By Siraj Sarwar
Investors are having a difficult time while the Fed maintains its current policy of keeping low interest rates. Treasury bonds, money market funds, certificates of deposit and similar investments that have been the traditional mainstays of many income seeking portfolios have recently yielded disappointing results, in some instances trailing behind even the current historically low rate of inflation.
For some income seeking investors, Master Limited Partnerships [MLPS] may be sensible alternatives. Factors include their favorable tax treatment, being regarded as the same as partnerships rather than corporations under the current tax code. The special tax treatment is extended as long as they consistently return 90% or more of their income to shareholders. This enables them to easily avoid double taxation and obtain new capital at a lower cost.
In this article, I choose three less-known MLPs with solid financials and strong cash flows, which offer significant distributions. These partnerships offer an eye-catching dividend yield above 8%. These are Martin Midstream Partners L.P (MMLP), Legacy Partners L.P (LGCY) and PVR Partners L.P., (PVR). These MLPs have a long history of paying attractive distributions to unithlders. They have a solid investment strategy and strong business models.
Martin Midstream Partners L.P. focused mainly in the United States Gulf Coast region with a diverse set of operations. Currently, the partnership offers a quarterly distribution of $0.77 per share. It has sustained similar distributions over the past two quarters. For the full year of 2012, the partnership paid an annual distribution of $3.08 per unit, yielding at 8.76%. The partnership has been gradually growing its distributions. Over the previous five years, the partnership has increased its distributions by 6.94%.
How distributions are Safe?
- Projected Dividend Yield: 8.81%
- Revenue Growth (3-Yr Avg): 31.10%
- Earnings Per Share [EPS] Growth (3-Yr Avg): 50.1%
- Payout ratio Trailing Twelve Months [TTM]: 77.2%
Over the years, Martin Midstream has been able to generate massive revenues. In previous three years, on average, the partnership has been able to increase revenues by 31.10%. The partnership was able to increase revenues from $912 million in 2010 to $1,490 million by the end of 2012. This is very substantial growth in such a tough economic environment.
Recently, the partnership announced Q4 results with massive earnings of $6.7 million. The partnership has been able to increase earnings above 50% compared to the previous year's quarter. In the last year, Martin Midstream operations were positively impacted by the recent infrastructure created at its vacuum tower unit and Corpus Christi crude oil terminal. In addition, at the end of Q4, the partnership had completed three acquisitions, which will further enhance its revenue, earnings and ultimately cash flows.
Furthermore, Martin Midstream has shown exceptional cash flows. At the end of Q4, the partnership had generated distributable cash flow [DCF] of $20.1 million. Its DCFs condensed compared to the prior year quarter. Its DCF provided 1.06 times coverage to its fourth quarter distribution, which was below the past year's quarter of 1.10 times.
The partnership's difficulties were mainly due to an enlarged level of administrative expenses linked with the higher than expected maintenance, capital expenditures and acquisitions. However, it was still able to complete some significant key organic growth projects. The partnership is expected to generate $7 billion of cash flows from the recently acquired Talen's Marine & Fuel, L.L.C.
At present, the partnership is working on an ambitious and aggressive business plan. Martin Midstream is working on an expansion plan and is robustly making acquisitions to enlarge both its reserves and its production. The partnership looks like a strong and safe pick for an income portfolio. I believe the partnership is well positioned to yet again increase distributions as the recent acquisitions start to contribute.
PVR Partners, L.P. owns and operates a network of processing plants and natural gas midstream pipelines. Over the years, the partnership has been paying substantial distributions. It recently increased its quarterly cash distribution to $0.55 per/unit. This was an increase of 1.9% over the prior quarter and 7.8% over the previous year's quarter. Since 2011, PVR Partners has increased its quarterly distributions by 17%. For the full year of 2010, the partnerships annual distribution stands at $2.20 per unit, yielding at 9.53%.
How Distributions are safe?
- Projected Dividend Yield: 9.80%
- Revenue Growth (3 Yr Avg): 15.39%
- EPS Growth (next year): 50%
Over the years, PVR Partners has been showing an outstanding revenue growth. In 2009, the partnership generated annual revenue of $657 million, which was significantly enlarged to $1,160 million at the end of 2011. However, in light of the current depressed Natural Gas Liquids [NGL] prices and the challenging environment in the coal market, PVR Partners' latest sales were also negatively impacted by the tough environment.
Despite this, partnership has been showing a solid growth in its Eastern Midstream business segment over the past few quarters. PVR Partners has benefited significantly by its internal growth project in the Marcellus and acquisitions of Chief Gathering. At the end of Q4, this MLP had produced adjusted EBTIDA of $33.1 million from Eastern Midstream, compared to $8.9 million in the prior year's quarter.
Furthermore, PVR Partners has been investing heavily in available growth opportunities. During Q4, PVR Partners has invested $33.6 million on internal growth projects in its midstream businesses. Additionally, the partnership has invested $175.8 million in the Eastern Midstream Segment. For the full year of 2012, the partnership's internal growth project investments stood at $528.8 million together with $410.6 million in the Eastern Midstream Segment.
It can be a safe pick for income-oriented investors as the partnership will be getting 80% of the midstream long-term fixed fee contracts. The move to the long-term fee-based contracts will eradicate the partnership's depressed commodity risks from natural gas.
Legacy Reserves L.P. focuses mainly on the acquisition and development of oil and natural gas properties. Its long-lived reserve base led it to achieve its twin objectives of providing growth and firmness in distributions to unit holders.
Currently, the MLP offers a quarterly distribution of $0.57 per unit. Legacy has a strong history of constantly increasing its distributions. Over the past five years, the partnership has increased its distributions by 16.33%. For the full year of 2012, the partnership provided one of the best annual distributions of $2.28 per unit, yielding at 8.49%.
How distributions are Safe?
- Projected Dividend Yield: 8.60%
- Revenue Growth (3-Yr Avg): 36.2%
- EPS Growth (5-Yr Avg): 3.75%
- Payout ratio TTM: 159.3%
Over the years, the partnership has been showing an outstanding revenue growth. At the end of Q4, its production increased by 13% over the earlier year's quarter. Its results were positively impacted by its earlier acquisitions. The company produced nearly $105 million in revenues from the acquisitions. I believe the company is strongly benefiting from its ongoing capital program.
With earlier acquisitions, the partnership produced record production of over 14,800 Barrels of Oil Equivalent Per Day [BOE/D] in 2012. With record production, the partnership's adjusted EBITDA currently stands at $197.6 million, the second highest in its history. Moreover, Legacy is also now engaged in huge capital spending on the maintenance of its assets and properties. Recently, for 2013, the partnership released a capital budget of $90 million of which Legacy plans to use $68 million on maintenance of its properties.
With recent acquisitions and aggressive capital spending, the partnership is well positioned to constantly raise its distributions. At present, the partnership offers a safe and healthy distribution. In addition, the partnership has a strong revenue base, and hefty cash flows to offer safe and consistently increasing distributions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.