One High-Yield MLP with Growth Buzz

03/28/2011 12:42 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Despite an excellent run over the past year or two, master limited partnerships in one specific sector are still showing plenty of growth signs, says Roger Conrad of Utility Forecaster in this exclusive interview with

Now Roger, you've written a lot about MLPs over the last few years. The stocks have done very, very well. I do get a sense, though, that with the market taking off over the last few months, there seems to be a little less focus on them.

How have they been doing? Can you update us?

Well, they've done very well, as you’ve pointed out, over the past couple of years. Some of them have tacked on further gains.

What we have seen, though, is higher prices—meaning higher expectations, and more events that seem to shock investors or create minor sell-offs. So actually, we've been using these as buying opportunities.

The most typical catalyst for a sell-off has been issuing equity. Of course, many investors are trained, when a company issues stock, to react negatively; our interest is being diluted and therefore earnings per share and dividends are less well covered. And we tend to like when a company buys back its own shares.

In the case of MLPs, the only way they grow, the only way they're able to add assets, add cash flow, and add and boost dividends—which is really the driver of the share prices over time—is to issue capital.

Right now, the MLPs, after such a huge run, are issuing equity capital at the lowest prices ever.

In other words, a high selling price for their units means a big take. It means they can plow that money into something that's fairly low risk and still own a fairly huge return. That's exactly what we're seeing. So we like to see equity issues for the companies we recommend.

Of course, what happens when the market learns of them? You tend to get a sell-off. So you get an opportunity to buy, at a lower price, an MLP that's more valuable than it was arguably before they did the equity offer. So, kind of an interesting situation.

You have to kind-of pick your spots with the MLPs. Again, as prices have risen, they've become a little more volatile, but certainly they're in the sweet spot of a lot of things. And dividend growth, if anything, seems to be accelerating for the better-run companies.

The deal between the President and Congress extending the Bush tax cuts two more years, including the 15% rate on dividend taxes—did that help them as well?

Ironically, that might have cooled some of the ardor investors had.

There was speculation that if the tax rates did go up, MLPs—because they pay returns of capital as a large portion of their dividends—were still tax-advantaged. They weren't threatened by the end of those. So that might have cooled some people off.

On the other hand, we don’t know what's going to happen in 2013. We do know Uncle Sam is very heavily in debt, and they're going to be looking at a lot of ways to come up with additional cash.

The energy-focused MLPs tend to have a lot of support in Congress. In fact, the bill that was recently passed, still languishing in the Senate, regarding carried interest specifically excludes the energy-focused MLPs.

But you don't want to be invested in the MLPs that are outside of energy. Many of them do use techniques that are similar to carried interest, and that can be a real disaster for people.

So, can you name very quickly one MLP you think is attractive for people, both in terms of price and quality now?

Well, I think Enterprise Products Partners (EPD) is one of the best. It’s a very high quality company, heavily owned by the family. The founder of the company, Dan Duncan, did pass away in the past year.

He passed in the right year for the taxes on his massive fortune, right?

I guess that's true. You know, he was always a huge buyer of his stocks. So his heirs own massive amounts of it. In fact, one of them I think makes on the order of $60 million in dividends every quarter.

EPD increases its dividends every quarter. Again, they're issuing equity very cheaply. They’ve kind of achieved a scale that allows them to do a lot of things that the smaller MLPs can't do. That's a real big plus, and I think it's a really nice growth story going forward.

It's one of the larger MLPs, but it's a fraction the size of a super-oil like ExxonMobil. It's still a very small part of the market. It think there's a lot of upside.

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