Global Net Lease And Kimbell Royalty: 2 Stocks With 10%+ Yields For Your Radar

By Valuentum Analysts

Stocks with dividend yields above 10% should always raise a red flag. There are generally no free lunches in the stock market, so a high dividend yield generally translates into high risk. If a company’s dividend payout was truly “safe,” for example, bidders would drive its price much higher so as the dividend yield would move closer towards the risk-free-rate.

A stock owner is a business owner, so investors already own the cash that will be paid as a dividend before it is paid. In many respects, when investors receive a dividend, they are getting paid with their own money. Business owners that pay themselves a dividend aren’t any better off. In many respects, due to tax considerations, business owners could be worse off.

Within the enterprise valuation construct, when a company pays a dividend, cash is reduced on the balance sheet, and therefore, the value of the company is reduced. Net cash is a key component of intrinsic worth. We see the market maker adjust the price of the stock lower on the ex-dividend date, too. In this light, the dividend should be viewed as capital appreciation that would have otherwise been received had the dividend not been paid.

Capital erosion therefore becomes a big risk with any high yield dividend strategy. That’s why you see a lot of high dividend yielders fail to achieve strong capital returns over time. For example on a price-only basis, the ALPS Alerian MLP ETF (AMLP) has fallen over 50% during the past 10 years, while the iShares Mortgage Real Estate Capped ETF (REM) has fallen nearly 60% during the past 10 years. These areas paid out hefty dividend yields, but they sacrificed potential capital appreciation to do so.

With all of these warnings clearly stated up front, we ran a screen of two stocks that have lofty 10%+ dividend yields. For the reasons noted above, we don’t think these high-yielders will deliver much in terms of capital appreciation potential in coming years, and while these entity’s dividends are as risky as they get, in our view, these ideas are interesting enough to keep on your radar, in our view. Let’s dig in.

Global Net Lease (GNL)

Global Net Lease currently yields 11.2%, so all of the caveats above apply. Though its equity held up during 2022, over the past 5 years, shares have faced a 23% decline. The REIT owns 235+ properties, primarily in the U.S. and Canada, with occupancy rates of 98.6%. More than three fifths of the company’s portfolio are investment-grade tenants. Some of its top tenants include FedEx (FDX), Whirlpool (WHR) and Penske (PAG).

Since 2017, the company has generated a 7.4% compound annual growth rate for both historical revenue and core funds from operations. Adjusted funds from operations has advanced at a 3.2% annual clip since that time. Investors should be cognizant of Global Net Lease’s massive debt position, however, as it ended the second quarter of 2022 with a net-debt-to-adjusted-EBITDA ratio of 8.0x. Roughly $534 million in debt will come due in the next two years.

With high yielders, GAAP financials are always going to be a bit messy, but through the first nine months of 2022, Global Net Lease hauled in $159.6 million in cash flow from operations while it spent $19.15 million in capital expenditures, resulting in free cash flow of $140.5 million. Dividends on common stock over this time period were $125.2 million, so GAAP coverage of dividends was surprisingly good (it also paid $15.2 million in preferred dividends over this time period).

We’re not expecting much in terms of capital appreciation potential for Global Net Lease, but assuming that management wants to keep paying the dividend, which it has stated it intends to do at an annualized rate of $1.60 per share, investors might expect the lofty dividend yield to continue on the basis of the firm’s traditional free cash flow coverage of the payout. Its leverage, however, is far too high for us to get comfortable, but we think Global Net Lease is still worth being on your radar.

Kimbell Royalty Partners (KRP)

Energy equities have been the place to be during the past 12-18 months, and Kimbell Royalty Partners is an oil and gas mineral and royalty company tied to the improving market trends. The company has 16+ years of drilling inventory remaining, and unlike GNL, its net-debt-to-EBITDA is much more manageable, coming in at 1.0x as of September 2022. Shares yield ~11.9% at the time of this writing, and the company has held up nicely during the past 52 weeks, advancing more than 10% over that time.

On a revenue breakdown during its most recent quarter, the firm generated 20% of revenue from the Permian Basin, 22% at Haynesville, 15% at Eagle Ford, 8% in the Bakken, and 10% in Appalachia. Very few companies have Kimbell Royalty’s financial profile, and investors should pay close to the tax considerations of this idea. For example, the dividend it paid in November 2022, roughly 65% of the payout was estimated to be a non-taxable reduction to the tax basis of one’s ownership interest in the stock.

On a GAAP basis, through the first nine months of 2022, the company hauled in $128 million in cash flow from operations and had negligible capital spending, resulting in free cash flow generation far in excess of $75.9 million in distributions to common unitholders. That’s not bad. Though Kimbell’s capital appreciation hasn’t been great since it first started trading years ago, it has returned more than two fifths of its $18.00/unit IPO price in cash dividends in less than six years.

Looking forward, Kimbell expects to “continue to opportunistically target high quality positions in the highly fragmented minerals arena.” Though investors should note its assets are in shallow decline, management believes “upside potential from its extensive drilling inventory is not fully appreciated by the market.” We find both Kimbell’s asset light operations and management’s commentary regarding its upside potential as quite interesting.

Concluding Thoughts

Investors should always be cautious with any high dividend yielders, especially those that are yielding north than 10%, given that a high dividend yield often implies high risk. In the case of GNL, the company has a huge net debt position that weighs on its equity value, while in the case of Kimbell, it holds shallow decline assets that may truncate its long-term potential. With many of the risks of high dividend yielders clearly stated, Global Net Lease and Kimbell Royalty are two 10%+ yielders that may be worth being on one’s radar.

This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice.