Looking for Value in MLPs
07/17/2013 8:30 am EST
The hot market has driven many master limited partnerships out of buy range, but Roger Conrad shares one high-yield candidate that isn't dangerously overbought.
Roger, everybody seems to be interested in master limited partnerships today. Of course, they’ve been around for quite some time, and I remember the old days when you could have MLPs and things like rollercoaster companies. I think Cedar Fair was one of the companies.
Today, they’re primarily limited to energy companies, aren’t they?
Yeah, this was a regulation that went into effect some time ago, and in fact it sort of killed off the new IPO action and the MLPs for a while. But we’ve seen a comeback over the last decade or so, and now we’re seeing actually quite a few new IPOs.
A lot of companies—traditional companies, say utilities that own pipelines—are considering spinning those out into new entities. Obviously, you know income is a big driver, and the MLP structure allows companies to payout pretty big dividends that they may not have been able to as organized corporations.
Right, and in terms for the individual investor, what kind of dividends can they expect for the average MLP?
It’s a real mix these days. You know, if you’d been really excited about MLPs back in 2009...which we were, that’s when we launched our former newsletter MLP Profits, and we did quite well with a number of the recommendations just because of the timing.
Right now, I think there are a number that are still in very good bargain range, still pretty cheap, but they’re also a number that have been a bid up probably to levels that indicate quite a bit of risk. You know, stock prices bake in expectations, and the higher prices go the higher the expectations; the more chance for some sort of disappointment.
You can look at these MLPs and look at the strongest ones. Not much risk to dividends at all. In fact, a lot of them really have very clear paths to strong growth going forward. But if you pay too much for them, you could wind up having a real bite taken out of your portfolio if the market sentiment should happen to shift.
Is there some M&A going on in that area now? I mean, companies buying each other?
I think yeah, there definitely is, and the reason is in those types of businesses, I think the advantages of scale are starting to really show through. In North America, we’ve had this massive energy boom, new drilling for oil, new drilling for gas, natural gas liquids in abundance, and there’s a lot of opportunity for building pipelines and other infrastructure to them.
On the other hand, because we have a lack of pipeline infrastructure, energy prices are weaker in some parts of North America than in others, so companies that are small and companies that are located in those weaker areas are actually going through a fairly bearish phase right now, while the overall situation is fairly bullish.
So companies are bulking up so they can reach a lot more areas, so they can ride out bad times in others. The larger companies, like Enterprise Products Partners (EPD) for example, can pretty much do a deal with anybody they want. It just means a lot of staying power going forward, and investors can really count on big dividends and dividend growth.
Would that be one of your favorite MLPs right now?
That’s actually one that’s gotten a little bit expensive, but if you’re looking for a company like that in the energy midstream area, Energy Transfer Partners (ETP) is a good bit cheaper.
It yields a little bit over 7%, which is about three percentage points more than Enterprise. The reason is they haven’t been increasing their distribution for quite some time, so when they start reviving that, and I think they will, I look for investors to get a pretty nice capital gain. As well as right now, if you buy it, you can lock in a really nice yield.