Magnifi Communities

Many expect that hydrogen can and will be a carbon-free substitute for natural gas. My research shows that existing manufacturers and energy midstream companies could handle much of the transition.

These facts heighten the long-term investment potential of the companies that will produce and deliver hydrogen to utility companies.

Let’s talk about what “green hydrogen” is – and what the companies that could profit from its rise are…

Hydrogen, as a single molecule gas, burns without emitting any carbon. The current primary use of hydrogen is to produce ammonia, which is used as a fertilizer. Typical hydrogen production involves breaking down natural gas to capture the hydrogen. If the hydrogen producers capture the released carbon rather than allowing it to enter the atmosphere, the hydrogen is called blue hydrogen.

Green hydrogen, on the other hand, comes from the electrolysis of water. Burning blue or green hydrogen produces clean electric power.

The challenge with hydrogen is that it is tough to transport and store, which brings us back to ammonia. The chemical formula for ammonia is NH3—one molecule of nitrogen with three of hydrogen. An article on the ETF Trends website noted that it is less flammable than hydrogen and can be stored at higher temperatures. These features make ammonia potentially the optimal way to transport and store hydrogen that will be used to generate electrical power.

Ammonia is already widely used as a fertilizer. It is the best way to deliver nitrogen as a plant nutrient. As hydrogen grows in popularity as a power source, the demand for ammonia should grow tremendously. In the U.S., CF Industries (CF) is by far the largest producer of NH3.

The ETF Trends article highlights that energy midstream companies that process, transport, and store natural gas already own and operate the infrastructure to deliver ammonia or hydrogen to end-user utility companies.

The article mentioned Canadian pipeline company Enbridge (ENB), which will build a blue hydrogen ammonia production facility at its energy center in Texas. Also mentioned was the transportation network, EnLink Midstream (ENLC).

From my Dividend Hunter recommended portfolio, ONEOK, Inc. (OKE) operates one of the nation’s largest natural gas distribution networks.

The trend of using ammonia as a fuel source to generate electric power is just starting. It is one to watch.
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Sometimes large block options trades can leave you scratching your head. For example, why would Nikola (NKLA), a publicity- challenged electric truck company, have a 50,000-lot 3-way spread trade in its options? After all, the stock is only trading around $1 per share. It looks like this could be a cheap put spread collar for

The 2022 bear market took the real estate investment trust (REIT) sector down, along with the broader stock market. Most of the stock market bottomed in October 2022, but has recovered a significant portion of the bear market losses.

REITs have not participated in the recent market gains, with share prices remaining near their 18-month lows.

Here’s why – and why now is the perfect time to buy REITs, especially this one…

REIT share prices are very interest rate sensitive, so as the Fed kept increasing rates, the REIT sector kept falling. For example, the Vanguard Real Estate Index Fund ETF Shares (VNQ) peaked around Christmas 2021 and even now is trading near its October 2022 lows. VNQ currently trades down 28% from the 2021 high.

When a market sector declines steeply, it takes the good companies down with the bad. Now that the Federal Reserve has announced the bulk of its expected rate increases, it is an excellent time to pick up beaten-down REIT shares.

The best REITs are those that will steadily grow their dividend rates. Investors often just think about dividend yields when researching REITs. The truth is that dividend growth can drive very attractive total returns. I look for REITs that will grow annual dividends by at least high single digits. Double-digit growth is even better (and rare).

National Storage Affiliates (NSA) is a $4.5 billion market cap self-storage REIT. The company owns 1,117 properties located in 42 states. Sixty-six percent of these properties are located in Sunbelt states.

National Storage employs its unique Participating Regional Operators (PROs) strategy to grow the business. PROs are self-storage companies that have contributed their properties to the company in exchange for equity, while continuing to function as property managers. PRO companies benefit from ownership of NSA stock and corporate support and earn from their contributed properties. The PROs often use the structure to move to full retirement eventually.

The PRO deals plus third-party acquisitions allowed National Storage to post the fastest growth in the self-storage REIT space. NSA’s five-year return through the 2023 first quarter was more than 50% greater than the second-best self-storage REIT (185% to 120%).

However, at $35, National Storage is down about 50% from the 2021 peak value. Self-storage was a hot pandemic sector, and the stock went from $25 in early 2020 to $70 in late 2021. The wind-down of the pandemic trade pulled a lot of investor money out of the self-storage stocks.

The NSA dividend continues to grow. The current dividend is 70% higher than the 2020 first-quarter payout. The dividend increased by 10% over the last year, even as the share price tanked. NSA has a five-year compounding dividend growth rate of 14.7%.

NSA currently yields over 6%, compared to a pre-pandemic average of 4%. From here, with a 6% yield and 10% dividend growth, an investment in National Storage should generate a CAGR of at least 15%. As interest rates moderate, the stock could quickly return to $50 per share.

And that’s just one of the 30-some income stocks I have in my Dividend Hunter portfolio now – each one set to outperform on both income and returns as interest rates peak. To see how to get access to the full list, see below.
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The stock market offers pockets of opportunity in sectors that combine a decent dividend yield with a good quality business. In other words, growth and income.

One such sector is the pharmaceuticals sector, which overall has lagged the S&P 500 in the past five years, although not by much.

There are, no doubt, some world-class companies in this sector. One candidate that caught my attention is Merck & Co. (MRK), even though its yield is just 2.67%. Let me tell you why…

Merck’s Blockbuster Drug

The company’s stock—trading at about $110 a share—is up 87% over the past five years and nearly 25% over the past year, although it is slightly down year-to-date. Merck’s share price has beaten the S&P index by 60% in the past 12 months.

The key factor behind the rise in Merck’s share price rise is its blockbuster cancer immunotherapy treatment, Keytruda, accounting for more than a third of Merck’s sales. In the first quarter, Keytruda accounted for 40% of revenues, coming in at $5.8 billion, up 20% year-on-year.

The treatment, approved in 2014, harnesses the body’s own immune system to fight cancers. And the results have been impressive, to say the least: it has led to a five-year survival rate in about one-quarter of advanced lung cancer patients, compared to 5% of people historically.

In 2022, Keytruda’s sales hit almost $21 billion and looks to be on its way to an annual figure that industry analysts suggest will top out at almost $60 billion. This growth comes despite the cost of Keytruda being very controversial in some circles—its list price is about $185,000 per patient per year.

Merck is looking to keep this gravy train on track. That’s why it’s looking to patent a new formulation of Keytruda that can be injected under the skin, allowing it to protect its best-selling drug from biosimilar competition, expected as soon as 2028.

The company is running clinical trials on two versions of the drug that can be injected under the skin. This is a quick alternative to infusions, the current delivery method, in which patients receive an intravenous drip in a health office once every three or six weeks. The new formulation will likely replace the current one in most cases, and its success will be crucial to Merck’s future.

On average, Wall Street analysts expect Keytruda revenues to top $30 billion in 2026 and $35 billion by 2028, according to Refinitiv data. However, BMO Capital’s Evan Seigerman told Reuters that private insurers in the U.S. may balk at paying for the more expensive branded product and prefer a biosimilar infusion version. Nevertheless, he believes the new formulation could allow Merck to hold onto as much as 20% of its Keytruda revenue into the 2030s.

Merck’s Long-Term Prognosis

The company’s future looks healthy.

Importantly for longer-term cash flows, Merck’s core products—Keytruda, as well as the human papillomavirus vaccine (HPV) Gardasil (sales up 35% to $2 billion in the first quarter)—continue to post strong gains.

Despite being on the market for a relatively long time, these products should continue to drive growth thanks to their high efficacy and expanding markets. These include adjuvant indications for Keytruda and expansion into the world’s developing markets for Gardasil.

The company has some potential future blockbuster drugs in the pipeline too. For instance, Merck’s phase 3 data for the pulmonary arterial hypertension (PAH) drug sotatercept was excellent, with an improvement of 84% in event-free survival. A key unmet need in pulmonary arterial hypertension is a lack of disease-modifying, curative therapies. But that may now change soon, thanks to sotatercept.

Originally developed by Acceleron Pharma, sotatercept is the only drug to have achieved breakthrough therapy designation in the U.S. for PAH, alongside orphan designation in the U.S. and the EU. Merck acquired Acceleron Pharma and its pipeline of therapies in September 2021 for $11.5 billion, with sotatercept being the key drug.

It looks like this acquisition has paid off for Merck, which has positioned it as a top competitor, with the potential to overtake the current leader in the PAH space, United Therapeutics. I believe the drug will be a home run for Merck.

MRK Stock

Regarding distributions to shareholders, Merck’s dividends and share repurchases are secure. Merck has generally targeted close to a 50% payout in dividends as a percentage of normalized earnings, which seems right for a mature industry. And Merck has shown a willingness to buy back stock at generally favorable time periods.

Morningstar analyst Damien Conover put it this way: “Merck supports a strong dividend yield that looks secure based on a wide diversified portfolio of drugs.”

MRK stock is a buy anywhere in the $105 to $115 price range.
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