Uber's messy data breach collides with launch of SoftBank deal

TORONTO/SAN FRANCISCO (Reuters) – A newspaper advertisement for an Uber Technologies Inc stock sale was juxtaposed on Wednesday with a report that the ride-service provider had covered up a data hack – something of a metaphor for Uber, a company with boundless investor interest, but whose penchant for rule-breaking has led to a series of scandals.

FILE PHOTO: A photo illustration shows the Uber app on a mobile telephone, as it is held up for a posed photograph, in London, Britain November 10, 2017. REUTERS/Simon Dawson/File Photo

The stock sale advertised in the New York Times will enable Uber [UBER.UL] investors to sell their shares to Japanese investor SoftBank, a critical deal for the company whose problems included building software to spy on competitors and to evade regulators and being investigated in Asia for paying bribes.

Uber on Tuesday said that it had paid hackers $100,000 to destroy data on more than 57 million customers and drivers that was stolen from the company – and decided under the previous CEO Travis Kalanick not to report the matter to victims or authorities. Uber was first hacked in October 2016 and discovered the data breach the following month.

Chief Executive Dara Khosrowshahi, who took the helm in August with the mission of turning around the company and overhauling its culture, acknowledged in a blog that Uber had erred in its handling of the breach. (ubr.to/2AmxlQt)

The timing of the disclosure could hardly have been worse.

The company is trying to complete a deal with SoftBank Group Corp (9984.T) in which the Japanese firm would invest as much as $10 billion for at least 14 percent of the company, mostly by buying out existing shareholders. SoftBank is advertising to find shareholders who want to sell.

Uber last month announced a preliminary deal for the SoftBank investment.

One question is whether SoftBank will now try to alter the price of the deal. One source familiar with the matter said SoftBank is planning to stick to its agreement to invest in Uber but may seek better terms. SoftBank has not yet made a final decision on whether to renegotiate, the source said.

Another question is the future of Kalanick, the co-founder who led Uber to becoming a global powerhouse but did so with aggressive and controversial tactics. He was forced out by investors in June who feared his leadership style would damage the company, although he stayed on the board and remains a significant shareholder.

A bitter battle among investors over how to resolve Uber’s problems led to a lawsuit by early investor Benchmark, which sought to oust Kalanick from any role. But a settlement was reached earlier this month to pave the way for the SoftBank deal, with Kalanick retaining his board seat and other rights.

Kalanick was made aware of the hack last November and was aware of the $100,000 payment, according to a person close to the matter. Kalanick has declined to comment. Uber did not respond to questions from Reuters on Wednesday.

MULTIPLE INVESTIGATIONS, LAWSUITS

The scope of the repercussions Uber will face for the October 2016 data breach began to take shape Wednesday with governments around the world opening investigations.

Authorities in Britain, Australia and the Philippines said they would investigate Uber’s response to the data breach. London’s transport regulator, which has been in discussions with Uber after stripping it of its license to operate, said it was pressing Uber for details.

Canada’s privacy watchdog said that it had asked Uber for details on the breach, though it had not launched a formal investigation.

Attorneys general offices in at least six U.S. states along with the Federal Trade Commission (FTC) have announced they are looking into the matter. Some states are likely to go after Uber for breaking laws on data breach notification within a reasonable period of time.

At least two class action lawsuits have been filed against the company in the United States for failing to disclose the data breaches and causing potential harm to consumers.

Uber said that it has been in touch with the FTC and several states to discuss a hack and pledged to cooperate.

Legal experts said the company is likely to face limited financial fallout from data-breach lawsuits. Uber might succeed in squelching them outright because its agreements with both customers and drivers call for mandatory arbitration of disputes.

Uber fired its chief security officer, Joe Sullivan, and a deputy, Craig Clark, over their role in handling the hack.

The board of directors had commissioned an investigation into Sullivan and his team, which is how the breach was discovered. The board committee concluded that neither Kalanick nor Salle Yoo, who was general counsel at the time, had been consulted in the company’s response to the breach, according to a second person familiar with the matter.

It is unclear what the board of directors knew, if anything. Multiple board members did not respond to requests for comment.

“The scope of this breach is something the Uber board should have been briefed about and consulted on at the very least,” said Cynthia Clark, an associate professor of management at Bentley University. “It’s a monitoring issue and one of strategy and reputation.”

Clark said that these sorts of risks could affect Uber’s IPO, which the board has agreed will take place in 2019.

The company has begun overhauling its security practices with help from Matt Olsen, former general counsel of the U.S. National Security Agency and director of the National Counterterrorism Center, CEO Khosrwoshahi said.

Uber in August settled with the FTC after the regulator found the company failed to protect the personal information of passengers and drivers, an agreement that requires 20 years of regular auditing of Uber’s data.

After this week’s disclosures, Uber can expect “more audits and more people inside of the company” from regulators, said cyber security attorney Steven Rubin.

Reporting by Jim Finkle in Toronto and Heather Somerville in San Francisco; Additional reporting by Diane Bartz in Washington, Greg Roumeliotis in New York and Alastair Sharp in Toronto.; Editing by Jonathan Weber and Grant McCool

Our Standards:The Thomson Reuters Trust Principles.

Exclusive: China's SenseTime plans IPO, aims to open R&D center in U.S.

HONG KONG (Reuters) – Chinese artificial intelligence start-up SenseTime Group is planning an initial public offering (IPO) and aims to open a research and development (R&D) center in the United States as early as next year, its founder told Reuters in an interview.

The Hong Kong and Beijing-based deep learning company founded by Tang Xiaoou, a professor at the Chinese University of Hong Kong, is a leader among Chinese AI start-ups that are enjoying fast growth thanks to demand from the government and private sector for their facial recognition technology.[nL4N1N72PS]

Reporting by Sijia Jiang; Editing by Anne Marie Roantree and Stephen Coates

Our Standards:The Thomson Reuters Trust Principles.

HPE CEO Meg Whitman Reveals Why She’s Stepping Down

Meg Whitman’s tenure as CEO of Hewlett Packard Enterprise is coming to an end.

Whitman said Tuesday that she would step down from the business technology giant after a six-year stint, and described the reasons for her upcoming departure in a call with analysts.

In Whitman’s view, HPE is in much better shape than it was when she first arrived in 2011, prior to the company’s split from personal computer and printer sibling HP Inc. in 2015. At that time, Hewlett-Packard “was an enormous conglomerate,” she said, that confused customers because it sold too many disparate products—from servers to software to printers.

Additionally, she explained that the company’s size and management structure was an obstacle to staying current with technology trends. HPE’s core data center hardware business has shrunk over the years amid the rise of cloud computing, in which companies can purchase computing resources in a pay-as-you-go model.

“This company was a slower company than I would have liked to seen six years ago,” Whitman said.

Whitman’s tenure at HPE was marked by a series of corporate restructurings she believed was necessary to return the company to fighting weight. Even after its massive split from HP Inc., HPE continued to shed off pieces of its business it deemed non-essential.

This included, as Whitman detailed in the call, several complex deals like HPE spinning off its software business to United Kingdom IT company Micro Focus, and spinning off and merging its IT services business with IT company Computer Sciences, thus creating a new company called DXC Technology. During Whitman’s tenure, HPE also unloaded its Indian IT outsourcing unit Mphasis to the Blackstone Group.

Now that HPE can put those financial overhauls behind it, Whitman believes that the company needs a leader with technology chops, which is something she lacked. Antonio Neri, a longtime HPE executive who currently serves as president, will become CEO on Feb. 1.

“The next CEO needs to be a deeper technologist,” Whitman said. “That is exactly what Antonio is.”

Bernstein analyst Toni Sacconaghi said on the call that he was surprised by Whitman’s upcoming departure, given Whitman’s earlier comments this summer that she had no plans to leave. At the time, Whitman was also reportedly discussing becoming CEO of the embattled online ride-hailing company Uber.

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Sacconaghi also cited Whitman’s comments at the time in about there still being a lot of work to do at HPE, and noted that the company’s core server business, which had a 5% drop in year-over-year sales in the latest quarter to $3.28 billion, indicates that “there still is a lot of work” to be done.

Whitman said “there hasn’t been a change in sentiment” about her earlier statements in the summer. She then reiterated that HPE is much smaller and more nimble than it used to be, and that Neri, with his tech skills, “is ready to go take the reins and go the distance.”

“He has worked at almost every business in this company,” Whitman said. “I just think it’s the right thing.”

Whitman didn’t say what she plans to do after, but insisted that one thing is certain: she will not join a competitor. That means, Cisco (csco), IBM (ibm), Amazon (amzn), Microsoft (msft), or any of the enterprise technology titans competing in the IT market.

“There is no chance I’m going to a competitor, no chance,” Whitman said. “I love my company and I would never go to a competitor.”

Still, despite Whitman saying that HPE is better run today, investors were spooked about her exit.

HPE shares fell 6% in after-hours trading Tuesday to $13.27.

Homeland Security Urges Businesses to Act on Intel’s Cyber Bug Alert

The U.S. government on Tuesday urged businesses to act on an Intel (intc) alert about security flaws in widely used computer chips as industry researchers scrambled to understand the impact of the newly disclosed vulnerability.

Homeland Security gave the guidance a day after Intel said it had identified security vulnerabilities in remote-management software known as “Management Engine” that shipped with eight types of processors used in business computers sold by Dell Technologies (dell), Lenovo Group (lnvgy), HP, Hewlett Packard Enterprise (hpe) and other manufacturers.

Security experts said that it was not clear how difficult it would be to exploit the vulnerabilities to launch attacks, though they found the disclosure troubling because the affected chips were widely used.

“These vulnerabilities affect essentially every business computer and server with an Intel processor released in the last two years,” said Jay Little, a security engineer with cyber consulting firm Trail of Bits.

For a remote attack to succeed, a vulnerable machine would need to be configured to allow remote access, and a hacker would need to know the administrator’s user name and password, Little said. Attackers could break in without those credentials if they have physical access to the computer, he said.

Intel said that it knew of no cases where hackers had exploited the vulnerability in a cyber attack.

Homeland Security advised computer users to review the warning from Intel, which includes a software tool that checks whether a computer has a vulnerable chip. It also urged them to contact computer makers to obtain software updates and advice on strategies for mitigating the threat.

Intel spokeswoman Agnes Kwan said the company had provided software patches to fix the issue to all major computer manufacturers, though it was up to them to distribute patches to computers users.

Dell’s support website offered patches for servers, but not laptop or desktop computers, as of midday Tuesday. Lenovo offered fixes for some servers, laptops and tablets and said more updates would be available Friday. An HP representative said the company would soon post fixes on its support site.

Security experts noted that it could take time to fix vulnerable systems because installing patches on computer chips is a difficult process.

“Patching software is hard. Patching hardware is even harder,” said Ben Johnson, co-founder of cyber startup Obsidian Security.

Amazon's Hidden Platform Labor Startups

For the past couple of years, Amazon has trialed last-mile delivery with individuals, in a program called Amazon Flex, and with small-courier companies using “white vans.” Both of these initiatives are designed to rival UPS and FedEx.

As Amazon prepares for the holiday season, these programs are ramping up to take on more of the load. But that’s not all. Amazon recently launched Amazon Relay, an app aimed at making it easier for truck drivers to make pickups from Amazon warehouses, and is soon to launch a trucking cargo app. All of these services are being trialed internally at Amazon and slowly being turned into platform businesses, specifically services marketplaces.

Amazon Flex: What Uber Rush Aspires To

Amazon Flex lets individuals with cars pick-up packages from an Amazon warehouse and deliver them to customers’ doorsteps. Amazon advertises that drivers can earn $18-25 per hour. The B2C delivery model has been tried before by platforms like Postmates, Deliv and UberRush. However, UberRush has been reported to be struggling after launching a couple years ago.

UberRush also focused on small businesses as its primary customer. These businesses, like restaurants, would use UberRush to deliver products to their customers. Postmates is different. The customer places the order through Postmates and pays Postmates the delivery fee.

Amazon Flex can subsidize the cost of the B2C delivery model to small businesses with its own package volume. As Amazon Flex gains a more public presence, it’s rumored that Amazon will let other small businesses use the program for their own needs. However, the cost structure is completely different if a driver is already on a scheduled route to deliver Amazon’s packages and is adding incremental volume from small businesses.

Amazon’s Trucking Apps

Amazon Relay is primarily for internal use and will likely not be opened up as a stand-alone platform. It helps trucker drivers coordinate their drop offs at Amazon warehouses. The app makes this tedious process more organized and efficient. However, the app also will prove to be a great learning experience for Amazon in advance of the rumored release of Amazon’s cargo delivery app for truckers.

Uber Freight launched in May of 2017 and began a national roll-out just a few months after launch. The service provides a seamless booking process for truck drivers to accept freight delivery jobs similar to the Uber process for passenger drivers. Uber Freight also provides driver benefits like payment within a few days of completing a job when the industry norm can be payment after a month or more. For this reason and others, Uber Freight seems to be making good progress.

Amazon’s competing app should be coming out soon and will probably follow a similar process of leveraging the existing demand from Amazon’s routes as we have seen with Amazon Flex.

Act as a Consumer

One of the hardest elements of building a successful platform is the chicken and egg problem. Existing businesses have an advantage in launch a platform because they can act as the producer or consumer at launch to seed the marketplace with liquidity. In Amazon’s case, it is acting as a consumer for both individual delivery drivers as well as truckers.

As Amazon builds a fluid network of producers (drivers), it can scale its network by opening the service up to other customers. If not opened up, this would still be considered a linear business; however, platforms like Amazon are masters at building new platform businesses on top of its core modern monopoly: the product marketplace.

Just like Google built platform moats around its modern monopoly in search. Google built Android, YouTube, Gmail and others which leverage Search’s advertising network and protect the business that drivers over 95% of Google’s profits.

As Amazon expands further into logistics, it seems to be heading down a similar path.

Record Earnings And A 10% Yield On Qualified Dividends – Buy This Niche MLP On The Dip (No K-1)

When does an LP not act like an LP? When it issues a 1099 at tax time, so you can avoid the complications of a K-1. KNOT Offshore Partners LP (KNOP) is one of a few LPs that has elected to be treated as a C-Corp, and issues 1099s to unit-holders at tax time. Thus, we are spared what some investors refer to as the “dreaded K-1.”

Profile:

KNOT Offshore Partners LP owns and operates shuttle tankers under long-term charters in the North Sea and Brazil. The company provides crude oil loading, transportation, and storage services under time charters and bareboat charters. KNOT Offshore Partners GP LLC serves as the general partner of the company, and Knutsen NYK Offshore Tankers AS is their sponsor. The company was founded in 2013 and is headquartered in Aberdeen, UK.

To say that shuttle tankers are a niche industry would be putting it mildly – shuttle tankers comprise only around 1% of the world’s conventional tanker fleet, and are a vital key solution for oil companies looking to monetize their product. Since many ports don’t have the infrastructure to accommodate large tankers, producers charter shuttle tankers to get their oil into port. These are specialized vessels that take 2.5-3 years to build, so there isn’t a lot of speculative new-building going on in this industry.

Fleet:

Like many of the high-yield stocks and LPs we cover in our articles, KNOP works on long-term, fee-based contracts, with strong counter-parties such as Statoil (NYSE:STO), Exxon Mobil (NYSE:XOM), and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B).

This serves to provide stable cash flow for KNOP’s distributions. The company now has an average of 4.4 years left on their fleet’s contracts, with an additional average of 4.5 years extension at the charters’ option.

Since their 2013 IPO, KNOP’s fleet has grown 230% to 14 vessels with a low average vessel age of about 4.5 years, compared to the rest of the industry average, which is much older – around 12 years.

(Source: KNOP site)

Distributions:

Our High Dividend Stocks By Sector Tables track KNOP’s price and current distribution yield (in the Services section).

KNOP pays their distributions in the usual Feb-May-Aug-Nov. cycle for LPs, but there’s a big difference at tax time: unlike most LPs, it’s elected to be treated as a C-Corporation for tax purposes, so investors receive the standard 1099 form and not a K-1 form. (Tell your accountant he owes you a beer.)

Management has held the quarterly distribution steady, at $.52, since October 2015 – it’s ~39% above their targeted minimum distribution of $.375. Since their 2013 IPO, KNOP has paid common unit distributions of $8.74.

When asked about future distribution hikes on the Q3 earnings call, management replied, “The MLP has an elevated yield compared to most MLPs, and we therefore are focused on first rebuilding coverage and then deleveraging when not making accretive investments. There is little benefit to the MLP in the short term (in) paying much more than the current yield.”

KNOP achieved record distribution coverage in the past two quarters, at 1.46x in Q3 ’17 and 1.43X in Q2 ’17:

Options:

KNOP has options, which we feature in our premium service, and didn’t list here. But you can see details for over 25 other income-producing trades in both our Covered Calls Table and also in our Cash Secured Puts Table.

Earnings:

After a sub-par Q1 ’17, KNOP has bounced back strongly in Q2 and Q3 ’17. Q3 ’17 saw 34% growth in Revenue, 29% EBITDA growth and 18% DCF growth.

KNOP hit record amounts for revenue, EBITDA, DCF, and net income in Q3 ’17, due to their new vessels contributing to earnings.

In the last 12 months, the MLP has acquired the Raquel Knutsen in 2016 Q4, Tordis in Q1 2017, Vigdis in Q2 2017 and Lena Knutsen in Q3. “The fleet achieved strong performance with 99.7% utilization for scheduled operations and 99.3% utilization, taking into account the scheduled drydocking and repair of Carmen Knutsen. We completed the acquisition of Lena Knutsen, which is a five-year charter to Shell.” (Source: Q3 ’17 earnings call)

Even with the unit count growing by 9%, distribution coverage has grown from an already strong 1.24x factor to 1.28x, over the past four quarters:

This table compares the low end of KNOP’s 2017 guidance, pro-rated for three quarters, to their actual figures for Q1-3 ’17. So far, they’ve exceeded their net income and EBITDA guidance, and narrowly missed their DCF, distributions and coverage ratio guidance:

Risks:

Dilution/Coverage: Since LPs pay out the lion’s share of their cash flow, they must periodically go to the debt and equity markets to raise more capital for further expansion. (See the Financials and Debt and Liquidity sections at the bottom of the article for more information about current debt levels.)

On 11/6/17, management announced a secondary public offering of 3,000,000 common units, representing limited partner interests in the Partnership. This 10% dilution caused their price to fall well over 12%, to around $20.00.

But therein lies the opportunity – with KNOP’s ample distribution coverage, that $.52 quarterly distribution isn’t going away. Even with a 10% higher unit base, they should still achieve good coverage.

3M more units at $.52/unit = $1.56M in additional payouts/quarter. In Q3, they paid out $17.39M in total distributions, so this would rise to ~$18.95M. If DCF is flat, coverage would still be ~1.26x, with plenty of leeway.

Management did warn on the earnings release that in Q4 ’17, “the Partnership’s earnings for the fourth quarter of 2017 will be affected by the planned drydocking and repair of the Carmen Knutsen, which is expected to be offhire for 73-75 days until mid-December 2017. Offsetting this offhire will be the Lena Knutsen, which is expected to operate for the entire fourth quarter. There is no further expected offhire for the fleet during the fourth quarter of 2017″ (Source: Q3 ’17 earnings release).

So we could see DCF fall, with the Carmen Knutsen being out for ~2.5 months, unless the new vessel, the Lena Knutsen is able to pick up the entire slack. Either way, we see KNOP maintaining good distribution coverage for the long term, which is why we bought more units on the dip.

Contract Expirations – Management has been working on renewing/extending contracts for some of their vessels which had contracts expiring in late 2017 (Windsor Knutsen) and in 2018 (Hilda and Torill Knutsen). So far, it’s gotten the Windsor extended to October 2018.

The company addressed this on the Q2 earnings call:

The Windsor Knutsen has been on a two-year contract from 13th of October 2015 with Brazil Shipping, a subsidiary of Royal Dutch Shell with a further six years of extension options. In July ’17, the first option is listed taken charter codes reaching October 2018.”

The company still has plenty of time to re-contract the Hilda Knutsen and Torill Knutsen, whose contracts expire at the end of Q3 ’18 and Q4 ’18, respectively. Also in their favor is the fact that these are highly specialized vessels, which would take 2.5 to 3 years to replace.

Privately held Preferred Units: Management sold a total of 4.1M preferred units in two private placements in February and May.

These 8% (~$2/unit annually) preferred distributions will take seniority over common units in any liquidation scenario, in addition to lessening the amount of DCF available to pay common unit distributions, by around $1-2M/quarter.

However, as we detailed above, KNOP’s distribution coverage hit records in Q2 and Q3 ’17, even after accounting for the preferred payouts.

Positive Developments:

Management elaborated about current trends and developments concerning their sub-industry and their sponsor Knutsen NYK on the Q3 earnings call.

As our production moves further offshore, these tankers operate in a space which will see substantial growth in the coming years. Some of the largest discovered oil reserves in the southern hemisphere are in pre-salt layer, 130 kilometers off the coast of Brazil. And Petrobras, for the month of September, oil and natural gas output on those proportions of 1.68 million barrels of oil equivalent average daily production, a 6.6% increase from the previous months and higher than last year’s average.”

Petrobras Transpetro have requested tenders for shore tankers and whilst have not been specific about numbers, we believe their requirement will be for at least 4 vessels initially. Although our MLP is young, our sponsor is a very experienced operator, having been involved in the design and construction of these type of vessels for over 30 years.”

Concerning future dropdowns, they said, “We will see when we get this Torill financing out of the way and perhaps, we’ll see how the equity market looks. I think probably early next year, first quarter next year, we might send that ship dropping to the MLP. But that’s subject to the factors on equity we can raise and what kind of financings we do. So it can be longer than that. But after that, we’d probably take a bit of a breather.”

Analysts’ Price Targets:

At $20.25, KNOP is over 16% below the average price target of $23.57, and 23.5% below the high price target of $25.00.

Estimates are mixed – with average EPS estimates rising over the past seven days for Q1 ’18, 2017, and 2018, but a mix of upward and downward EPS revisions for those same periods, and two downward revisions for next quarter:

(Source: YahooFinance)

Performance:

KNOP was outperforming the market and the Guggenheim Shipping ETF (NYSEARCA:SEA) over the past year, until the November pullback. At $20.25, the stock is only 2% above its 52-week low.

Valuations:

Although KNOP isn’t an LNG tanker company, we’ve added them this LNG shipping company valuations table to compare the company to other tanker companies we cover in our articles, such GasLog Partners LP (GLOP), Golar LNG Partners LP (GMLP), and Dynagas LNG Partners LP (DLNG). The table also includes Teekay Offshore Partners L.P. (NYSE:TOO), the closest comparative company we could find, and Hoegh LNG Partners LP (HMLP).

KNOP is in the lowest tier of this small group, for price/DCF, price/book, and price/sales. Their 10.27% distribution yield is above average also:

Financials:

Like most LPs, KNOP’s debt levels wax and wane over time as the company takes on debt to finance new vessels, and those vessels begin to contribute to earnings. The company ended Q3 ’17 at a net debt/EBITDA level of 6.11x, up substantially from Q3 ’16, but also much lower than their peak of 7.15x. Their ROE ratio has improved over the past two quarters, while their ROA is lower than it was in Q3-4 ’16, due to a higher asset base and higher depreciation and amortization charges:

KNOP is in a lower margin business than these LNG carriers, but their financial metrics are certainly much better than Teekay’s, the other shuttle company in the group:

Debt and Liquidity:

In the year-to-date, to finance the growth of acquisitions, we have raised both $145 million of new equity and $100 million of long-term debt, and $25 million of credit facilities, all on attractive terms.”

At the end of Q3, we had a very solid liquidity position with cash and cash equivalents of $38.1 million and undrawn credit facility of $12 million. And the credit facilities are available until mid-2019.”

The Partnership announced that its subsidiary, KNOT Shuttle Tankers 15 AS, which owns the vessel Torill Knutsen, has entered into a term sheet for a new $100 million senior secured term loan facility with The Bank of Tokyo-Mitsubishi UFJ, which will act as agent. The New Torill Facility is expected to be repayable in 24 consecutive quarterly installments with a balloon payment of $60.0 million due at maturity. The New Torill Facility is expected to bear interest at a rate per annum equal to LIBOR plus a margin of 2.1%. The facility is expected to mature in 2023 and be guaranteed by the Partnership. The new Torill Facility would refinance a $74.4 million loan facility associated with the Torill Knutsen that bears interest at a rate of LIBOR plus 2.5% and is due to be paid in full in November 2018. Closing of the New Torill Facility is anticipated to occur by the end of 2017.” (Source: KNOP Q3 ’17 release)

With the new Torill Facility, KNOP’s first maturity is in 2019:

(Source: KNOP Q3 ’17 release)

Summary:

We rate KNOP a long-term buy, based on their very attractive yield, their distribution coverage, and their secure position, via long-term contracts within their niche industry.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Articles posted on SA aren’t meant to be all-inclusive white papers by any means. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure: I am/we are long KNOP, GLOP, GMLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Last Chance To Pick Up This 5.3% Yielder On The Cheap

It’s been a rather forgettable year for shareholders in New York Community Bancorp (NYSE:NYCB). While the rest of the financial sector has surged, NYCB stock has been left for dead. Here’s the financial sector ETF (NYSEARCA:XLF) (red line) and the regional banks ETF (NYSEARCA:KRE) (yellow line) as opposed to NYCB in blue since the election last November.

I previously wrote about NYCB with my article The Sky Isn’t Falling in May. Since then, the stock has been flat once you count dividends. Indeed the sky wasn’t falling, but I’d been hoping for a rally. Instead, New York Community has continued to trail other regional and national banks. NYCB initially popped following Trump’s victory – along with the sector – but it’s been downhill since then.

That’s all about to change though. New York Community has trailed the market due to a specific problem. That is that NYCB is on the threshold between being a regular bank and a systemically important bank. Following the financial crisis, regulators put in place a rule that causes banks with total assets of more than $50 billion to face greatly enhanced oversight.

The threshold is high enough that not many banks were caught right at the $50 billion figure. However, New York Community Bank has been stuck up against the limit for years now. This arbitrary limit has caused a great deal of trouble for the bank, since any additional growth would cause NYCB to trip the limit and see its regulatory costs shoot up.

The bank tried to resolve this problem by merging with Astoria Financial, a move that would have catapulted the bank far over the $50 billion threshold. However, the merger fell apart. And, in the process of preparing for the merger, NYCB cut its dividend and issued new stock. Those moves, combined with the failed merger, greatly irritated much of the shareholder base, and the stock ended up largely abandoned. Hence the steady trade down from $17 into the 12s over the past year. Read NYCB articles at Seeking Alpha and elsewhere, and you’ll find there’s still plenty of resentment and revulsion toward the management team – understandable in the heat of the moment, but at this point, the past is past, and it’s not worth dwelling on any longer.

For years now, almost every quarter, we see NYCB perform well, but it is forced to sell off most of the new loans it makes. The bank operates in a quality niche within the New York City market where it has access to a large pool of low-risk loans. NYCB’s loan losses are among the lowest you’ll ever see for a national bank of its size. However, instead of getting to hold these high-quality loans and make steady profits, as most banks do, NYCB issues new loans and then immediately sells them to stay clear of the $50 billion limit.

As such, investors have looked at the bank as a dead stock, good for its 5%+ dividend, but not much else. Without any possibility of growth, NYCB stock may look more like a bond. I’ve been long the stock for awhile now, not just for the dividend but also for the possibility that the arbitrary $50 billion cap would be raised.

And now, at last, it’s finally happening. NYCB stock popped pretty aggressively on Monday, but there’s a lot more coming assuming this catalyst plays out. What’s the news?

Chart

NYCB Price data by YCharts

On Monday, reports surfaced that the Senate banking committee is preparing a bipartisan bill that would repeal some of Dodd-Frank’s most restrictive provisions, including the SIFI limit which has been the thorn in NYCB’s side. The bill specifically plans to raise the SIFI limit to $250 billion and has the support of nine Democrat and Independent senators.

Now, I’ll be the first to say that it’s been a bad bet to invest on the assumption that Trump can get any legislation passed in 2017, even through his own party. However, the SIFI limit in particular, and tough banking regulations in general are one area where there is substantial support within both parties for changes. In fact, there was a sizable contingent of Democrats that wanted to relax the banking rules, post-crisis, during the Obama era. And, on the Republican side, it seems unlikely that you’ll find too many votes against freer markets and fewer regulations. The bill would give Democrats a tangible example of them not being obstructionist, while allowing Trump to point to something in particular that he’d signed which should lead to job creation.

In short, there are a lot of reasons why a bill like this should be able to pass, even in a generally acrid political climate. It follows the historical pattern as well, where financial institutions are given more and more liberties until a crisis, and then the government hastily cracks down again. At nearly a decade out from the last crisis, and with banks exceptionally well-capitalized at the moment, there’s good reason to think the banks will be able to achieve a looser regulatory environment.

What’s it mean for NYCB specifically? If a bipartisan bill along these lines passes, the bank can immediately go back into growth mode. The bank trades cheaply now because the market is assuming that it can’t grow. When it flips back into growth mode, the rally will be a lot bigger than the 6% or so that we saw on Monday.

It’s also worth considering that NYCB has far less exposure to rising interest rates than most other banks, due to its short-duration loan book and reliance on wholesale funding. This was viewed as a negative when the market had assumed that the yield curve would be moving up sharply, as New York Community had less exposure (it actually loses money as interest rate spreads rise!)

The Financial Times explained it well earlier this year:

New York Community Bank, one of the largest US lenders, is facing a potential hit to annual profits from higher interest rates. While the earnings dent should be manageable for the $49bn-in-assets lender, the forecasts show there are some exceptions to the rule that increased borrowing costs will be good for the sector. […]

For a smaller group of lenders, however, higher rates are expected to spell lower profits. The largest is NYCB, which estimated in the small print of its most recent quarterly filing that a 1 percent rate rise would cause its net interest income to drop 3.9 percent. […]

Most banks can benefit from higher rates because they push up interest charges for borrowers while keeping deposit rates lower for longer. The widening gap between what they earn on assets and the cost of their funds should lift profits. NYCB has a different business model, however. It focuses on commercial real estate loans with terms fixed for several years, giving it less scope to increase interest charges.

However, now that the yield curve has plunged to new 5-year lows, more than wiping out the entire Trump rally, NYCB is among the best-positioned for this unexpected interest rate climate. As other banks see declining NIMs, NYCB gets relief on its short-term borrowing costs and doesn’t have nearly as much to lose from the long-end rates going down since it doesn’t lend for duration.

To sum up, NYCB is still yielding 5.3% and has massively underperformed its rivals over the past year. That despite its main obstacle (the SIFI limit) going away soon, and the interest rate curve taking a massive turn in NYCB’s favor as compared to peers.

At this point, NYCB stock is still down simply for past perceived sins. You still see authors demanding that NYCB’s management resign due to the stock’s underperformance for the past couple years. Classic “what have you done for me lately?” thinking.

It’s worth remembering that NYCB’s long-time CEO Joseph Ficalora took the company from seven branches in New York City to a 255 branch bank that is 24th-largest in the country. The stock performance over the past 23 years (as far back as my data source goes) has been jawdroppingly good:

NYCB sailed through the financial crisis with hardly a scratch, and in total, has compounded at 14%/year for the past 23 years, producing a total return of 1,994% over that stretch. One of the best banks in the US in fact. It’s short-sighted, to say the least, to demand that management leave because they had to play it conservatively for the last few years due to an arbitrary government limit that crushed their ability to grow. With that limit going away, the good times are back for NYCB. Put another way, you won’t have much time left to buy this stock with a 5%+ yield.

Disclosure: I am/we are long NYCB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

How to Watch the Leonids Meteor Shower

The annual Leonids meteor shower this weekend will brighten the night skies with a fireworks show, courtesy of the universe.

