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LinnCo Drills for Dividends

11/13/2013 8:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert


Our latest recommendation is a high-yield play in the energy sector; it is set-up in a way that avoids the tax complications associated with a master limited partnership, notes Mark Skousen, editor of Forecasts & Strategies.

Yielding 10.4%, the sole purpose of LinnCo (LNCO) is to own units of Linn Energy (LINE), a fast-growing, high-yielding, independent oil and gas producer.

Based in Houston, LinnCo owns properties in the Mid-Continent, the Hugoton Basin, the Green River Basin, the Permian Basin, and the Williston/Power River Basin.

It has more than 4.8-billion cubic-feet-equivalent oil and natural gas, and operates more than 15,800 wells. It is aggressively expanding, and has enough oil and gas reserves to supply the energy needs of the entire state of South Carolina for two decades.

Thanks to the company's high-quality management, Linn Energy has grown from its founding in 2003 to become one of the nation's top 15 independent producers.

Revenue hit more than $1.9 billion during the last 12 months, with sales soaring 36% in the most recent quarter. It earned its first profit of $345 million in the quarter ended June 30.

Insiders own 16% of the outstanding shares—and several of them bought more stock in May and June. Security and Exchange Commission (SEC) filings show that officers and directors Terrence Jacobs, Arden Walker, Jr., and Mark Ellis have made recent six-figure purchases.

There had been considerable uncertainty about the company's short-term future, due to an investigation by the SEC into accounting irregularities, and a takeover bid of Berry Petroleum.

However, Linn Energy recently disclosed that its SEC accounting issue had been resolved, and it raised its offer to buy Berry Petroleum by $600 million.

Analysts expect LinnCo to be worth $40 a share by next year, as they aggressively expand operations. While we wait, the company pays an incredibly high dividend.

It began trading publicly in 2006 and has paid a dividend to shareholders every quarter. In July, it started paying a monthly dividend of 24.2 cents a share. That's an annualized rate of more than 10% that I believe is sustainable. LinnCo receives the same monthly distribution as LINE, 24.2 cents a month.

Note: As a corporation, LinnCo avoids the tax complications associated with a master limited partnership. If investors aren't concerned about the tax problems associated with master limited partnerships, LINE is a better deal—selling for a lower price and a higher dividend.

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