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Whether you are considering a conservative investment in midstream large-cap like Enterprise Products Partners (NYSE:EPD) or Kinder Morgan Energy Partners (NYSE:KMP) for growth and income; mainly focused on a growth oriented general partner investment like ONEOK (NYSE:OKE) or Williams Companies (NYSE:WMB); or focused only on yield with an investment in several other options, there is one little used and little discussed projection metric with which you should be familiar.

This is the fourth of a series of articles that will assist average retail investors in building an outperforming MLP (Master Limited Partnership) portfolio. The first article had a focus on the Catch-22 of MLP investing: you are lost without a good MLP update - but none of the brokerages have good updates for average retail investors. The second focused on the need for DCF (distributable cash flow) projections instead of EPS projections because MLP valuations are based on DCF and not EPS. The third focused on the distribution to DCF ratios and consumer staple dividend to EPS ratios - and the use of that ratio in explaining historical growth. It was also hoped that seeing how the ratio explained historical growth would prep you for using it a one of the tools in projecting forward payout growth.

This article is on analyst CAGR (Compound Annual Growth Rate of the distribution) projections. I will - in an upcoming article - provide evidence that Yahoo Finance CAGR projections for MLPs are not useful as projections of distribution growth. This is not the case in other sectors. In general, the Yahoo Finance EPS CAGR projections are a tool worth using. The analyst projections provided by the full service brokerages are a superior tool in providing accurate or "accurate enough" distribution CAGRs for MLPs.

CAGR projections are important to you because MLPs sell at a logical yield plus CAGR metrics with significant adjustments for risk. CAGR projections - and risk assessments - explain or justify yields. When you under size the importance of the growth perception on yield, you will tend to buy the higher yielding MLPs that also tend to be the under-performing MLPs when it comes to total return.

Projection CAGRs are also an important topic to discuss due to the lack of awareness by retail investor. Many do not know that such a metric exists. It is my impression that the metric is hidden in the clutter of hundreds of metrics in the typical analyst report. They are one of the least talked about topics on the message boards. It is my perception that they are never talked about on CNBC - and I watch a lot of CNBC. The main stream media never talks about them.

It is logical to believe that if no one is talking about dividend projection CAGRs - the topic must be unimportant. I would argue the opposite. If no one is talking about it, then the projections are a potential advantage that is waiting to be harvested. It is a tool I expect to heavily use in every investment decision in every sector for the rest of my life.

As I see it, here are the questions you should have about the topic.
(1) Where can I find good dividend and distribution CAGR projections?
(2) Is there evidence that CAGRs strongly influence yields?
(3) Is there evidence that higher CAGRs sell at a discount?
(4) Is there evidence that CAGR awareness adds to total returns?
(5) How volatile are CAGR projections?
(6) Are the CAGR projections accurate enough to use in investment decisions?
(7) How many CAGR projections do I need to gather?
(8) What metrics or attributes should I use to double check a CAGR projection?
(9) If I want and need income from my portfolio in the here and now - can I ignore CAGRs?
(10) How do I start to use CAGR projections in my next investment decision?
{11} How are price-implied CAGRs calculated?
(12) How can price-implied CAGRs be used in an investment decision?
(13) What are my current CAGR projections - and how are they justified?
(14) What is the evidence that the Yahoo MLP CAGRs are bad?

The plan of providing acceptable answers to those questions is an ambitious agenda - and more than can be done in one article. I will try to tackle the first four questions in this post; answer more question in a second and third article (reader feedback should cause the question list to grow); and provide my personal CAGR projections in a final article on the topic.

(1) Where can I find good dividend and distribution CAGR projections?
For stocks in sectors other than MLPs (and BDCs or Business Development Companies), Yahoo Finance is a good place to start. Go to one of their "Analyst Estimates" pages for any specific stock. The Yahoo "Next 5 Years (per annum)" projection - which is toward the bottom of the page and is included in the "Growth Est" numbers - appears to be an EPS growth projection. (The link above is to the Yahoo page for EPD. If you have found the "6.00%" projection, then you have found the Yahoo 5 year CAGR. This is one of the rare cases when the Yahoo projection is a good projection.) But there is a high correlation between EPS growth and dividend growth in most sectors.

MSN-Money also provides "EARNINGS GROWTH RATES - NEXT 5 YEARS" projections on their "Earnings" page for each stock.

My research light primary brokerage publishes projections in a monthly update.

My small local library has copies of Value Line, and most of their single page updates contain five year dividend growth projections. Look under "ANNUAL RATES" in the left hand column that is close to the middle of the page. Value Line provides estimated 2010-2012 to 2016-2018 projections for sales, cash flow, earnings, dividends and book value - along with past 10 year and past 5 year historical numbers for those metrics. Value Line offers a larger data set in its subscription service. The link given above takes you to the Value Line update for Procter & Gamble (NYSE:PG). If you found the "7.5" projection - then you found the dividend CAGR projection

For MLPs, those using the full service brokerages of Bank of America, Barclays, Credit Suisse, Goldman Sachs, Ladenburg Thalmann, Morgan Stanley, RBC, UBS and Wells Fargo can find distribution CAGR projections in their updates. I average the single year distribution growth projections from Citi to create an average five year CAGR number. Oppenheimer provides two year and 3-5 year projections over a small midstream coverage universe - but its E&P coverage universe is larger than average. JP Morgan projects current and next year dividend growth in the text of some of their updates - and growth in specified ranges for a vague "multi-year period" in other updates. I have not found forward projections in the updates from Deutsche Bank and Raymond James. These are the brokerages from which I gather the data to make my consensus DCF projections. My need for this DCF data creates a bias in me. I do not trust CAGR projections from firms that fail to do DCF projections. I am not aware of the existence of projections from other brokerages.

I have a full service Wells Fargo account as a secondary brokerage specifically for harvesting the benefit of their research. If I did not network with a few others to generate more sources of DCF, risk and CAGR projections, I would have more than one secondary brokerage. It is my suggestion that others who will both want and use the data take the steps to at least have access to the updates from Barclays, Morgan Stanley and Wells Fargo.

(2) Is there evidence that CAGRs strongly influence yields?
I will start the data presentation by showing two spreadsheets. The first is my "why" spreadsheet that shows the year to date unit price changes and unreinvested total returns. Along with that information in data that helps explain why one MLP might be outperforming due to projection changes in the EPS, DCF, target price and CAGR projections. It also has some of the data that would explain why one MLP might merit having a lower yield due to a higher distribution growth projection that is supported by last twelve month distribution growth or its distribution/DCF ratio.

This is one spreadsheet that I wish every brokerage update would copy. Let me provide two reasons why. Reason one: Investors can be guilty of generating too high a level of desire for a yield displayed out of context. Reason two: Unless one can easily see that there are correlating events to explain price changes, you will never perceive the correlations.

Here is that data:



  CurrentDistrib/Q2 DistDist/dcfDist/dcfYear-to-Date Percent Change

Atlas PipelinesAPL39.750.59005.9480.2774.4525.9129.65-1.127.85-4.555.363.26
DCP PartnersDPM55.890.70005.0190.3282.1133.8737.22-10.916.56-3.736.060.00
El PasoEPB44.250.62005.6090.8489.5319.6923.050.006.85-1.0921.57-21.43
Energy TransferETP52.500.89386.8193.8385.5322.2926.467.654.86-2.810.0023.33
Eagle RockEROC7.750.220011.3592.6394.62-10.40-5.32-78.79-6.73-11.210.00-50.00
Kinder MorganKMP87.401.30005.9595.2492.369.5412.805.583.17-3.368.3320.00
Mark WestMWE65.810.83005.0489.7375.1129.0132.27-25.7118.02-13.955.06-2.25
Plains All-AmerPAA56.430.57504.0870.1274.4324.7327.2815.1923.609.7010.0541.67

Pipeline Average  5.7388.0782.1627.4130.90-12.2310.257.17  

Shipping Average  8.1893.00 29.6034.840.735.79  

MidStream Average 5.9689.0684.6327.6231.27-11.019.83  

The (price change only) Alerian MLP index [the ^AMZ - which includes other MLP sectors] is 20.75% year to date.
The Alerian MLP index ETN AMJ is 25.40% and with dividends is 28.14%.
The S&P500 index ETF SPY is 17.63% and with dividends is 18.70%.
The Russell 2000 index ETF IWM is 21.77% and with dividend is 22.09%.
With the 10yr Treasury @ 2.58% & the sector average yield [on Q2 distrib's] at 5.96% - the spread is 338 bps.
With the JNK yielding 6.20% - spread to the Lehman U.S. High Yield Index is -24 bps.
With the HYG yielding 6.20% - the spread to the iBOXX High Yield Index is -24 bps.

Let's spend a little time on this data. There are only two midstream MLPs with declines in unit prices year to date: EROC and OKE. Both of those have had major downgrades in their EPS, DCF, target and CAGR projections. You are not going to find out everything you need to know in a spreadsheet. You would also like to know why the projections are falling. On the other hand, this spreadsheet provides more information than one would find in the typical analyst spreadsheet. You know that something is going wrong with the fundamentals of EROC and OKE.

BPL, EXLP and GEL are up over 50% year to date. BPL is recovering from problems in 2012. Its distribution CAGR has risen from 1.8% to 4.1%, which is a 128% change. EXPL began the year with a 10.01% yield that was just too high given its moderate growth. GEL has had fairly consistent 10% distribution growth the last four years. It is not widely covered by the brokerages - but coverage has expended in 2013. Off the radar stocks can become "discovered" and have atypical growth in their unit prices when that happens. GEL is having such a year.

The second spreadsheet shows my CAGR and RRR (required rate of return) assessments; shows the yield plus CAGR numbers; subtracts the required rate of return; and displays a final valuation assessment in a positive number for the "buys" and a negative number for the "sells".

Here is that data:
Total Return Expectations

CoYieldCAGRTotal RtnMy RRRsTR - RRR



My CAGR projections are "consensus" CAGR projections derived from the MLP analyst reports to which I have access. It is a good sample size - but not a great sample size. I lack the stats to produce a weighted average CAGR projection. Some of the sources possess more gravitas that merit a higher weight. My personal CAGRs slightly differ from these projections. Next month's consensus projections will vary slightly from the current projections. You are best served to think of these as fuzzy numbers. For example - a 5.6% and a 5.9% projection should both be thought of as an "upper 5%" projection - and not be significantly different from one another.

There is a degree of irony in this warning. Here I am, in the midst of an article that is strongly suggesting that readers make their growth perceptions less nebulous. At the same time, I am warning you to see my consensus projections as fuzzy numbers. I would argue that a "5-ish" CAGR perception is a significantly less nebulous than the one held by the average retail investor.

The final data output is in text form. My computer code finds the yields for a given range of CAGR projections and then generates an average yield for that subset of MLPs. This is my evidence that distribution CAGR projections strongly influence yields.

Here is that current data based on the distributions paid in Q2-13 and the prices as of 7-12-13
The following had CAGR projections over 8.5%: APL, ACMP, MMP, MWE, NGLS, PAA, SXL and WES. Their current average yield is 4.35%.
The following had CAGR projections under 8.5% but over 5.9%: DPM, EPB, EPD, GEL, HEP, OKS, WPZ and XTEX. Their current average yield is 5.18%.
The following had CAGR projections under 6.0% but over 3.5%: BPL, ETP, EXLP, KMP, RGP, SEP, TCP and TLP. Their current average yield is 6.01%.
The following had CAGR projections under 3.5%: BWP, CMLP, EEP, EROC, NS, NMM, MMLP and TGP. Their current average yield is 8.30%

You will not have consistent access to data like this. So it is time for you to go back to the first spreadsheet. You should be able to see how the lower yielding MLPs have the better distribution to DCF ratios and the larger last twelve month distribution growth. One can see with their naked eyes the justification for the lower yields of the higher growth MLPs. That perception is only attained when the right group of data accompanies the yield data in the same spreadsheet. If your brokerage is not displaying yield data in the right way - you need to tell them to change.

(3) Is there evidence that higher CAGRs sell at a discount?
AS I have just shown, CAGR projections influence yields. Are the higher CAGR projections already fully priced in to all stocks? Let's look at the total return (or yield plus CAGR) data to find out:

The companies with CAGR projections over 8.5%: APL, ACMP, MMP, MWE, NGLS, PAA, SXL and WES had an average total return projection of 13.47%.
The companies with CAGR projections under 8.5% but over 5.9%: DPM, EPB, EPD, GEL, HEP, OKS, WPZ and XTEX had an average total return projection of 11.75%.
The companies with CAGR projections under 6.0% but over 3.5%: BPL, ETP, EXLP, KMP, RGP, SEP, TCP and TLP had an average total return projection of 10.10%.
The companies with CAGR projections under 3.5%: BWP, CMLP, EEP, EROC, NS, NMM, MMLP and TGP had an average total return projection of 10.40%.

The third grouping had a lower total return than the fourth grouping. With that exception, the total returns fell as the CAGRs fell. Why did the third grouping have a lower total return than the forth? The answer related to risk. If lower risk MLPs are priced correctly, then they should have a lower "yield plus CAGR" number. And this is the case with grouping three.

(4) Is there evidence that CAGR awareness adds to total returns?
It is logical that higher CAGR projections sell at a "yield plus CAGR" discount. Yield is a single bird in the hand - while growth is another single bird in the bush. We all know that a bird in the hand is worth TWO in a bush. The inherent uncertainty of the growth attribute leads to a valuation discount.

It is consistently the case that higher CAGRs sell at a discount - but the degree of discount varies over time as the spreads between the different CAGR ranges varies. CAGR projections are not static. High CAGR projections can fall. With MLPs, it has historically been the case that almost all double digit CAGR projections have fallen. That is one of the reasons I never make a double digit CAGR - even when all metrics point in that direction. That decision results in the "yield plus CAGR" projections being understated for the high CAGR MLPs because the high CAGR projections are low balled.

I want to end with one final spreadsheet on MLP distribution growth since Q2-07 - and data in text format on CAGRs and total returns. This spreadsheet is a reminder that high distribution growth frequently happens. And it only happens to MLPs with high distribution CAGR projections. As shown in data from my prior articles, high total returns have resulted from investing in high distribution growth MLPs.

MLP Midstream Distribution History [based on Q4 Distributions]



 Distribution/Unit/QuarterPercentage Distribution GrowthAv Growth


Average      12.5211.88-6.445.2132.168.30

The sector average growth rate for 2011 distribution is distorted by the huge increase by EROC

High CAGRs and Year to Date Returns for 2013
The following companies had CAGRs of 4.5% or more: APL, ACMP, DPM, EPB, EPD, GEL, HEP, KMP, MMP, MWE, NGLS, OKS, PAA, SEP, SXL, WES, WPZ and XTEX. Their mean price gain for the year is 28.88%. Their mean total return for the year is 31.95% - and 11 of the 18 beat the sector median yearly price gain of 26.78%.
The following companies had CAGR estimates under 4.5%: BPL, BWP, CMLP, EEP, ETP, EROC, EXLP, NS, RGP, TCP, TLP, NMM, MMLP and TGP. Their mean price gain for the year is 25.99%. Their mean total return for the year is 30.58% - and 6 of the 14 beat the sector median yearly price gain.

Notes: So far this year, it has not so much been the absolute level of the CAGR projection, but the change in the CAGR projection that has influenced total returns. Low CAGR BPL has changed to a mid CAGR projection and has had price appreciation that has significantly beaten the midstream average. High CAGR OKS and WPZ have had downgrades in their CAGR projections that have resulted in returns significantly lower than the sector average.

High CAGRs and Returns for 2012
The following companies (weeding out APL, EROC and XTEX) had CAGRs of more than 4.5%: CPNO, DPM, EPB, EPD, GEL, HEP, MMP, MWE, NGLS, OKS, PAA, RGP, SXL, WES and WPZ. Their mean price gain for the year is 5.99%. Their mean total return for the year is 12.03% - and 9 of the 15 beat the sector median yearly price loss of -2.62%.
The following companies had CAGR estimates under 4.5%: BPL, BWP, CMLP, EEP, ETP, EXLP, KMP, NS, SEP, TCP, TLP, NMM and MMLP. Their mean price gain for the year is -11.90%. Their mean total return for the year is -4.21% - and 3 of the 13 beat the sector median yearly price gain.

High CAGRs and Returns for 2011
The following companies (weeding out APL, EROC and XTEX) had CAGRs of more than 4.5%: BPL, CMLP, DPM, EPB, EPD, GEL, HEP, MMP, MWE, NGLS, OKS, SEP, SXL, WES and WPZ. Their mean price gain for the year is 18.25%. Their mean total return for the year is 24.38% - and 11 of the 15 beat the sector median yearly price gain of 8.32%.
The following companies had CAGR estimates under 4.5%: BWP, CPNO, EEP, ETP, EXLP, KMP, NS, PAA, RGP, TCLP, TLP, NMM, MMLP and TGP. Their mean price gain for the year is -6.80%. Their mean total return for the year is 0.08% - and 2 of the 14 beat the sector median yearly price gain.

Notes: APL and XTEX returned to paying distributions in late 2010. EROC went from paying a token distribution to paying a distribution that was a reasonable percentage of DCF in the first quarter of 2011. In 2011, all three had larger than average gains that were probably related to that payout change. In 2012, all three under performed the sector as they gave back some of those gains. As a result of this distortion in pricing, I weeded out those three in many of my attribute comparison stats for 2011 and 2012. You should also pick up that the membership in the "over 4.5" club slightly varies by year. Each data set is based on the consensus CAGR projection from that specific year. I will address the issue of CAGR projection accuracy and volatility in an upcoming article. In the data above, you are inadvertently getting data that will serve to answer those two upcoming questions.

High CAGRs and Returns for 2010
The following companies had CAGRs of more than 4.5%: APL, EPB, EPD, EROC, EXLP, GEL, KGS, MMP, NGLS, SEP, SXL, WES, WPZ, XTEX and TGP. Their mean price gain for the year is 43.46%. Their mean total return for the year is 49.90% - and 8 of the 15 beat the sector median yearly price gain of 31.64%.
The following companies had CAGR estimates under 4.5%: BPL, BWP, CPNO, DEP, DPM, EEP, ETP, HEP, KMP, MWE, NS, OKS, PAA, RGNC, TCLP, TLP and MMLP. Their mean price gain for the year is 26.50%. Their mean total return for the year is 34.45% - and 5 of the 17 beat the sector median yearly price gain.

While the total return performance of the higher CAGR MLPs beat the lower CAGR MLPs by a substantial margin from 2010 to 2012, not all of the higher CAGR MLPs were winners. It is this specific data set that has led to my perception that you should buy companies with superior metric attributes in baskets. There is no guarantee of capturing a superior performance when buying one or two. You have to have a diversified selection of metrically superior investments in a given sector to have acceptable odds that you will capture those expected superior returns.

It is my current expectation that I will post the data on consumer staples that supports CAGR awareness in a separate article. I am about to enter a period of the quarter where my focus turns to the earning releases of the regional banks. That will probably delay the writing of the next parts of this series. The completion of this series also depends on the quantity of readers this first part generates - and on the feedback of your impressions expressed in the comments section for this article.

Disclosure: I am long CMLP, DPM, EPB, EPD, GEL, KMP, MMP, MWE, PG, WES, WMB. 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.