Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Pick-up Cheap MLP Dividend Stocks at Bargain Basement Prices

Companies / Dividends Dec 16, 2007 - 12:32 PM GMT

By: Elliot_H_Gue

Companies

Best Financial Markets Analysis ArticleMaster Limited Partnerships (MLP) have long been my favorite income-oriented group. The stocks offer an unbeatable combination of high tax-advantaged yields, steady cash flow profiles and the potential for significant income growth over time.

Even better, I see a rare opportunity developing in this space: The recent pullback in the group looks like an outstanding opportunity to buy at bargain-basement prices and lock in some highly attractive yields. We've seen a handful of pullbacks in the MLPs over the past decade, and each has proven to be an outstanding opportunity for investors with the foresight to jump in. And this latest short-term selloff will prove to be no different.


The Alerian MLP Total Return Index tracks the performance of publicly traded MLPs and limited liability companies (LLC) traded on the US exchanges. Many are focused in some way on the energy industry, typically owning assets such as pipelines, actual mature oil and gas fields, and storage facilities. This index tracks the performance of the group, including both capital gains and distributions (the MLP equivalent of dividends) paid over time.


Source: Bloomberg

The chart shows that the long-term performance of the index has been solid. During the past three years, the group has returned just more than 52 percent, equivalent to a 15.1 percent annualized gain. For comparison, consider that the S&P 500 is up just 33 percent on a dividends reinvested basis over the same time period, equivalent to an annualized gain of just 10.1 percent.

On this longer-term chart, the recent dip in the Alerian Index looks next to meaningless. However, it certainly hasn't felt that way for investors lately. The index is down nearly 12 percent since its July highs, although it's still up around 10 percent from year-ago levels.

There's been two primary factors behind the decline in the Alerian Index in recent months: a full calendar of initial public offerings (IPO) and credit-related concerns.

As for the first point, a similar issue pressured the group back in late 2005. Check out the chart below.


Source: Bloomberg

Back in late 2005, a number of new MLPs became public, and existing MLPs issued new units (the MLP equivalent of shares). Investors should remember that, although the MLP space has grown a great deal, it's still a relatively small, niche market. Most MLPs are lightly traded; in fact, many trade less than 200,000 shares per day.

What happened back in 2005 is that investors sold down their existing MLP holdings to participate in new IPOs. The additional supply of stock had an outsized effect because of the light volume traded in most MLPs.

The key point to note is that this was a technical/trading issue, not a factor that had any real, fundamental effect on the MLPs' ability to pay distributions or generate cash. MLPs issuing new units were doing so to finance acquisitions of cash-producing assets like pipelines. Therefore, as soon as that excess supply was absorbed in late 2005, the sector shot higher. Investors who grabbed high-quality MLPs were handsomely rewarded for buying the dip.

Today, MLP investors face a similarly hefty calendar of IPOs and new issues. Between now and the end of the first quarter of 2008, there are more than $3 billion worth of new issues coming to market and a number of secondary offerings of units by existing MLPs. This is the heaviest calendar of issuance since that late 2005 time frame. Just as additional supply pressured prices in late 2005, it's hitting the group today.

However, this selling is artificial. Investors aren't really selling down existing MLP holdings because of fundamental deterioration but because they want to own the new issues with strong prospects. I expect this headwind to gradually dissipate in the first quarter of 2008 as the new supply of MLPs is absorbed.

Perhaps the more important factor in the recent decline relates to credit woes and the plethora of so-called PIPE deals completed this year. (PIPE stands for Private Investment in Public Equity. PIPEs are a way that many partnerships raise capital quickly to fund acquisitions.) This has been a particularly strong headwinds for MLPs involved in the actually production of oil and natural gas.

In such a deal, the partnership sells additional units to so-called “qualified” investors, typically institutions. Such units aren't registered for trading on the major exchanges, and there's no ready public market for these shares.

But in a typical PIPE deal, the partnership will agree to register these privately issued units at some time in the future, allowing those units to be traded on the exchange just like any other unit. PIPE deals aren't dilutive to current unitholders as long as the capital is used to purchase new assets that generate cash.

However, the result of all these PIPE deals is that ownership of many smaller, fast-growing MLPs has become concentrated in the hands of only a few institutional investors. Closed-end MLP funds and hedge funds are just two examples. The fear here is twofold.

First, because these hedge funds were hit by the recent credit crunch, they may become less willing to buy into future PIPE deals. Alternatively, they may demand a larger discount to buy into such deals. These factors would hamper the partnerships' access to capital and could ultimately impact their capacity to continue growing.

And second, many such institutional investors need to raise cash. As a result, they may choose to dump their holdings and take their money off the table. This would pressure the partnerships' stocks for obvious reasons: Added selling pressure in relatively thinly traded securities spells falling stocks.

These concerns are real but vastly exaggerated. First, partnerships have continued to close PIPE deals in the past few months. Although the cost of such deals has risen, it's still a cheap source of capital. And several partnerships have managed to negotiate expanded lines of credit and other debt facilities to fund future growth. And given the strong cash flow profile of most partnerships, these firms still have access to debt capital.

Moreover, some publicly traded partnerships (PTP), such as Linn Energy (NSDQ: LINE), with the greatest overhang of PIPE shares, are now trading with yields in the 10-to-11-percent range. And these distributions are sustainable.

In fact, these stocks are down significantly even though, in many cases, they're actually planning big boosts to their distribution payouts in the coming year. These stocks have been falling in anticipation of share overhang from institutional investors. To a large extent, they're already pricing in the risk of that share overhang pressure.

The golden rule of investing in PTPs: Buy PTPs with sustainable, rising cash distributions. Partnerships that can continuously boost the amount they pay us quarter after quarter consistently outperform.

In the most recent issue of The Partnership , we took a closer look at all the stocks in the Alerian MLP Index that have been public for at least three years; a total of 25 partnerships fit the bill.

The average PTP boosted distributions by 11.6 percent annually over the trailing three years. That's equivalent to a near 40 percent jump in total cash paid out to unitholders over just three years. Also note that the average MLP in this universe managed a total average annualized gain of around 15 percent, or 50 percent over the entire three-year period.

Although that average is far from a shabby return, investors could have done far better. We also ranked the Alerian MLP Index members by average annualized distribution growth. Note that the top five distribution growers boosted their payouts by nearly 25 percent annualized, more than twice the average rate.


Source: The Partnership , Bloomberg

That strong distribution growth filtered through into superior performance. These five returned an average annualized gain of 20.2 percent. During a three-year period, that means that investors made close to 75 percent on their cash.

And PTPs that ranked poorly in terms of total distribution growth vastly underperformed the average. The bottom five PTPs managed to boost payouts by just more than 2 percent annualized and returned less than 9 percent. That's a dramatic variation in performance.

Although the partnerships may be pressured by the aforementioned factors short-term, the long-term prospects for those with the scope to maintain and steadily boost distributions is strong.

I'm co-editor of The Partnership , which focuses solely on PTPs, including MLPs, LLCs and a host of other similar securities. In this newsletter, we're recommending a twofold approach to playing the pullback in these high-income stocks.

To pick the best-placed partnerships, you can't just look for PTPs offering the highest percentage yields. Sometimes PTPs with ultra-high yields may be vulnerable to distribution cuts. Others may simply have limited scope to boost their payouts in the coming years.

First, we focus on PTPs that are amply covering their current cash distributions. That means that their distributable cash flow is equal to or higher than their current payout. PTPs that don't cover their payouts will eventually be vulnerable to a cut in distributions.

Second, we look for PTPs with the scope to grow distributions in the coming years, either via acquisitions or through the completion of new projects.

There's a big difference between long-term outperformance and short-term market noise. Specifically, the market occasionally punishes PTPs that fit our favored distribution growth characteristics. That can be painful, but you shouldn't fear the volatility. Such downdrafts offer investors the chance to buy more at an attractive price and yield

 

By Elliott H. Gue
The Energy Letter

© 2007 Elliott H. Gue
Elliott H. Gue is editor of The Energy Letter , a bi-weekly e-letter as well as editor of The Energy Strategist , a premium bi-weekly newsletter on the energy markets. Mr. Gue is also associate editor for Personal Finance , where he contributes his knowledge of the energy markets.

Mr. Gue has a Master's of Finance degree from the University of London and a Bachelor of Science degree in Economics and Management from the University of London , graduating in the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that university.

Elliott H. Gue Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jack Griffin
03 May 08, 11:44
Mlp stocks.

Do you buy MLP stocks like you buy stocks that aren't MLP

stocks or is there a special way you have to go about this?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules