This MLP Fell for the Right Reasons
06/20/2012 5:21 pm EST
The company dropped on news it was going to sell more units, but that often means cash is being raised for a big opportunity, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.
Western Gas Partners (WES) dropped 4.96% on June 19, on news that the master limited partnership had filed to sell 5 million units this Friday, June 22, at a price of $43.88 a unit.
The units closed at $43.15 on June 19. (Western Gas Partners is a member of my Jubak’s Picks portfolio.)
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. 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 have 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 unitholder, 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 unitholders 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%.