Partnerships More Popular

7/29/2013


The number of master limited partnerships (MLPs) has roughly doubled since the end of 2006. We find 123 MLPs trading on U.S. exchanges, up an annualized 11% from the 62 on the market at the end of 2006. MLPs combine for a stock-market value of $509 billion, just 11% below the combined value of the 62 utility stocks in the S&P 1500.

Technically, some of these publicly traded partnerships (PTPs) are not true MLPs operated by general partners, but limited liability corporations (LLCs) that opt for partnership tax treatment. However, most people use the acronyms MLP and PTP interchangeably, and so will we.

MLPs aren't subject to corporate income taxes, which explains why more and more companies are setting them up. MLPs generally distribute most of their pretax cash flows to owners of their publicly traded partnership units, so they're known for paying fat dividends.

These companies earn their tax break if they generate 90% of income from “qualifying” sources, which include:

• Transportation, storage, processing, distribution, or production of natural resources and a few types of chemicals.

• Retail sales of propane.

• Rents and capital gains from real estate.

• Investments (interest, dividends, capital gains, or commodities).

Companies that transport, store, produce, or distribute petroleum and natural-gas products account for 77% of MLPs and 83% of the group's total stock-market value. Energy-infrastructure companies — mostly pipeline and storage concerns — account for two-thirds of MLPs' market capitalization.

A rise in U.S. oil and natural-gas production has strained pipeline capacity, paving the way for solid long-term growth for energy-infrastructure companies, as well as providing opportunities for expansion via the construction of new pipelines. The International Energy Agency says the U.S. will surpass Saudi Arabia as the world's largest petroleum producer by 2020 and become a net exporter of oil by 2030. MLPs, which already own more than 300,000 miles of pipeline, seem well-positioned to capitalize on this trend.

While we don't recommend any MLPs on our buy lists, we do cover 31 in our Alternative Income Watch list (www.DowTheory.com/Go/Alt). Check out the table below for a list of MLPs earning A (above average) or B (average) ratings. Four with A ratings are discussed below.

Alliance Holdings ($61; AHGP) owns the third-largest coal producer in the eastern U.S. About 93% of its coal production was purchased by electric utilities last year, primarily under long-term contracts. Yielding 5.0%, Alliance Holdings has grown its dividend at a 21% annualized rate over the past five years. The hefty payout is supported by steady growth in cash provided by operations, up in six of the past eight years. Looking ahead to the June quarter, the consensus expects Alliance Holdings to earn $0.85 per share, down 7%. Sales are projected to rise 3%, which would mark the 14th straight quarter of growth. Alliance Holdings was scheduled to report results on July 26.

Kohlberg Kravis Roberts ($21; KKR), a global investment company, operates in private, public, and capital markets. The majority of its investments are in private equity, including a stake of more than $3 billion in Alliance Boots a privately-owned health and beauty company. Trading at less than eight times trailing earnings, the stock earns a Value rank of 88, while its Overall score, currently 85, has exceeded 80 in 10 consecutive months. The dividend equates to a fat 6.3% yield, yet accounts for just 48% of earnings. The company generated $7 billion in free cash flow in the 12 months ended March. KKR was expected to announce June-quarter results on July 26, after our deadline.

Plains All American Pipeline ($56; PAA) owns oil and gas pipelines and storage facilities; it also operates a fleet of trucks, trailers, barges, and railcars for hauling crude oil and natural-gas liquids. The company has spent $3.7 billion on 17 acquisitions since 2011. Although the balance sheet contains net debt of $7 billion, or nearly $21 per share, management seems comfortable taking on additional debt for more deals. Plains All American has raised its quarterly dividend in 33 of the past 35 quarters; it expects 2013 distributions to exceed those from last year by 9% to 10%. Plains All American is a member of our Top 15 Utilities Portfolio.

Formed in 2002, Sunoco Logistics Partners ($62; SXL) operates a network of pipelines, terminals, and storage facilities for crude oil and refined products. The balance sheet holds just $2 million in cash versus $2.32 billion in long-term debt, but less than 8% of that debt comes due before 2016. Sunoco has raised its dividend in 32 straight quarters, with the last four hikes at least 5% from the previous quarter. Sunoco pays out only about half of its earnings in dividends, suggesting it can continue delivering robust dividend growth. Yielding 3.7%, Sunoco is a component of our Top 15 Utilities portfolio.

Before you buy

Because of their rich dividend yields (average of 6.6%), master limited partnerships appeal to income-oriented investors.

But before you add MLPs to your portfolio, consider three key facts:

• These companies can afford to pay high dividends in part because they don't pay taxes at the corporate level, and the partnership structure that allows this tax avoidance complicates taxes for investors. Some distributions will be taxed at ordinary-income rates, while most are considered returns of capital that will lower investors' cost basis in the shares. At the end of the year, owners of MLPs will receive a K-1 form breaking down the distributions for tax purposes.

