack from short sellers over the past year and some quite incendiary charges against it which we researched and found to be quite overblown and very hypey and so we, again, we found a company where the group was cheap and then this particular company was unfairly—had been—unfairly beaten down.

So we’ve got a yield between 9% and 10% on this, on this particular company and, again, we think it’s got a lot of potential for growth with producing more energy.

There’s a big energy production boom going on in America right now, but also again, it’s sort of an unloved pick so we’re getting a nice chance for a pop in that.

Steven Halpern:  Now, would you consider both Linn Energy and LinnCo to both be attractive for purchase and, in particular, what type of investor could consider each one?

Roger Conrad:  Well, I think the partnership is obviously more attractive to someone in a high income bracket and particularly if you’re buying something in a taxable account because a good chunk of that dividend you won’t owe any tax on until you sell it, so that would be, I think, it’s a good way to cut down your taxes and get a nice yield.  

The LinnCo, I think, is appropriate for investors of any sort, that, by paying a cash dividend, will eliminate some of the potential complications for holding it say in a tax advantaged account like an IRA where you might have some questions if you do hold a lot of master limited partnerships with unrelated business taxable income.

That’s actually somewhat of an overblown concern when it comes to holding MLPs in an IRA, but with LinnCo you don’t have to worry about that at all. It’s, again, a common stock that gives you the same dividend and same growth potential as the limited partnership.

Steven Halpern:  Well, we really appreciate you taking the time to join us. Thank you.

Roger Conrad:  Hey, thank you, Steve.

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