Outlook for MLPs Ahead of April Earnings

MLPs are one of the very few winning groups in 2009 (for those long in the markets). After beginning the year at 172, the Alerian MLP Index at 177 is still up. While MLPs have gained as the Dow was dropping over 20% YTD, selling sentiment has been affecting MLPs recently. In just the last two weeks, market averages sold off over 10% reaching 12 year lows. Two weeks ago the Dow crashed through the important 8000 floor which had held for four months. On March 2, the Dow plunged through 7000. This round of selling reached MLPs; they followed along as the Dow dropped and the index was aggravated by a 12 point drop on March 2. The largest new factor affecting financial markets, among many disasters in the credit crisis, has been the actual and proposed macro economic government spending programs coming from DC.

The US government is reorganizing itself around the concept that big government needs to get more involved by spending considerably more money to solve problems. However, markets have been rejecting this concept in the last two weeks. High yielding securities have been punished severely in the financial confusion. REITs have sold off badly in the last six months assuming the recession will bite them hard, sinking to new lows in recent days. Junk bond funds, after a nice bounce from overly depressed levels late last year, sold off on increased worries about more bond defaults. MLPs joined this decline for reasons which are not completely clear. They are high yield securities and that association must have contributed to their recent decline.

There are also increased worries about how the economic slowdown will hurt them. In April, MLPs will announce Q2 earnings, give guidance and set the distributions for Q2. Q1 distributions went well, with only a few reductions. If the recession bites their businesses harder, there may be more cuts in Q2. The desire to conserve cash is affecting more companies this year. Kinder Morgan (KMP), the largest MLP with the strongest finances, increased their distribution to a $4.20 annual rate in Q1. However, their guidance said they expect the distribution for 2009 will be $4.20, indicating no further increases. That sounds like a subtle hint that they are expecting to feel the effects of slowing economic growth as their capital expenditures bring new pipelines on stream throughout the year.

All dividends are suspect and the highest yield securities are considered to have the greatest uncertainty, much more so than in the past. If financial markets keep falling, MLPs could also get dragged down (as seen in the March 2 decline) with other high yield securities. Their long term prospects remain excellent as the country's desire to build infrastructure for moving oil and gas around the country has not changed. However, bumps in the road immediately ahead will try even the most loyal fans of MLPs.

Comments

[You're Kidding:]

I think word will get out on MLPs, especially pipelines, and those holding these stocks, will do very well in the long run.

Lets not forget that dividend stocks (with dividends used to purchase more shares) are the best long term investments there are in the stock market, as academic studies have shown. Not to mention the pain that going after capital gains alone has recently caused.

Investors will learn to think "long term" I predict, and sooner, rather than later.

Mar 04 08:22 AM

[La Marque:]

Owning MLPs directly is a pain-in-a-butt taxable event. (the IRS has a limit on annual income from them in a tax-deferred account). Owning a basket of them in a closed-end fund makes them just another stock worth holding in a portfolio.

Mar 04 12:34 PM

[henarl:]

MLPs are probably the safest of high dividend holdings in this current market. Other than XOM, they are the only buy and hold stocks in my portfolio. Long KMP, OKS, LINE, MWE.

Mar 04 12:59 PM

[searcher:]

KMR for tax advantaged accounts is a good alternative. Stay away from vehicles with K-1/UBTI issues in such accounts.

Mar 04 02:09 PM

[grbn:]

...but keep an eye out for talk of tax law changes should the US govt put MLPs in their crosshairs....

Mar 05 10:03 AM

[mopgcw:]

La Marque,
True, you do not want to hold them in an IRA, but holding them in a taxable account is not an issue at all wrt the tax filings. in fact, all of the mlps I own have the ability to download the required info into turbotax automatically....quite simple actually.

Mar 08 01:12 PM

[L S:]

I was a bit hesitant when first turned on to the MLPs, but the tax implications are not as daunting as it may seem. Like mopgcw, I found the handling of the K-1 forms to be a non-event when downloaded from my Fidelity account into TurboTax. For 401K's or IRA's, there are options such as KMR, the 'equivalent' of Kinder Morgan KMP. Another option I've used is KYE, which issues 1099's instead of K-1's. Again this is acceptable for 401K's/IRA's, and it diversifies your risk by investing in a variety of MLP investments. Think of it as your MLP Mutual Fund. I'm sure more options are out there, and I'd love to hear about them. These are a solid contributor to my portfolio.

Mar 09 08:32 AM