Protected Principal Retirement Strategy: CAGR + Increasing Distributions = Buy Candidates

Includes: CLMT, CMLP, SDRL
by: Akaralph

During the past few days I, like everyone else holding Master Limited Partnerships [MLPs] and other energy positions in their portfolios, have been awestruck with sharply declining stock prices.

For those of us who have been invested in these asset classes for several years, I offer the following observations:

1. Precipitous drops such as these generally occur once, or twice a year, typically tied to secondary stock, and senior note offerings.

2. During bear markets (such as in 2008 - 2009), stock prices for most of the MLPs dropped by 70 percent of so, giving many of us the opportunity to add to our positions at almost unheard of yields.

3. Periodically, the case for changing the tax provisions for MLPs raises its ugly head. This appears to be contributing to the recent "MLP Beatdown" that we have been witnessing.

I believe that we are coming up on another opportunity to selected holdings in the Protected Principal Retirement portfolio, and in the ensuing paragraphs, I would like to cover just a few.

My primary metrics for evaluating the MLPs include: distributable cash flow (DCF), the distribution coverage factor, increasing quarterly distributions, and the five-year compounded annual growth rate (CAGR). For energy stocks other than MLPs, revenues and earnings are of course important, but dividend increases, payout ratios (in some cases), and their CAGRs.

In my recent research, three stocks have caught the bulk of my attention.

Calumet Specialty Products Partners

Calumet Specialty Products Partners LP (NASDAQ:CLMT) recently reported quarterly net income of $42.4 million vs. $19.6 million quarter over quarter. Their DCF was $92.5 million vs. $50.5 million quarter over quarter. This equated to a 5.1 percent distribution increase to $.62/share.

The distribution coverage ratio was well over 1.0, and the company believes that going forward the ratio will remain between 1.3X and 1.5X.

CLMT is not a variable distribution MLP. They have now increased the distribution for ten consecutive quarters. According to Yahoo, CLMT's CAGR is currently 14.6 percent. I consider anything above 5 percent for an MLP to be excellent.

Crestwood Midstream Partners

Crestwood Midstream Partners LP (NYSE:CMLP) is a midstream partnership focusing on natural gas and natural gas liquids.

In the most recent quarter, they reported adjusted EBITDA of $32 million vs. $28.5 million for the prior quarter. Their DCF was $25.2 million vs. $20.6 million for the prior quarter, and they declared a distribution of $.51, which is 6.3 percent higher than same quarter last year.

The coverage ratio increased from .85X to 1.0X for the reporting quarter.

Yahoo shows a CAGR of 16.60 percent going forward.

Seadrill Ltd.

In the non-MLP space, I continue to be pleased with what I see reported about Seadrill (NYSE:SDRL). While their earnings will not be released until November 26th, recent announcements would indicate continued profits and growth within their asset class.

Significant announcements include:

1. Acquisition of Asia Offshore Drilling.

2. Positive new analyst coverage and upgrades by Deutsche Bank and Credit Suisse.

3. A five-year contract extension on their West Mira rig from Husky Energy.

4. A merger of their tender rig business with SapuraKencana.

5. Acquisition of a new ultra-deepwater, semi-submersible rig.

SDRL carries a high debt load, but revenues to date more than offset this, enabling them to increase dividends and from time to time to declare special dividends.

Both revenues and earnings per share are forecast to continue to increase, and their release later this month will let us know if there will be another dividend increase this year.

The CAGR going forward is 30.80 percent.


I continue to like (and own) all three of these stocks in the Protected Principal Retirement portfolio. While I am in a "watchful waiting" mode with respect to the markets in general, I would not hesitate to add to CLMT around the $26 level (a 9.5 percent yield), CMLP at or below $21.50 (also a 9.5 percent yield), and SDRL around the $35 level (again a 9.5 percent yield - I do not count the special dividends since they are sporadic). I might even add to the portfolio's holdings in each at a nine percent yield level.

Disclosure: I am long CLMT, CMLP, SDRL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The information presented does not constitute a buy recommendation on any of these stocks. Rather, it is presented for the sole purpose of assisting those interested in one, or more of the stocks discussed to conduct adequate research.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .