Published on June 14th, 2019 by Josh Arnold
Income investors tend to like stocks that produce high and growing dividends, but those dividends are generally paid on a quarterly basis for most stocks. By contrast, there are currently 39 stocks that pay their dividends monthly, allowing for more current income, as well as faster compounding of wealth for holders.
One such stock is Pacific Coast Oil Trust (ROYT), a stock that offers a massive, double-digit yield, and dividend payments each month.
Beyond its high dividend yield, Pacific Coast also pays monthly dividends, instead of the traditional quarterly distribution schedule. Monthly dividend payments are highly superior for investors that need to budget around their dividend payments (such as retirees).
There are nearly 40 companies with monthly dividend payments. You can see the full list of monthly dividend stocks below:
Pacific Coast has a very high yield, but also significant risks. In this article, we’ll take a look at Pacific Coast’s business model, its prospects for future growth and of course, its distribution outlook.
Pacific Coast Oil Trust is a perpetual trust that was formed in 2012 by Pacific Coast Energy Company, or PCEC, through a conveyance of interests in California onshore oil properties. The trust owns properties located in the Santa Maria and Los Angeles Basins. PCEC owns the underlying properties from which net profits in the interests are conveyed to Pacific Coast’s holders.
The trust operates in two segments: Underlying Properties and Remaining Properties. The former consists of properties that have proved developed reserves, while the latter is all other development potential on underlying properties.
The trust earns income based upon production from the wells it owns interests in. Developed properties are already producing and thus, require very little in additional capital expenditures. Thus, these properties are projected to have positive net profits for the trust immediately upon conveyance.
Remaining properties, on the other hand, require meaningful capital expenditures for the drilling of wells and installation of infrastructure. PCEC supplies required capital on behalf of the trust, but because costs initially outpace proceeds, Remaining properties tend to have negative net profits upon conveyance.
The trust is entitled to 80% of the net profits from the sale of oil and natural gas production from developed properties. In addition, it is entitled to 7.5% of the proceeds attributable to the sale of oil and natural gas from remaining properties, or 25% of the net profits from the sale of oil and natural gas from those properties, whichever is greater. The trust uses this income to determine the monthly distribution, if there is one.
As noted above, Pacific Coast is a pure play on oil. While the trust derives some income from natural gas, nearly 100% of its revenue comes from oil, making natural gas production almost meaningless to unitholders. The trust owns interests in high-quality properties, and it is perpetual in nature, meaning that it doesn’t have a stated liquidation or termination date, as do some other trust of similar types.
Pacific Coast has another advantage for investors in that it is more tax efficient than some other stocks that offer similar exposure for investors. Pacific Coast issues 1099s to investors and offers the better of the two tax shields between cost depletion and percentage depletion. In practice, this helps to reduce taxes for the holder of the units, as seen above. In addition, there is no K-1 filing, as is the case with many other publicly-held trusts of this type.
Pacific Coast reported Q1 earnings on May 1st, 2019, and results were weaker than they were in the same period last year. Underlying sales at Developed Properties were 2.4% lower year-over-year at 201,341 barrel of oil equivalents, or BOE. Pricing hurt Pacific Coast during the quarter as well as the average price for each BOE declined from $61.91 to $57.62. Further crimping margins, production costs increased from $31.67 to $39.59.
The trust’s Remaining Properties saw underlying sales volume rise nearly 30% to 59,036 BOE. Pricing was off for this segment as well, however, declining from $59.23 to $54.71 in the past year. Production costs were up in this segment too, but only from $30.42 to $31.12 per BOE.
Distributable income during the quarter came to 4.61 cents per share, a sizable decline against the 8.40 cents per share in the year-ago period due to the factors discussed above.
We expect total distributable income per share to come to $0.25 this year, which would be somewhat lower than last year’s showing of $0.33. Higher production costs and lower oil prices will continue to weigh for the rest of the year, so we aren’t particularly optimistic despite higher production volumes.
Growth will be difficult to come by for Pacific Coast unless the price of oil on the world markets moves materially higher than where it is today. Indeed, Pacific Coast is a pure play on the price of oil as its margins are fully dependent upon the difference between the production cost of a barrel of oil and what it can be sold for.
The trust has very little control over what those two numbers are at any given point, so when prices are moderate, as they are now, Pacific Coast struggles to grow. Additionally, much of the oil the company produces is “heavy”. As a result, it fetches a lower price per barrel.
As a result of this, Pacific Coast’s distributable income per share has been very volatile since the trust was formed in 2012. Crude prices were very high from 2012 to 2014, so Pacific Coast did very well and shareholders were rewarded with high distributions.
From 2012 to 2014, distributable income per share averaged $1.42, which is somewhat amazing considering the share price today trades for just over $2.
However, since oil prices crashed in 2014 and haven’t recovered, Pacific Coast has struggled. Distributable income in 2016 was just one penny, while 2017 saw $0.11, and last year was $0.33. Given the weak pricing of oil and rising costs, we see annual growth at -2% for Pacific Coast.
That said, its results can be very volatile from year to year given that it is so dependent upon the price of oil, but we think the long-term trend is lower.
We are projecting a dividend of $0.22 for this year as the trust has declared just over 12 cents of distributions thus far this year, through the June payout of just over three cents. Based on a recent share price of $2.06 per share, an annualized payout of $0.22 represents a sky-high dividend yield of 10.7%.
Distributions in the most recent months have been much higher than the first quarter payouts but again, given the factors of rising production costs and languishing oil prices, we don’t see this relative strength continuing. Thus, buyers should beware that the significant potential exists for a lower second half distribution than what we’ve seen in the first half.
Over time, Pacific Coast has distributed just about all of its income, as it is required to do. Pacific Coast has distributed $5.09 to shareholders since inception, which is around 2.5X the current value of the stock. Pacific Coast’s share price has fallen by around 90% from its IPO price of $20 in 2012 to just $2 today as distributions have fallen over time.
We don’t see a huge amount of additional downside from today’s price given that so much negative news is priced in, but we also don’t think Pacific Coast deserves to trade much higher than $2 given the risk to its income, and thus, the distribution.
On the surface, Pacific Coast offers investors monthly payouts and a huge annualized yield in excess of 10%. However, looking at the risks of owning the stock, we think it is a poor choice for those seeking high levels of income.
The volatile nature of trust’s distributions is very unattractive for investors that are looking to rely on this income for living expenses, such as retirees, and we think the risk of falling distributions in an industry downturn or recession is high. Thus, we rate Pacific Coast a sell and recommend investors look elsewhere for higher-quality dividend stocks.