After the huge cut in the Boardwalk Pipeline Partners (NYSE:BWP) distribution on Monday, that is the claim I have heard echo on the message boards - "MLP (Master Limited Partnerships) Brokerage Analysts are Worthless". Numerous investors believe they were less than well served by the analyst because they were caught by surprise. And given the size of the market's reaction to the cut - this was one very unpleasant surprise.
But instead of taking the consensus view, this article will make the argument that the cut (but not the size of the cut) should not have caught anyone by surprise. The analysts were already telling anyone who would listen that a cut was possible. Let me borrow a famous movie line - "What we have here is a failure to communicate." Both parties in this communication share some blame. Investors were told in three different ways that BWP was a problem. They failed to listen. I will list those ways. And in two different ways, they brokerages failed to serve their customers with their communications. I will also list those ways.
(1) The analysts told you to be afraid by their ratings
Let's start with the ratings. The analysts were already telling anyone who was willing to listen that BWP - despite its well above average yield - was not a buy. The data - which I have publicly shared before in my "Yield + CAGR (the projected compound annual growth rate of the distribution) Total Return Expectations" spreadsheet from 1-30-13:
Yield + CAGR Total Return Expectations
|Company||Q1-14||Consensus||Total||Bonds||DCF||My||Total Rtn||Consensus||Pr Impl||Distribution|
|Yield||CAGR||Return||Ratings||Accr||RRRs||- RRR||Ratings||CAGR||/14 DCF|
|Large Cap Midstream|
The analysts - which work for investment banks that have the MLPs as clients - are not going to jump and down and wave big red flags to tell you not to buy a stock. They are going to whisper "don't buy this stock". BWP's consensus rating of 3.1 was such a whisper. A 3.1 is a terrible rating. It is tied for the worse rating in the large cap midstream sector. I know that casual investors would have liked a stronger sell signal than this. But they are wishing for something that rarely happens. Attenuate your antennas. That is what a sell signal looks like.
(2) The analysts told you to be afraid by their numbers
As shown in the spreadsheet already provided - the 2014 distribution was not covered by distributable cash flows. As shown by the spreadsheet used to make point three - the 2015 distribution was not covered by the analyst projections for 2015 distributable cash flows. And in 2013, the 2013 distribution was not covered by distributable cash flows.
(3) Your fellow investors told you to be afraid by the yield
If you want to know which stocks your fellow investors believe are those that are safe and have payouts that will grow - look at the stock's yield. Stocks that investors believe are safe and have distributions that will grow will have lower yields. They will "bid them up" till they have lower yields. The same is true with the opposite attributes. Stocks that investors believe are unsafe and have distributions that will be flat or shrink will have higher yields. Your fellow investors will "bid them down". The data from 1-30-14:
MLP Midstream 01-31-14
Yields are based on the Q1-14 distribution that had been declared before 1-31-14. Under the "year to date" header, the change in the distribution is actually the change since Q1-14 - or the change over the last twelve months. The change in the target, EPS, DCF and CAGR is the percentage change in the consensus 2013 projection that has happened since the beginning of the year.
|Current||Distrib/||Q1 Dist||Dist/dcf||Dist/dcf||Year-to-Date Percent Change|
|Company Name & Ticker||Price||Quarter||Yield||2014||2015||Price||Pr+Dist||EPS||Target||DCF||Dist*||cagr|
In three very important ways, the market was telling you not to buy BWP before the distribution was cut. If you recently bought or still held BWP on Monday, you failed to listen. You need to change your ways. The brokerages do bare some portion of the blame for your loss. But you cannot count on them changing. If you are to avoid similar losses, the burden is one you to do the changing. That is just the way it is.
The brokerages bare blame for two reasons - and I will briefly go into those.
(1) Brokerage updates on MLPs are heavy in obfuscation
I harvest brokerage reports for data. I would fault many reports for lacking data. For example, too many reports lack DCF and distribution CAGR projections. For me, their reports can have too little data. But for most retail investors - I can sum up the brokerage reports in three short statements. Too much lingo. Too much data. Too little context.
(2) Brokerage updates on MLPs fail to drive home the importance of two key metrics
(NYSE:A) The importance of the distribution/DCF (distributable cash flow) ratio
I have covered the importance on this ratio in prior writings. If you need the evidence, then read some of those prior writings. You will not find the importance of this ratio stressed in the brokerage updates. They need to change that.
(NYSE:B) The importance of DCF projection accuracy.
MEGO is the acronym for "my eyes glaze over". And that is the reaction I sense from my readers when I start to get obscure and write about "DCF projection accuracy" and "required rates of return". The story is in the numbers. Listen to the numbers until you hear the story.
Some MLPs Have Assets That Produce More Predictable DCFs
BWP had terrible intra-year DCF projection accuracy in the historical numbers. The historical record could have prepped you to have the expectation that BWP's sub-par performance could continue. The brokerages fail to provide those historical numbers. They need to change that.
So what is an investor to do?
To me, the answer is simple. Invest in companies that have earning projections you can believe in based on the historical record. The "DCF projection accuracy" spreadsheet says those companies include Enterprise Products Partners, Kinder Morgan Energy Partners, Magellan Midstream Partners and Plains All American Pipeline. If you have read my prior writings, that is already a familiar list.
Disclosure: I am long EPD, KMP, MMP. 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.