The meteor shower, which usually takes place in November, gets its name from because some of its shooting stars appear to come from part of the Leo star constellation. In fact, the Leonids meteors are debris from Tempel-Tuttle comet that burn up in the Earth’s atmosphere—creating colorful streaks in the sky.

How to see the Leonids meteor shower:

The meteor shower, which can last for weeks, peaks in visibility tonight. The New Moon, when the moon passes between the Earth and Sun, helps make the sky particularly dark. For the best view, get away from city lights, if possible, and, of course, away from any clouds. Expect to see up to 10 meteors per hour during the shower’s crescendo at 3:00 am on Friday, according to NASA. If you can’t make tonight, you can also try Saturday night, when the shower will be only slightly less visible.

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Where to look:

Although the meteors can appear anywhere in the sky, you’re better off looking towards the Eastern horizon, where the Leo Constellation typically appears, according to a report by Space.com. At 5:00 am, the Leo Constellation will appear in the “south-southeast part of the sky,” the report said.

How to watch online:

Of course, if you can’t stay awake, are fogged in, or unwilling to go out into the cold, you can always watch a livestream. One should be available on Friday from the astronomy and telescope website Slooh.

12 Things You Didn't Know About Webinars That Will Blow Your Mind

Ah, yes…the webinar. That online seminar that we know so well. The slides. The monotonous speaker. The boring topics. Pretty much sums up my webinars, at least!

And yet, webinars continue to thrive. We all know the reasons why. They’re inexpensive. Easily accessible. Relatively quick. Some people love them and some don’t. But there’s no question that webinars are here to stay. In fact, 73 percent of B2B marketers and sales leaders they say that a webinar is the best way to generate high-quality leads and 57 percent of them say they will continue to create webinars in 2018.

These facts were evident in GoToWebinar’s recently released 2017 Big Book of Webinar Stats.  The webinar service provider studied 351,000 online events conducted on their platform from over 16,000 of their customers.  So what did they find?  If your company does webinars get ready to be blown away…

1 – 61 percent of webinars are done for B2B purposes. They can be a great lead generation and educational tool for your customers, just so long as your customers are businesses.

2 – The best webinar titles include lists (10 ways or 101 ideas), or the words “how to”, “new” or “trends.”

3 – Their average customer does about 23 webinars per year. Remember – these are companies that are choosing webinars as a marketing strategy over other options. But twice a month seems reasonable. My company does about four per month.

4 – When it comes to marketing, 73 percent of a webinar’s attendees ultimately come from e-mail solicitations. A website listing and some search engine optimization is helpful but let’s admit it: e-mail is far from dead.

5 – You’re going to get the most sign-ups (69 percent) a week before the event with a third coming the actual day of the webinar. So focus your marketing on the 24-72 hours beforehand.

6 – However…15 percent of webinar registrants sign up as much as three to four weeks ahead of the event, so don’t be afraid to get the word out a month early.

7 – Most people register for a webinar on a Tuesday. Not sure why, but your marketing (and event day) should coordinate around that. Don’t worry if you can’t make that happen – Mondays, Wednesdays and Thursdays aren’t that far behind for registrants. But target your marketing between 8AM and 10AM (for the recipient) because that’s when the most people sign up.

8 – The most popular day for a webinar is…drumroll please…Thursdays!

9 – The most popular time for a webinar is…drumroll please…between 12PM to 3PM Eastern Time.

10 – The most popular length of a webinar is…drumroll please…60 to 90 minutes. Really? I thought shorter is sweeter but GoToWebinar found that people don’t mind longer online events. 60-minute webinars attract 2.1 times more registrations than 30-minute webinars, and 90-minute webinars attract 4.6 times as many. Over half of their webinars fall between 45 to 60 minutes.

11 – The vast majority of marketing webinars have fewer than 50 attendees. If you fall into this range, you’re doing fine.

12 – Actually it doesn’t really matter how many people attend your live event. 84% of B2B customers opt for replays over live webinars. So make sure you archive your webinars for future viewing.

I’d like to add a personal 13th:  I’ve found that more and more of our attendees like discussions rather than one person shuffling through slides. A roundtable.  A group conversation.  Maybe that’s related to the explosion in podcast popularity.  Or maybe it’s because people like to listen when they’re on the go and don’t want to be stuck staring at a screen.  Whatever, if you’re doing online events this year you should consider this change in format.

OK…mind blown. So is there any reason why we can’t make our online events successful in 2018?

GE: When Will Shares Become Attractive?

By Bob Ciura

To say that General Electric (GE) has had a difficult year would be an understatement. Shares of the industrial conglomerate have lost over 40% of their value year-to-date.

Chart

GE Year to Date Price Returns (Daily) data by YCharts

GE’s fundamentals have deteriorated in 2017, and the decline accelerated in the most recent quarter. GE has performed so poorly this year that it made the difficult decision to cut its dividend by 50%.

The dividend cut, while painful, allows GE to reset its capital allocation program. Along with cost cuts, it will free up billions of cash that GE can invest to improve its under-performing businesses.

GE has been in operation for more than 100 years. Prior to the dividend cut, GE had a dividend yield well above 3%. These qualities placed GE on Sure Dividend’s list of blue-chip stocks. You can see our entire list of blue chip stocks here.

It is reasonable to question whether GE still deserves recognition as a blue chip. But it is important to remember that GE is still a highly profitable company, with growth potential. If the stock continues to drop, it could soon become a value opportunity.

News Overview

At its 2017 investor meeting, GE announced a number of new policies. First and foremost, it cut its quarterly dividend by 50%, to $0.12 per share. GE also lowered its earnings guidance, below analyst consensus.

For 2017, GE expects earnings-per-share of $1.05-$1.10. For fiscal 2018, GE expects adjusted earnings-per-share of $1.00-$1.07, compared with analyst expectations of $1.14. GE has gotten to a position where it simply isn’t growing. The company had become a lumbering giant, with an overly complex web of businesses that could no longer be managed effectively.

GE will focus on three core businesses for growth: health care, aviation, and power. This makes sense, as these are GE’s three largest businesses, together comprising over 50% of annual revenue. These three businesses also have the strongest growth prospects moving forward.

As a result, while there was not much for investors to be encouraged about from the investor update, GE’s portfolio trimming could help position the company for a return to growth down the road.

Growth Prospects

GE’s strongest areas of growth moving forward are health care and aviation. The aviation and healthcare businesses posted 7% orders growth last quarter. GE’s industrial backlog grew by 3% for the quarter, to $328 billion.

Source: Investor Update Presentation, page 25

GE’s aviation business is the flagship of the industrial operation. At the same time, GE is hoping to improve performance in the power business, while continuing the strong performance of the aviation business.

Source: Investor Update Presentation, page 12

These two areas will fuel GE’s long-term growth. GE will also utilize asset sales to streamline its portfolio. The company will shed $20 billion of low-growth businesses over the next one to two years, such as transportation and lighting. The positive aspect of GE’s asset sales is that the company can improve its balance sheet.

GE is targeting a net-debt-to-EBITDA ratio of 2.5, which would be a healthy amount of leverage. An improved balance sheet would help keep GE’s cost of capital low and further reduce the burden on the company’s dividend.

The turnaround initiatives and cost cuts will help the company become more efficient. Management expects as much as 3% organic revenue growth in 2018, including 7%-10% growth in aviation. If GE’s earnings bottom out and return to growth, the stock could be an attractive value here.

Valuation & Expected Returns

GE stock has lost over 40% of its value year-to-date. With such a huge decline, value investors might begin to view the stock as a buying opportunity. GE might not be there yet, but it’s getting close.

Based on the midpoint of fiscal 2017 earnings guidance, GE stock trades for a price-to-earnings ratio of 16.6. GE is still valued slightly above its 10-year average price-to-earnings ratio, of 15.9.

Source: Value Line

As a result, it would not be surprising if GE shares continued to fall. Investor sentiment has become very pessimistic, meaning GE’s valuation could continue to contract.

However, at some point GE would become attractive. If GE traded at its average valuation over the past 10 years, it would have a share price of $16.45 based on the midpoint of 2018 guidance. This price is approximately 8% below the November 14th closing price of $17.90.

From a dividend perspective, a 3% dividend yield would be an attractive entry point for GE. At the new annual dividend rate of $0.48, this would result in a share price of $16.

Therefore, there is potential for further downside for GE stock. But at a price near $16, the stock is attractive on the basis of valuation and dividend yield.

Assuming GE returns to earnings growth in 2019 and beyond, the stock could generate positive total returns. Positive organic revenue growth, along with margin expansion and cash returns, could fuel returns as follows:

  • 1%-2% organic revenue growth
  • 0.5%-1% margin expansion
  • 2% share repurchases
  • 2.7% dividend yield

Based on this, total returns could reach approximately 6%-8% per year.

Dividend Analysis

The new quarterly dividend rate of $0.12 per share works out to a $0.48 per share annual payout. This is a 50% dividend cut, but will save GE approximately $4 billion per year. GE’s right-sized dividend is more in-line with the cash flow of the company, given the massive divestments that have taken place over the past year.

The bad news is the dividend yield drops significantly. GE’s forward dividend yield is 2.7%.

Source: Investor Update Presentation, page 16

The good news is, GE’s new dividend has much better coverage than the previous payout, which took up more than 100% of free cash flow. GE needed to cut its dividend. After the massive sale of multiple financial businesses as well as poor performance in power and oil and gas, the dividend cut was necessary. The new $0.48 per-share annual payout represents a free cash flow payout ratio of 60%-70%, which is manageable.

In a previous article, I argued investors should avoid GE at least until the results of the November 13th investor meeting. At that time, I stated that if GE were to cut the dividend, the stock could fall to $18 or below. Dividend cuts are typically accompanied by a drop in the share price.

Sure enough, GE did cut the dividend, and the stock has indeed fallen below $18. At this point, it is reasonable to wonder if the selling is overdone. After all, GE is still a massive company and is an industrial giant and economic bellwether. If GE continues to decline to a 3%+ dividend yield and a price-to-earnings ratio in the mid-teens, the stock becomes more attractive.

Final Thoughts

There is no doubt that GE has struggled over the past year. The reduced guidance and dividend cut are a disappointment, and are a reflection of the company’s poor financial performance. However, GE is not a doomed company. It remains one of the strongest brands in the U.S., with a leadership position across multiple industries.

GE is still a profitable company, and its turnaround initiatives will help slim down the company for an eventual return to growth. The balance sheet is in better shape as well. While there could be further downside risk for the shares, given the highly negative sentiment right now, at some point GE will become an attractive value.

There are many industrial stocks with longer histories of dividend growth than GE. Find out which ones are confirmed buys or sells with our service Undervalued Aristocrats, which provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.