New Tools For REIT, MLP Analysis

6/8/2015


For years, we've used sector-specific scores to help us analyze stocks. While traditional Quadrix scores compare a given stock to all the others in our universe of roughly 5,000, sector-specific scores take a tighter focus, measuring stocks only against peers.

While we encourage you to take advantage of our Quadrix sector-specific scores (find them at www.DowTheory.com/Go/Sector), some groups of stocks differ enough from others in their sector to warrant their own scores. With that in mind, we've developed special scores for REITs and MLPs.

Most real estate investment trusts (REITs) own commercial property, making their money from rent payments and the proceeds of property sales. Some also develop property, while others just own mortgage loans. REITs aren't technically stocks, but trust units, with corporate structures that allow them to avoid taxation of their earnings if they pass on 90% of their income to unitholders.

Publicly traded partnerships, which we lump together under the name master limited partnerships (MLPs), are also not stocks. These entities get favorable tax treatment if they generate 90% of their cash flows from "qualifying sources," which generally limits them to natural resources, commodities, or real estate. Most MLPs operate in the energy sector.

Our Quadrix scores are designed to analyze traditional operating companies. The odd corporate structure of REITs and MLPs makes them difficult to assess — not to mention that sales, profits, and other cornerstones of traditional stock analysis aren't the best gauges of their performance. In the tables below we present some statistics unique to REIT and MLP analysis.

TOP-RATED REITS
To analyze the operating performance of REITs, we focus on funds from operations. Our shorthand version of FFO reflects net income plus depreciation of real estate holdings, minus gains on the sale of property. Below we list 10 REITs that earn A (above average) ratings in our Alternative Income Watch List.
- Dividend Metrics -
Funds From
---- Operations ($) ----
------ Quadrix Scores ------
Company
(Price; Ticker)
Yield
(%)
3-Yr.
Annual.
Growth
(%)
Div.
As %
Of FFO
Last 12
Months
(Mil.)
12-Mo. Chg.
(% of Chg.)
Overall
12-
Factor
Reranked
Overall
Boston Properties
($128; BXP)
2.0
51
107
1,021
(333)
(-25)
62
74
90
Home Properties
($74; HME)
4.1
5
48
357
32
(10)
59
95
84
Hospitality Pptys.
($30; HPT)
6.8
3
57
518
69
(15)
60
97
87
Kimco Realty
($24; KIM)
4.0
8
42
888
399
(81)
81
87
92
Lamar Advertising
($60; LAMR)
4.6
NM
NM
388
12
(NM)
89
99
96
LaSalle Hotel
Pptys. ($37; LHO)
4.9
47
52
287
51
(22)
89
98
93
Mid-America
Apart. ($75; MAA)
4.1
5
54
409
59
(17)
61
77
66
Public Storage
($193; PSA)
3.5
12
60
1,630
160
(11)
62
82
78
Simon Property
($179; SPG)
3.1
13
64
2,572
91
(4)
58
71
40
UDR ($32; UDR)
3.5
9
59
449
65
(17)
56
96
89
NM Not meaningful because of an accounting change or a lack of dividend history.
Note: Quadrix scores are percentile ranks, with 100 the best.

 

MASTERING THE MLP
Distributable cash flow is the best operating metric to analyze MLPs. Our shorthand version of DCF starts with earnings before taxes, depreciation, and amortization, then subtracts capital spending. Ten intriguing MLPs are listed below.
-- Dividend Metrics --
Funds From
---- Operations ($) ----
------ Quadrix Scores ------
Company
(Price; Ticker)
Yield
(%)
3-Yr.
Annual.
Growth
(%)
As %
Of
Dist.
Cash
Flow
Last 12
Months
(Mil.)
12-Mo. Chg.
(% of Chg.)
Overall
12-
Factor
Reranked
Overall
Alliance Holdings
($50; AHGP)
7.6
14
43
495
147
(42)
86
97
94
Alliance Resource
($30; ARLP)
8.8
10
37
499
146
(41)
88
96
96
Blackstone
($44; BX)
6.1
60
30
4436
1354
(44)
95
99
92
DCP Midstream
($38; DPM)
8.2
6
NM
(97)
(94)
(NM)
70
77
86
Energy Trans.
Equity ($67; ETE)
2.9
10
NM
(3,535)
(2,124)
(NM)
58
76
55
KKR ($23; KKR)
8.3
37
17
5145
(2,696)
(-34)
70
92
85
Magellan Midstr.
($78; MMP)
3.7
18
123
486
11
(2)
57
39
53
Spectra Energy
($50; SEP)
4.8
7
977
68
409
(NM)
50
50
60
Star Gas Partners
($9; SGU)
4.3
4
18
111
19
(20)
99
100
100
Targa Resources
($42; NGLS)
7.9
11
349
110
497
(NM)
51
87
63
NM Not meaningful because distributable cash flow was negative in current or historical period. Note: Quadrix scores are percentile ranks, with 100 the best.

About the new scores

Our original sector-specific scores come in two flavors.

• 12-Factor Sector scores take into account a dozen individual Quadrix statistics that work particularly well in a given sector.

• Reranked Overall scores start with the same six category scores that derive the traditional Overall score, but reweight them based on which are more effective in each sector.

Our MLP and REIT scores follow the same template, and we now have 12-Factor and Reranked Overall scores to help us compare companies in both groups. Of course, just because we've created new analysis tools doesn't mean you should expect REITs and MLPs to flood the recommended lists.

Investors like REITs and MLPs because of their high yields, which shouldn't come as a surprise. The lack of corporate taxation leaves more cash on hand to pay dividends. REITs must pay them, and while MLPs are not legally required, most offer large dividends in an effort to attract investors.

As the chart above illustrates, REITs and MLPs have delivered long-term returns well above those of large-cap stocks. However, investors shouldn't load up on either group, or they'll run the risk of taking a big hit when either real estate or energy is out of favor.

At the moment, the Forecasts does not like any REITs or MLPs enough to grant one a spot on our buy lists, though Spectra Energy Partners ($50; SEP) and Star Gas Partners ($9; SGU) are in our Top 15 Utilities portfolio. However, we do provide A (above average), B (average), and C (below average) rankings on dozens of REITs and MLPs via our Alternative Income Watch List (www.DowTheory.com/Go/Alt). Some of the higher-rated trust and partnership units are presented in the nearby tables

A preference for income

Investors like preferred stocks because they pay hefty dividends. To say your portfolio needs exposure to preferreds is a bit of a stretch. Still, provided you know what you are buying, the stocks make sense as niche investments.

Companies offer preferred stocks because shares are normally cheaper to issue than common stock and don't dilute earnings the way a common-stock offering does. Financial stocks dominate the sector, accounting for 84% of the S&P U.S. Preferred Stock Index.

The index, which contains 302 stocks and yields around 6.2%, through May 31 returned 3.2% this year, versus 3.2% for the S&P 500 Index and 1.0% for the Barclays U.S. Aggregate Bond Index. Preferreds offer potential diversification benefits for stock investors, as only about 60% of long-term returns are explained by movements in the S&P 500.

Gauging the risk of preferreds can be challenging. Preferreds behave more like bonds than common stocks and can fluctuate with changes in interest rates. Thus, the potential for the Fed to raise interest rates poses a risk. Preferreds are also sensitive to an issuer's creditworthiness. Finally, most preferreds have a call date — when the issuer can redeem the shares — presenting reinvestment risk.

Risks aside, preferred stocks should appeal to tax-sensitive investors looking to generate dependable income. Many preferred stocks pay qualified dividends taxed at a lower rate than ordinary income.

While investors should not load up on preferreds, the shares offer an alternative to traditional income stocks. Below we list five preferred stocks appropriate for most subscribers, including three that qualify for favorable tax treatment. All five have investment-grade credit ratings, yield at least 5.6%, trade at modest premiums to their call price, and aren't callable until 2019 or later.

If you want a basket of stocks without paying too much, look to iShares U.S. Preferred Stock ($40; PFF), an exchange-traded fund (ETF) that tracks the S&P Preferred index and charges an expense ratio of 0.47%. The fund, which pays only partly qualified dividends, yields 6%. Adventurous investors might consider Flaherty & Crumrine Preferred ($20; FFC), a closed-end fund yielding 8.3% that uses leverage (borrowed money) to boost income and returns.

SELECT PREFERRED STOCKS
The five preferred stocks below earn investment-grade ratings from both Standard & Poor's and Moody's and yield at least 5.6%. For most investors, preferreds should represent only a small portion of a diversified portfolio.
Preferred (Price; Ticker)
Dividend
($)
Yield
(%)
Call
Date
Premium
To Call
Price
(%)
S&P/Moody's
Credit Ratings
Eligible For
15% Tax Rate
Estimated Dividend
Payment Dates
State Street, 5.90% D
($26; STT-D)
1.48
5.6
3/15/2024
5
BBB/Baa2
Yes
3/15, 6/15,
9/15, 12/15
Integrys Energy, 6.00%
($27; IEH)
1.50
5.6
8/1/2023
7
BBB/Baa1
No
2/1, 5/1,
8/1, 11/1
Public Storage, 5.875% A
($25; PSA-A)
1.47
5.8
12/2/2019
2
BBB+/A3
No
3/31, 6/30,
9/30, 12/31
Northern Trust, 5.85% C
($26; NTRSP)
1.46
5.7
10/1/2019
3
BBB+/Baa2
Yes
1/1, 4/1,
7/1, 10/1
Wells Fargo, 5.85% Q
($26; WFC-Q)
1.46
5.7
9/15/2023
3
BBB/Baa2
Yes
3/15, 6/15,
9/15, 12/15

 

SELECT PREFERRED STOCK FUNDS
Below are five top preferred-stock funds, including three exchange-traded funds and one closed-end fund — an alternative investment suitable for aggressive income investors.
--- Total Return ---
Fund (Price; Ticker)
Estimated
Yield
(%)
Year-
To-Date
(%)
5-Year
Annual.
(%)
Expense
Ratio
(%)
Manager
Tenure
(Years)
Dividend
Payments
Fund Type
Flaherty & Crumrine Preferred ($20; FFC)
8.3
11.1
16.8
1.39
12
Monthly
Closed end
Forward Select Income ($26; FFSLX)
3.2
1.7
12.1
1.61
8
Quarterly
Mutual
iShares U.S. Preferred Stock ($40; PFF)
6.0
2.7
8.2
0.47
5
Monthly
Exchange traded
PowerShares Fin'l Preferred ($18; PGF)
5.8
2.9
9.5
0.63
5
Monthly
Exchange traded
SPDR Wells Fargo Pref. Stock ($44; PSK)
5.3
2.4
7.7
0.45
3
Quarterly
Exchange traded

 

 


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