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Update Western Gas Partners (WES) in my Jubak's Picks portfolio
06/20/2012 6:06 pm EST
Now I understand why stocks (or in this case master limited partnerships) fall when the company decides to sell more shares or units. The current stream of profits going to investors will in the future have to be spread over 5 million more units. That’s dilution of about 5.2% on the 95.78 million units outstanding. And certainly nobody wants to pay more for units—they closed at $45.40 the day before the announcement—than the new units being sold command.
But master limited partnerships are a little bit different than your normal run of the mill stock and I think the market’s reaction to the new offering creates an attractive opportunity for investors looking for income now and income growth in the future.
Because master limited partnerships distribute most (and sometimes more than all) of their earnings to investors, they don’t much in the way of retained earnings to reinvest. (Frequently master limited partnership distributions exceed earnings since the distributions are based on cash flow and take advantage of depreciation and other items that would lower taxable income. In 2011, for example, Western Gas Partners earned $1.60 a unit but distributed $1.66.)
That all means that to grow their business master limited partnerships constantly have to raise new money when they think there are good opportunities to invest in (and when money is cheap as it is now.) As a unit holder, you’d like to see the master limited partnership raise new money because it means that management has identified new investment opportunities that will increase distributions to unit holders in the future. I think that’s the case with Western Gas Partners and its sale of new units this week
I’m not raising my current target price of $49 a share but I am extending the schedule from June 2012 to December 2012. The appreciation from the June 19 close at $43.15 to my target is 13.6%. Add onto that a dividend yield of 4.25%.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Western Gas Partners as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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