• MLPs issue partnership or membership units, not stock, and traditional analysis methods don't work as well on them. In part because of their ability to heavily depreciate long-lived assets, accounting profits tend to be of limited use in measuring growth or value. Of more importance is distributable cash flow (see the table below for details).

• We rank 31 MLPs in our Alternative Income Watch List, giving them ranks of A (above average), B (average), or C (below average). These ranks are considered relative to other MLPs, not the broad market. None of our A-rated MLPs have earned a spot on our buy lists.

MLPs WORTH WATCHING
Below we present the 22 MLPs on our Alternative Income Watch List (www.DowTheory.com/Go/Alt) that earn ratings of either A (above average) or B (average). For MLPs, profits often don't tell us much, in part because of the companies' massive depreciation of assets. Instead, we look at distributable cash flow, which is calculated by subtracting interest and capital-spending costs from earnings before interest, taxes, depreciation, and amortization.
Distributable
Cash-Flow
---- Growth ----
-- Valuation Ratios --
Company (Price; Ticker)
Div.
($)
Yield
(%)
3-Yr.
Annual.
Div.
Growth
(%)
Last
12
Months
(%)
Last
5 Yrs.
(Annual.)
(%)
Div. As
% Of
Dist.
Cash
Flow
Market
Value/
Dist.
Cash
Flow
Price/
Sales
Enter-
prise
Ratio
Quadrix
Overall
Score
Rank
Industry
Alliance Holdings
($61; AHGP)
3.1
5.0
18
49
29
100
22.5
1.8
7.3
95
A
Coal &
Consumable Fuels
Alliance Resource
($75; ARLP)
4.5
6.0
12
83
12
148
15.0
1.3
5.3
96
A
Coal &
Consumable Fuels
AmeriGas Partners
($47; APU)
3.4
7.2
4
37
11
130
18.0
1.4
13.3
47
B
Gas Utilities
Blackstone Group
($24; BX)
0.9
3.8
(16)
2527
NA
38
8.9
2.8
16.2
72
A
Asset
Management
Boardwalk Pipeline
($33; BWP)
2.1
6.6
3
NA
NA
137
20.2
6.1
13.8
50
B
Oil & Gas
Storage & Trans.
Buckeye Partners
($71; BPL)
4.2
5.9
4
1382
0
272
52.8
1.7
16.0
60
B
Oil & Gas
Storage & Trans.
Calumet Spec.
Prods. ($33; CLMT)
2.7
8.2
10
148
NA
61
9.9
0.5
8.4
65
A
Oil & Gas
Refining & Mktg.
Cedar Fair
($43; FUN)
2.5
5.9
35
37
10
58
13.3
2.2
10.0
50
B
Leisure Facilities
El Paso Pipeline
($43; EPB)
2.5
5.8
18
31
35
72
14.2
6.2
12.6
70
A
Oil & Gas
Storage & Trans.
Energy Transfer
Equity ($63; ETE)
2.6
4.1
6
NA
NA
NA
NA
0.7
14.4
48
B
Oil & Gas
Storage & Trans.
Energy Transfer
Ptnrs. ($51; ETP)
3.6
6.9
0
NA
NA
NA
NA
0.6
14.1
38
B
Oil & Gas
Storage & Trans.
Enterprise Products
($64; EPD)
2.7
4.3
5
NA
NA
NM
NM
1.4
17.1
47
B
Oil & Gas
Storage & Trans.
Genesis Energy
($51; GEL)
2.0
4.0
10
NA
NA
NA
NA
1.0
29.6
58
B
Oil & Gas
Storage & Trans.
Holly Energy
($39; HEP)
1.9
4.9
5
20
NA
123
22.5
7.7
15.5
29
B
Oil & Gas
Storage & Trans.
Kinder Morgan
Energy ($86; KMP)
5.3
6.2
6
(9)
NA
182
25.7
3.5
11.4
70
A
Oil & Gas
Storage & Trans.
KKR ($21; KKR)
1.3
6.3
NA
820
NA
250
39.1
2.9
22.0
85
A
Asset
Management
Magellan Midstream
($55; MMP)
2.0
3.7
10
(50)
8
248
72.2
7.2
20.7
53
B
Oil & Gas
Storage & Trans.
Natural Resource
($21; NRP)
2.2
10.5
1
(6)
10
149
14.7
6.4
10.4
62
B
Coal &
Consumable Fuels
Plains All American
($56; PAA)
2.4
4.2
6
24
NA
159
29.2
0.5
11.4
73
A
Oil & Gas
Storage & Trans.
Sunoco Logistics
($62; SXL)
2.3
3.7
12
(1)
53
102
24.2
0.5
10.9
71
A
Oil & Gas
Storage & Trans.
Teekay LNG
($43; TGP)
2.7
6.3
6
12
NA
116
17.5
8.0
18.8
52
B
Oil & Gas
Storage & Trans.
Teekay Offshore
($33; TOO)
2.1
6.4
4
11
7
72
11.7
3.0
11.1
39
B
Oil & Gas
Storage & Trans.
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not available.     NM Not meaningful.     

 


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