How to Buy Stocks in MLPs

Jun.10.10 | About: Enbridge Energy (EEQ)

MLPs are a class of securities with excellent track records and outlooks going forward. However, as limited partnerships they pay distributions, which brings a certain amount of tax hassle, not to mention extra record keeping. But it is possible to invest in MLPs via stock ownership.

Kinder Morgan (NYSE:KMP) and Enbrdige Energy (NYSE:EEP) are two of the largest MLPs with excellent track records. Each created a separate corporation, allowing investors to buy shares in their businesses, with each share backed by one unit of the partnership. The shares track the units, generally at a discount, and pay a stock dividend that is comparable in value to the quarterly distribution paid to unit holders. Shareholders are not issued Schedule K-1 or 1099 tax forms. Gains are recognized only when shares are sold, and then taxed at favorable capital gains rates. In addition, the shares are more suitable for tax exempt investors than are partnership units.

Enbridge Energy

--------------------Price
EEP units___50.66
EEQ shares___49.09

Kinder Morgan

--------------------Price
KMP units___63.15
KMR shares___55.10

(Prices from June 9)

Enbridge Energy paid a distribution in Q2 at an annualized rate of $4.01, which implies a 8.2% yield on its stock dividend. Kinder Morgan has a similar arrangement. Their distribution in Q2 was at an annualized rate of $4.28, which implies a 7.8% yield on its stock dividend.

Financing arrangements are nice, but the fundamental consideration for investing is the soundness of the business. Enbridge pipelines have been bringing Canadian oil into the US and eastern Canada for decades. They also have thousands of miles of pipelines moving industrial gas, centered in Texas. Their ultimate general manager is Enbridge Inc. (NYSE:ENB), a very large and successful Canadian energy company. Kinder Morgan is by some measures the largest MLP, with over 8,000 miles of pipelines for oil products and 14,000 miles of natural gas transmission pipelines.

Each has a impressive track record in the last 10 years, something that is difficult to find among thousands of stocks. EEP units have risen from $36, ten years ago, to over $50. They have been more cautious about raising distributions, which have been increased from $3.50 to $4.01 presently. Kinder Morgan has more than tripled from $20. KMP paid $1.71 in distributions in 2000, which has been raised to a $4.28 rate presently. They have track records to be proud of and prospects are excellent for more growth. The toughest question is timing, another key consideration in investing.

Disclosure: No positions