MLPs: Success Story in an Otherwise Dismal Quarter

by: Avi Morris

The stock market suffered badly in the first quarter; most indices dropped at least 10%. As good as the March rally was, it only limited the damage done in the first quarter. However, MLPs did well.

Like the averages, they started 2009 from a depressed level, The Alerian MLP Index began the quarter at 176 and finished 15 points higher while the Dow plunged almost 1200. High yields may have attracted some investors and the Index still yields 11%. Junk bond funds had a similar track record to the averages in Q1 with a recovery in March while REITs sold off, then remained low during the March rally. Three high high yield sectors performed very differently in the last 90 days.

On the first trading day of the new year, the MLP index shot up 12 to 188. Since then, it has been pretty much traded sideways in the 190-200 range. The rally on March 31, up 2+ to 191, took it back into its trading range. Being range-bound in a difficult market is encouraging for the bulls, but the resistance level of 200 will have to be solidly broken through if MLPs want to advance.

In April, MLPs will report earnings, set distributions and give guidance. I have a feeling the economic recession and credit crisis will be shown to have a greater impact on MLPs. Kinder Morgan (NYSE:KMP), the largest and best known MLP, raised almost $1 billion 3 months ago. Then they announced a good increase in the distribution to $4.20 annualized, but later in the statement said they expect to pay $4.20 in 2009 (i.e. no more increases during the year). The largest with good finances should be able to get through this difficult times with limited damage. But medium and smaller MLPs may get pinched (or worse) by the recession.

Double digit yields are common. Even the biggest ones with less risk, offer yields near 10%. Very high yields will continue to attract investors, especially when other investments offer low yields (some even near zero). MLPs may have tougher tests to pass in the second quarter. If so, they could take stronger measures to conserve cash (such as reducing distributions) as other businesses are doing. But long term prospects remain excellent for those which make it through the credit crisis.