Smoking Profits, with Reduced Risks

In This Issue: Smoking Profits, with Reduced Risks The New Normal - Six Years Later The Quest for Midstream Scale This Will Shatter Everything You Thought You Knew (About Investing) Can building wealth really be boiled down to following three ridiculously easy rules? The short answer is, YES! I've spent the past 26 years perfecting a system that makes picking winners in the stock market as easy as 1-2-3. That's not an exaggeration. The first time I tested this system out, I banked a cool $127,344 in profits for myself… on a single trade. Today, I'd like you to show you how to use the system for yourself. Get the details here. Smoking Profits, with Reduced Risks 1/30/2015 By Benjamin Shepherd According to data from the World Health Organization, the global smoking rate has been steadily declining since 1980, with the smoking rate for men falling by 25% and for women by 42%. Just 31% of men and 6% of women now smoke, consuming just less than a pack a day on average. But while the prevalence rate may be falling, thanks to global population growth the absolute number of smokers is up . . . way up. Over the past three decades the total number of smokers has grown from 721 million to 967 million, while the total number of cigarettes consumed annually has risen from not quite 5 trillion to 6.25 trillion. Essentially all of that increase is in the emerging markets. When U.S. Surgeon General Luther Terry released the first report outlining the dangers of smoking in 1964, 43% of American adults smoked. Today, only about 18% of us light up on a regular basis. But while the anti-tobacco crusaders have scored a win here in the U.S. -- and in much of the rest of the developed world -- there have been sharp increases in the number of smokers in countries such as China, Indonesia, Russia and many other emerging markets. Obviously, the death knell was sounded for the tobacco industry in the early 2000s was a bit premature, even if the industry did have to retool a bit. Altria was clearly ahead of the curve on that point, spinning out Philip Morris International (NYSE: PM) in 2008. While Altria hung on to its U.S. business, Philip Morris was given the exclusive right to make and sell the tobacco giants' iconic brands, such as Marlboro and Parliament, outside the country. Thanks to that, Philip Morris sells the world's top 15 brands in about 160 countries, with number one market share in 59. Given its dominance, the tobacco group has managed to turn in slow but steady growth. Over the past five years, revenue growth has averaged about 4% annually while earnings per share have grown 9.6% thanks to industry-beating margins. That growth has helped to fund the company's $1 per share quarterly dividend, even as it has been working an $18 billion share-buyback plan since 2008. But while cigarettes may be the company's specialty, it recognizes that emerging market consumers will one day get wise to the health risks associated with smoking. The company has invested nearly $2 billion to develop what it calls "reduced risk products," designed to provide the pleasurable aspects of lighting up with so many of the harmful byproducts. The company is currently working with two basic designs: battery-powered "e-cigarettes" that heat and aerosolize a nicotine solution and another that heats, but doesn't burn, actual tobacco. While e-cigarettes are becoming more ubiquitous, it's that latter platform which is actually most promising. Heat-not-burn technology gives users more of the tobacco taste and nicotine levels which smokers have come to expect, creating an experience more like smoking an actual cigarette. It creates fewer harmful chemicals such as tar, since the tobacco isn't actually burned, resulting in a somewhat safer, similarly satisfying smoking experience. Philip Morris CEO Andre Calantzopoulos is pretty optimistic about the products. He spoke to Forbes about these products in 2013, telling the magazine, "These products can bring the biggest single benefit in a short period of time, in terms of public health." Aside from the health benefits, there's also the bottom line to consider. Management predicts that reduced risk products could generate between $720 million and $1.2 billion in annual profits once the products are rolled out at full steam. Given the promise of these new products, Philip Morris should be able to continue growing its dividend. In 2009 the company paid out $4.3 billion in dividends and repurchased $5.6 billion of shares. While full-year 2014 won't be released for another week, last year it paid out nearly $6 billion in dividends and about $5 billion in repurchases. If these products help maintain even its mid-single digit revenue growth, dividends will maintain their upward trajectory. So while the tobacco industry may face more challenges in the future, not the least of which is the risk that emerging market governments may take a regulatory approach similar to the developed world's, Philip Morris International is already adapting to future challenges. Smoke 'em if you've got 'em. What Great Recession? My top financial recommendation for 2015 can legitimately ask that question. They shrugged off the catastrophic real estate crisis as if it were no more than a pesky gnat, while not requiring any TARP funds or government subsidies of any kind. Where can you find them? Right here. The New Normal - Six Years Later 1/30/2015 By Jim Pearce In May of 2009 the phrase "the new normal" entered the lexicon of the financial media. The term was used by PIMCO analyst Mohamed El-Erian to describe an economic landscape consisting of stagflation, high unemployment, and slow growth. At a time when nearly everyone was grasping for a narrative that could succinctly explain an almost overwhelming deluge of complex financial issues, El-Erian's letter provided the perfect sound-bite to fill that void. In a public letter than attracted global attention, El-Erian used the phrase "The New Normal" as a headline above this paragraph; "For the next 3-5 years, we expect a world of muted growth, in the context of a continuing shift away from the G-3 and toward the systemically important emerging economies, led by China. It is a world where the public sector overstays as a provider of goods that belong in the private sector. It is also a world in which central banks and treasuries will find it difficult to undo smoothly some of the recent emergency steps. This is particularly consequential in countries, such as the U.K. and the U.S., where many short-term policy imperatives materially conflict with medium-term ones." He went on to hypothesize "the following potential configuration: We would look for financial rehabilitation in the U.S. to occur in the context of low growth and an eventual inflationary bias down the road. The U.K. would also be stuck in a low growth world, but with greater vulnerability to domestic and/or external financial instability. Core Europe will also grow slowly, influenced by its historical inflation phobia and concerns for the integrity of the European Union. Japan will continue to face growth headwinds as its economy is too encumbered by fiscal and demographic issues. Emerging economies will bifurcate more clearly into two groups. Those with weak initial conditions will return to the old emerging market paradigm that alternates between austerity and financial instability; those with strong initial conditions will maintain their development breakout phase; albeit not at the torrid pace of recent years." In fairness to El-Erian, this letter was released only two month s after what would later prove to be the bottom of a steep stock market decline when the world was in a general state of panic (the Dow Jones Industrial Average would close at 6,547.05 on March 9th of that year, and is now above 17,000). His timing was impeccable in terms of identifying a clear dividing line between the past and future, but some of his predictions -- especially those regarding inflation -- have not (yet) materialized. Now that it has been more than five years since those predictions were made and inflation remains low while unemployment is dropping and GDP is growing in the U.S., it is tempting to disregard El-Erian's prediction as being overly influenced by the dark mood prevalent at the time. But the fact of the matter is many of his other predictions did prove true, and still persist today. It is doubtful El-Erian could have anticipated the degree of central bank intervention here in the U.S. that would transpire over the next five years, culminating in a massive program of quantitative easing that, thus far, has avoided the stagflation scenario he envisioned. So, his first bullet point has not yet proven true, and the near term outlook for inflation remains muted. However, his other four predictions were pretty much on the mark (pun intended), as just last week the European Central Bank introduced its own version of quantitative easing in an attempt to avoid deflation. Also this month, the Swiss National Bank removed trading limits on its currency (the Swiss mark) against the Euro, calling into question the integrity of the European Union. More importantly, as investors we should be asking ourselves what we can learn from El-Erian's pre-US Q.E. worldview, as that may inform the post-US Q.E. world we have now entered. Heightened volatility in the stock market suggests mounting concerns over our ability to continue to grow GDP in the face of a strengthening dollar, and a decline in wage growth (discussed by my colleague Bob Frick in this column last week) may portend a weaker middle-class with less money to spend on housing, automobiles, and consumer goods. If nothing else, we shall soon get an answer to the question of whether or not Q.E. was an exercise in kicking the can down the road as some alleged at the time, accomplishing little more than simply delaying the stagflation scenario El-Erian anticipated. While I can see the slow growth half of that scenario coming true, I do not see the potential for a meaningful hike in inflation this year or next. Many investors bailed out of the stock market in 2009, perhaps in part due to El-Erian's pessimistic view of things to come. Instead, they chose to flee to the safety of cash and treasury securities, driving yields on them down to historic lows while missing out on a stock market recovery that almost nobody predicted. That said, I admire the courage of people like Mohamed El-Erian who put their unambiguous opinions in writing and share them with the world, knowing one day they may be proven wrong. In El-Erian's case, he may have gotten certain elements of the story wrong, and may have been premature in the timing of other aspects of it. But for all of us, one lesson we can draw from this exercise is already clear: how we respond to the fear of the unknown is more important than attempting to know it. This article originally appeared in the Mind Over Markets column. Never miss an issue. Sign up to receive Mind Over Markets by email. I'm Sorry, But You Can't Get Rich from Wall Street Your chance to get rich on America's rise to greatness ended right around the time the market crashed in 2008. The only people who have gotten rich since then are the one-percenters – the rich elite who, quite honestly, don't need more money. But half a world away, one of the best-kept secrets in the investing world is unfolding. A consumer force over a billion strong – and with $30 trillion of economic power – is taking one surprising country by storm. It's unlikely rise to greatness will transform the stock exchange there into the next Wall Street. If you want a safe way to bank triple-digit gains outside of America's rigged stock market… I suggest you click here before it's too late. The Quest for Midstream Scale 1/29/2015 By David Dittman Some energy stocks have gotten killed during crude oil's 60% slide since June, 20, 2014. Some have held up well. Upstream master limited partnership (MLP) Linn Energy LLC (NSDQ: LINE), which cut its distribution by 56.9% earlier this month, has shed 66% of its value over the past seven months. Midstream MLP Energy Transfer Partners LP (NYSE: ETP), by contrast, posted a total return of 7.5% from June 20, 2014, through Jan. 28, 2015. ETP has also raised its distribution three times during this period. The basic explanation for Energy Transfer Partners' (ETP) outperformance is that long-term, fee-based contracts for pipelines, processing units and storage assets typically generate stable cash flow with less direct exposure to energy prices than drilling acreage and equipment owned by exploration and production companies such as Linn Energy. ETP also stands out among its midstream MLP peers with its performance over the past seven months, a testimony to the scale and the diversity--by geography as well as by commodity--of its operations. Stable cash flow allowed ETP to announce its sixth consecutive quarterly distribution increase earlier this week, a 2.1% bump effective with the January payment to unitholders of record as of Feb. 6 on Feb. 13. ETP's quarterly distribution rate has grown by 11.3% since the MLP got back to payout growth in July 2013. The short lesson for income-focused investors is to resist the siren song of high-yield upstream MLPs and focus on midstream stability. ETP, RGP, ETE and M&A Operational efficiencies, greater scale and a better use of capital: Those are the three main elements defining ETP's deal to acquire affiliate Regency Energy Partners LP (NYSE: RGP) for approximately $17 billion. While there are factors specific to the ETP-Regency affiliation that played a role in the deal, we're likely to see more moves to consolidate U.S. energy midstream assets in the present environment. UF Portfolio Holdings Buckeye Partners LP (NYSE: BPL) and NuStar Energy Partners LP (NYSE: NS) could be attractive candidates for large pipeline owners with the balance-sheet flexibility to do deals now because almost all of their cash flow comes from contracted fees that don't change with commodity prices. Another UF Portfolio Holding, Kinder Morgan Inc (NYSE: KMI), is buying privately held Hiland Partners LP for approximately $3 billion, gaining a foothold in the Bakken basin in North Dakota, one of the most fertile producing areas in the U.S., with well-established, mostly fee-based midstream assets. The acquisition is expected to be modestly accretive to cash available to pay dividends in 2015 and 2016 and will add $0.06 to $0.07 per share beginning in 2017. Kinder Morgan reported fourth-quarter distributable cash flow (DCF) per share of $0.60, up from $0.46 a year ago. Full-year DCF per share was $2, up from $1.65 for 2013. Management also boosted its quarterly dividend by 2.3% to $0.45 per share. ETP will pay 0.4066 of its units for each Regency Energy unit held. It will assume $6.8 billion in Regency debt and also make a one-time cash payment of $0.32 per unit to Regency unitholders. Both master limited partnerships (MLP) are controlled by Energy Transfer Equity LP (NYSE: ETE). Energy Transfer Equity (ETE), which owns the general partner (GP) and 100% of the incentive distribution rights (IDR) of both Regency and ETP, has agreed to reduce the incentive distributions it receives from ETP by a total of $320 million over a five-year period. The IDR subsidy will be $80 million in the first year post closing and $60 million per year for the following four years. That's a positive for ETP unitholders. The all-in offer price of $26.89 represents a premium of 13.2% for Regency unitholders based on Jan. 23, 2015, closing prices. The implied value of Energy Transfer Partners' offer is well above Regency's recent low of $21.52, reached on Jan. 14, 2015, but even further below its recent high of $33.11, set on Sept. 2, 2014. Why It Works Benefits for Regency unitholders, who will have a 34% stake in the combined entity, go beyond the premium. Regency, which is down 17.3% since last June, had been punished due to its outsized exposure to NGLs, the pricing of which correlates with crude, and the concentration of its assets in what one analyst described as "less desirable" production basins. Merging Regency, one of the largest gathering and processing MLPs in the U.S., with ETP has long been an option for ETE. Recent weakness for Regency's unit price due to commodity volatility highlighted its need for greater scale and diversification as well as access to cheaper capital. Hooking up with ETP will avail Regency's growth projects of an investment-grade balance sheet. Standard & Poor's and Moody's have affirmed ETP's investment-grade BBB- and Baa3 ratings. S&P noted that the deal will have no adverse impact on ETP's credit profile, while Moody's affirmed ETP's "stable" outlook. The merger will also allow Regency and ETP to consolidate complementary midstream operations in the Permian and West Texas areas, which should result in lower costs. ETP's primary commodity remains natural gas, though recent expansion, in line with activities of producers in its key basins, has focused on liquids. Midstream service to gas-dominant basins such as the Marcellus and the Utica is still critical to ETP's overall businesses. An East Coast NGL hub centered on the Marcus Hook facility in southeast Pennsylvania will leverage the supply from the Marcellus and Utica for natural gas and NGLs. At the same time, ETP plans to leverage LNG projects in the Gulf Coast, chiefly through its Lake Charles liquefaction facility and related supporting assets. ETP also has a foothold in the Permian Basin and will continue to support natural gas, crude oil and NGL transport, processing and storage services. And it has invested heavily in the Eagle Ford as well. Regency operates in most of the above-referenced asset bases. Midstream operations in the Permian and West Texas area will likely be consolidated. And the merger increases the likelihood of further liquids volume growth for the Lone Star NGL joint venture between ETP and Regency, as well as expected increases in natural gas volumes into ETP's intrastate Texas pipeline system. Regency also brings operations and growth projects in the Marcellus and Utica shale plays, which complement ETP's Rover interstate gas pipeline project. The market's treatment of Regency, ETE and ETP reflects the benefits for each entity. Regency units have obviously traded up to approximate the premium. ETE is higher because of the perceived positives that come with simplification. ETP is down because it's adding assets with lower perceived value in the present commodity environment. Over the long term, however, the deal should support management's distribution growth forecasts. And that will benefit unitholders. ETP remains well positioned to acquire additional midstream assets in this developing consolidation phase for the industry, with a still-strong balance sheet augmented by highly visible, stable cash flows. This article originally appeared in the Utility & Income column. Never miss an issue. Sign up to receive Utility & Income by email. Look What's Coming Out of Your Electrical Socket! The electricity flowing to your home or office may be generated by an unexpected source. Hardly anyone's noticing, but an historic change to the U.S. electricity supply is happening now. This is a defining moment for the nation – and a once-in-a-generation opportunity for investors. Interested? Read more. You are receiving this email at benjamart.ss.stock@blogger.com as part of your subscription to Investing Daily's Stocks To Watch, published by Investing Daily. 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