Why I'm Buying More of This High-Yield-Dividend Play

Hi-Crush lived up to its name in November, crushing investors but delighting journalists with the opportunity to produce a clever pun. Hi-Crush announced that it had cancelled a supply contract with Baker-Hughes based on that company's breach of contract. Like always in this kind of situation, there's a lot of back-and-forth.

But based on Hi-Crush's ability to sell its production into the spot market and the purchase of shares by insiders, I'm doubling my stake in Hi-Crush in my Special Situations portfolio on the next market day, adding $1,000 in shares. The stock yields a very high 12%, and the distribution is expected to grow in coming years.

Anatomy of a breach
On the company's conference call in November, Hi-Crush executives said that Baker-Hughes didn't question Hi-Crush's quality, delivery, or any other material agreement. Baker made up a huge chunk of sales, about 20%, but execs said that they were in advanced discussions to replace that business, and they expected pricing to come in near what Baker was paying.

The company maintains about three-year average contract life with its other customers that include FTS International, Halliburton, and Weatherford. It averred that the current problems are limited to Baker and that other clients remain satisfied with Hi-Crush's performance. That's important since the sustainability of Hi-Crush is linked to its ability to maintain these contracts.

Even without Baker's business, Hi-Crush could pay its sizable dividend, at least on its common units, which are what trade publicly now. Remember, one-half of the shares are non-trading subordinated units that receive nothing until the common units receive their full helping of distribution. Even more startling perhaps is that the company still aims to grow its distribution at 10% per year, through acquiring more sand resources.

So the fundamentals on that front look okay, if not stellar. But I'm more enthused that they're backed up by director John Huff's acquisition shortly thereafter of 75,000 shares for about $1.25 million. He paid about $16.30 per share, just slightly more than what shares trade at today.

In addition to Huff, we have a lot more inside action at Hi-Crush, from large investors. Ardsley Partners acquired 2.6% of the fully converted common units (about 5.2% of the currently issued common units) by late December. Kayne Anderson Capital bought up to 6.5% (nearly 13% of the currently issued common units), while BlackRock increased its stake to 5.3% (or 10.6% of the current units). That's a lot of supply taken off the market in a short period of time.

Conclusion
If business conditions return to normal, investors get "un-spooked," and the dividend grows as expected, then I think this stock has a very good chance to double reasonably quickly. So the next market day I will add $1,000 in shares to my Special Situations portfolio. I expect this stock to go on to beat the market over the next couple years.

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The article Why I'm Buying More of This High-Yield-Dividend Play originally appeared on Fool.com.

Jim Royal has no positions in the stocks mentioned above.The Motley Fool owns shares of Halliburton and Hi-Crush Partners. Motley Fool newsletter services have recommended buying shares of Halliburton. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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