Is it a good time to buy midstream MLPs (or Master Limited Partnerships) like Enterprise Products Partners L.P. (NYSE:EPD) or Kinder Morgan Energy Partners, L.P. (NYSE:KMP)? I believe that the answer is a context sensitive "it depends," and will list some of those contexts. The quick and dirty answer is "no - it is not a good time to buy." But there are metrics one can use to argue the opposite. It is my hope and expectation that readers will join the conversation in the comment section.
The stats in this article are based on the 35 midstream MLPs in my coverage universe. To be included in that coverage universe, the MLP has to have a year over year distribution in order to have a distribution growth rate, and be covered by at least three brokerages in order to have a decent chance of generating a meaningful consensus DCF (or Distributable Cash Flow - the MLP earnings metric I use in valuations). Let's look at the year to date numbers through 6-30-14, along with a few spreadsheets that offers clues to purchase "timing":
MLP Midstream 06-30-14
The consensus DCFs were last updated on 06-14-14. The CAGR projections were updated 6-30-14. Yields are based on the Q2-14 distribution. Under the 'year to date' header, the change in the distribution is the change since Q2-13 - or the change over the last twelve months. The change in the target, EPS, DCF and CAGR is the percentage change in the consensus 2014 projection that has happened since the beginning of the year.
|Company||Current||Distrib/||Q2 Dist||Dist/dcf||Dist/dcf||Year-to-Date Percent Change|
|Access Midstream Partners, L.P.||(NYSE:ACMP)||63.55||0.5750||3.62||70.12||66.47||12.32||14.35||-3.11||20.48||1.86||23.13||0.00|
|American Midstream Partners, LP||(NYSE:AMID)||28.84||0.4625||6.41||97.88||84.09||6.50||9.92||0.00||5.80||-8.70||6.94||40.00|
|Atlas Pipeline Partners, L.P.||(NYSE:APL)||34.40||0.6200||7.21||91.85||85.22||-1.85||1.68||-95.24||-14.75||-8.47||5.08||4.29|
|Blueknight Energy Partners, L.P.||(NASDAQ:BKEP)||9.12||0.1300||5.70||67.53||55.32||7.17||10.22||-56.60||0.00||-25.24||10.64||2.35|
|Buckeye Partners, L.P.||(NYSE:BPL)||83.06||1.1000||5.30||95.86||87.30||16.97||20.07||-0.54||9.04||-2.34||4.76||20.00|
|Boardwalk Pipeline Partners, LP||(NYSE:BWP)||18.50||0.1000||2.16||24.24||23.67||-27.51||-26.72||-22.31||-39.45||-16.67||-81.22||0.00|
|Crestwood Midstream Partners LP||(NYSE:CMLP)||22.07||0.4100||7.43||93.71||84.97||-11.33||-8.04||-26.79||-7.01||-5.41||3.80||16.67|
|DCP Midstream Partners LP||(DPM)||57.00||0.7450||5.23||93.71||83.94||13.21||16.17||-7.08||6.63||-3.34||6.43||4.48|
|El Paso Pipeline Partners, L.P.||(NYSE:EPB)||36.23||0.6500||7.18||97.74||95.94||0.64||4.25||-16.50||-12.10||3.10||4.84||8.70|
|Enbridge Energy Partners, L.P.||(NYSE:EEP)||36.93||0.5435||5.89||106.57||100.18||23.64||27.27||-14.29||6.98||-3.77||0.00||33.33|
|Enterprise Products Partners L.P.||78.29||0.7100||3.63||67.62||64.99||18.08||20.23||5.03||12.71||1.20||5.97||0.00|
|Energy Transfer Partners, L.P.||(NYSE:ETP)||57.97||0.9350||6.45||81.30||83.86||1.26||4.52||12.35||5.02||-1.92||4.62||8.11|
|EQT Midstream Partners, LP||(NYSE:EQM)||96.74||0.4900||2.03||57.65||46.12||64.55||66.22||21.76||47.53||9.68||32.43||1.05|
|Exterran Partners, L.P.||(EXLP)||28.28||0.5375||7.60||78.75||83.01||-6.45||-2.89||-41.27||7.00||4.60||3.86||0.00|
|Genesis Energy LP||(NYSE:GEL)||56.04||0.5500||3.93||78.85||67.90||6.60||8.69||-19.79||5.24||-5.10||10.55||4.65|
|Holly Energy Partners L.P.||(NYSE:HEP)||34.39||0.5075||5.90||89.43||83.20||6.37||9.51||5.08||1.78||3.65||6.28||0.00|
|Kinder Morgan Energy Partners, L.P.||82.21||1.3800||6.71||97.87||94.68||1.92||5.34||1.84||-5.11||-1.57||6.15||-31.91|
|Magellan Midstream Partners LP||(NYSE:MMP)||84.04||0.6125||2.92||72.27||66.04||32.83||34.76||18.71||34.57||10.42||20.69||2.27|
|MarkWest Energy Partners, L.P.||(NYSE:MWE)||71.58||0.8700||4.86||89.23||75.65||8.24||10.87||-45.68||-7.58||-10.14||4.82||-12.64|
|Targa Resources Partners LP||(NYSE:NGLS)||71.92||0.7625||4.24||77.02||73.49||37.51||40.43||55.63||18.74||12.82||9.32||7.25|
|NuStar Energy L.P.||(NYSE:NS)||62.01||1.0950||7.06||107.88||97.77||21.61||25.91||6.99||22.70||6.56||0.00||6.67|
|ONEOK Partners, L.P.||(NYSE:OKS)||58.60||0.7450||5.09||89.22||82.78||11.30||14.13||9.67||4.85||0.00||4.20||0.00|
|Oiltanking Partners, L.P.||(NYSE:OILT)||94.43||0.4950||2.10||58.41||51.03||52.13||53.73||-7.57||51.95||20.21||22.22||19.48|
|Plains All American Pipeline, L.P.||(NYSE:PAA)||60.05||0.6300||4.20||86.01||78.50||15.99||18.43||-8.24||3.63||-6.39||9.57||0.00|
|Regency Energy Partners LP||(NYSE:RGP)||32.21||0.4800||5.96||93.66||84.21||22.66||26.31||-5.77||8.34||-0.97||4.35||25.00|
|Spectra Energy Partners, LP||(NYSE:SEP)||53.35||0.5563||4.17||83.65||83.97||17.64||20.09||5.08||14.94||3.10||10.97||-1.54|
|Sunoco Logistics Partners L.P.||(NYSE:SXL)||94.22||0.6950||2.95||63.33||59.66||24.83||26.67||-4.67||29.75||-4.77||21.40||1.12|
|TC PipeLines, LP||(NYSE:TCP)||51.66||0.8100||6.27||85.26||83.08||6.67||10.01||14.59||4.08||2.70||3.85||-10.00|
|Tesoro Logistics LP||(NYSE:TLLP)||73.40||0.5900||3.22||85.51||71.52||40.24||42.49||5.49||20.65||-10.10||20.41||5.88|
|Transmontaigne Partners L.P.||(NYSE:TLP)||43.75||0.6600||6.03||70.59||77.65||2.94||6.05||-5.86||0.52||6.86||3.13||-6.67|
|Western Gas Partners LP||(NYSE:WES)||76.48||0.6250||3.27||79.37||69.44||23.97||26.00||0.87||8.70||3.28||15.74||0.00|
|Williams Partners L.P.||(NYSE:WPZ)||54.29||0.9045||6.66||97.00||90.45||6.74||10.30||-10.28||6.23||4.48||6.73||-1.85|
|EnLink Midstream Partners, LP||(NYSE:ENLK)||31.43||0.3600||4.58||95.36||77.42||13.88||16.49||2.17||16.88||-3.82||9.09||2.35|
|Navios Maritime Partners L.P.||(NYSE:NMM)||19.44||0.4425||9.10||111.32||97.25||1.67||6.30||-4.11||8.48||-9.14||0.00||0.00|
|Martin Midstream Partners LP||(NASDAQ:MMLP)||41.18||0.7875||7.65||95.45||82.03||-3.79||-0.11||-1.25||-1.49||-5.17||1.61||6.06|
|Teekay LNG Partners LP.||(NYSE:TGP)||46.14||0.6918||6.00||93.49||90.14||8.03||11.27||12.62||1.17||0.34||2.49||0.00|
|The (price change only) Alerian MLP index [the ^AMZ - which includes other MLP sectors] is 13.02% year to date.|
|The Alerian MLP index ETN AMJ is 13.01% and with dividends is 15.48%.|
|The S&P500 index ETF SPY is 5.97% and with dividends is 6.93%.|
|The Russell 2000 index ETF IWM is 2.99% and with dividend is 3.25%.|
|With the 10yr Treasury @ 2.52% & the sector average yield [on Q2 distrib's] at 5.24% - the spread is 272 bps.|
|With the JNK yielding 5.59% - spread to the Lehman U.S. High Yield Index is -35 bps.|
|With the HYG yielding 5.32% - the spread to the iBOXX High Yield Index is -7 bps.|
Yields say no.
The current yield is just as low as when MLPs were in a bubble in the spring and early summer of 2007. That should be a big red flag telling us to stop our buying.
Historical MLP Month-End Yields:
|Jan 05: 5.97%||Feb: 6.10%||Mar: 6.07%||April: 6.15%||May: 6.16%||June: 6.03%|
|July 05: 5.87%||Aug: 6.10%||Sept: 6.07%||Oct : 6.45%||Nov: 6.79%||Dec: 6.92%|
|Jan 06: 6.56%||Feb: 6.68%||Mar: 6.56%||April: 6.68%||May: 6.76%||June: 6.82%|
|July 06: 6.61%||Aug: 6.65%||Sept: 6.70%||Oct : 6.58%||Nov: 6.44%||Dec: 6.28%|
|Jan 07: 6.05%||Feb: 5.96%||Mar: 5.77%||April: 5.54%||May: 5.54%||June: 5.43%|
|July 07: 5.44%||Aug: 6.05%||Sept: 6.26%||Oct : 6.20%||Nov: 6.64%||Dec: 6.70%|
|Jan 08: 6.79%||Feb: 6.79%||Mar: 7.43%||April: 7.08%||May: 7.44%||June: 7.56%|
|July 08: 8.16%||Aug: 8.45%||Sept: 10.76%||Oct : 11.73%||Nov: 16.53%||Dec: 19.50%|
|Jan 09: 14.76%||Feb: 14.54%||Mar: 13.90%||April: 14.66%||May: 9.80%||June: 9.59%|
|July 09: 8.39%||Aug: 8.61%||Sept: 7.96%||Oct : 7.84%||Nov: 7.62%||Dec: 7.13%|
|Jan 10: 6.64%||Feb: 6.50%||Mar: 6.34%||April: 6.23%||May: 6.71%||June: 6.27%|
|July 10: 5.85%||Aug: 6.14%||Sept: 5.89%||Oct : 6.14%*||Nov: 6.00%||Dec: 5.79%|
|Jan 11: 5.87%||Feb: 5.62%||Mar: 5.65%||April: 5.59%||May: 5.95%||June: 5.90%|
|July 11: 6.21%||Aug: 6.73%||Sept: 7.10%**||Oct : 6.51%||Nov: 6.80%||Dec: 6.45%|
|Jan 12: 6.45%||Feb: 6.43%||Mar: 6.43%||April: 6.42%||May: 7.26%||June: 7.06%|
|July 12: 6.81%||Aug: 6.87%||Sept: 6.75%||Oct : 6.79%||Nov: 7.08%||Dec: 7.31%|
|Jan 13: x.xx%||Feb: x.xx%||Mar: x.xx%||April: x.xx%||May: x.xx%||June: 6.14%|
|July 13: 6.18%||Aug: 6.51%||Sept: 6.39%||Oct : 6.34%||Nov: 6.21%||Dec: 5.77%***|
|Jan 14: 5.92%||Feb: 5.84%||Mar: 5.69%||April: 5.64%||May: 5.48%||June: 5.24%|
* The increase in month end yields occurring in the October 2010 stats was mainly due to APL and XTEX re-starting distributions, and not due to a decrease in the unit prices of the MLPs. And the same cause was evident in the increase in the MLP to ten year treasury spread.
** The deletion of low yielding DEP from the data base added 7 bps to the sector average yield.
*** The deletion of high yielding EROC combined with the addition of low yielding EQM, OILT and TLLP to the coverage universe subtracted about 20 bps to the sector average yield.
Price/DCF ratios say no.
The current sector average Price/DCF ratio is higher than when MLPs were in a bubble in the spring and early summer of 2007. That should be a second big red flag telling us to stop our buying.
Historical MLP Month-End Current Year P/DCF Ratios:
|July 06: 13.78||Aug: 13.97||Sept: 14.19||Oct : 13.67||Nov: 14.18||Dec: 14.54|
|Jan 07: 13.73||Feb: 13.99||Mar: 14.67||April: 15.64||May: 16.02||June: 16.02|
|July 07: 16.07||Aug: 14.73||Sept: 14.16||Oct : 14.66||Nov: 14.72||Dec: 15.02|
|Jan 08: 12.32||Feb: 12.00||Mar: 11.28||April: 11.70||May: 11.63||June: 10.49|
|July 08: 10.01||Aug: 9.90||Sept: 7.60||Oct : 7.26||Nov: 5.85||Dec: 5.68|
|Jan 09: 6.79||Feb: 6.37||Mar: 6.53||April: 7.30||May: 7.83||June: 7.84|
|July 09: 8.98||Aug: 8.63||Sept: 9.31||Oct : 9.14||Nov: 9.56||Dec: 11.26|
|Jan 10: 10.87||Feb: 11.16||Mar: 11.51||April: 11.84||May: 10.91||June: 11.83|
|July 10: 12.86||Aug: 11.92||Sept: 12.60||Oct : 13.13||Nov: 13.45||Dec: 13.89|
|Jan 11: 13.45||Feb: 14.06||Mar: 13.89||April: 14.27||May: 13.34||June: 13.48|
|July 11: 13.13||Aug: 12.49||Sept: 12.18||Oct : 13.24||Nov: 13.03||Dec: 13.81|
|Jan 12: 13.81||Feb: 13.23||Mar: 13.23||April: 13.27||May: 12.09||June: 12.42|
|July 12: 12.xx||Aug: 13.39||Sept: 13.83||Oct : 13.73||Nov: 13.40||Dec: 13.04|
|Jan 13:||Feb:||Mar:||April:||May:||June: 15.50|
|July 13: 15.84||Aug: 15.07||Sept: 15.27||Oct : 15.71||Nov: 15.93||Dec: 17.15|
|Jan 14: 15.34||Feb:||Mar: 15.71||April: 16.15||May: 16.80||June: 17.78|
Context shrinks the red flags
Before we jump to the conclusion that it is a bad time to buy, we need to look at two factors that significantly change the context. Average distribution coverage ratios are higher. High coverage ratios results in the perception that the yields are more secure, and that lowers yields. Also, DCF growth rates are higher than they have been for several years. And stocks with higher growth rate projections sell at higher price to earnings ratios. That results in the inter-temporal comparisons failing to be apples to apples comparisons. In the small spreadsheet below, I show the projected DCF growth for the current year and the next year. For 2014, the current year is 2014 and the next year is 2015. For 2010, the current year is 2010 and the next year is 2011. The 2010 "next year" growth number does not match the 2011 "current year" growth number because the next year number is a projection - and projections change over time.
|Date||Coverage||Current Year||Next year|
* The coverage ratio for 2010 partially distorted by EROC. EROC was paying a token distribution that was 9.80% of DCF. With the market still hyper risk-aware and in the early stages of recovery from the credit crisis, a smaller DCF payout ratio was a very good thing back then. The coverage ratio for 2009 was distorted by APL, EROC and XTEX paying token distributions. The coverage ratio for 2008 is relatively low, but the market confidence in all DCF projections was being radically shaken. The yield for my MLP coverage universe was 19.46%. EPD was selling at a 10.08% yield. KMP was selling at an 8.92% yield. MWE - which would never cuts its distribution - was selling at a 32.08% yield.
Because there are times when a few MLPs can cause the sector average numbers to be distorted, I also track period ending yields and P/E (or price to EPS) ratios for EPD and KMP. The EPS metric is a terrible metric to use for comparisons of one MLP to a different MLP. It is an OK metric to use for inter-temporal comparisons for the same MLP. It is also a more relevant metric for the large cap midstream stocks. Let's look at those numbers.
Historical MLP Month-End Current Year P/E Ratios for EPD:
|Jan 06: 21.78||Feb: 24.78||Mar: 23.29||April: 23.12||May: 23.12||June: 22.84|
|July 06: 24.69||Aug: 24.34||Sept: 24.10||Oct : 23.90||Nov: 23.97||Dec: 24.56|
|Jan 07: 23.10||Feb: 23.84||Mar: 25.04||April: 27.74||May: 26.77||June: 27.19|
|July 07: 26.36||Aug: 25.44||Sept: 26.08||Oct : 31.36||Nov: 30.95||Dec: 31.88|
|Jan 08: 22.74||Feb: 22.12||Mar: 20.77||April: 21.69||May: 17.60||June: 17.17|
|July 08: 14.44||Aug: 14.09||Sept: 12.39||Oct : 13.12||Nov: 11.49||Dec: 11.21|
|Jan 09: 11.32||Feb: 12.26||Mar: 12.79||April: 13.80||May: 15.03||June: 14.33|
|July 09: 16.24||Aug: 16.77||Sept: 17.59||Oct : 17.31||Nov: 18.74||Dec: 21.08|
|Jan 10: 17.04||Feb: 18.20||Mar: 19.21||April: 18.57||May: 17.14||June: 17.95|
|July 10: 19.99||Aug: 19.88||Sept: 21.44||Oct : 22.91||Nov: 22.38||Dec: 22.55|
|Jan 11: 23.17||Feb: 23.19||Mar: 23.01||April: 23.26||May: 21.58||June: 22.51|
|July 11: 21.77||Aug: 21.73||Sept: 20.71||Oct : 23.11||Nov: 21.66||Dec: 22.09|
|Jan 12: 22.09||Feb: 21.51||Mar: 21.51||April: 21.39||May: 19.12||June: 20.09|
|July 12: 21.06||Aug: 21.19||Sept: 21.35||Oct : 20.75||Nov: 19.78||Dec: 19.11|
|Jan 13:||Feb:||Mar:||April:||May:||June: 21.07|
|July 13: 21.24||Aug: 20.85||Sept: 21.49||Oct : 22.20||Nov: 22.41||Dec: 23.59|
|Jan 14: 22.28||Feb: 22.08||Mar: 22.59||April: 23.34||May: 24.37||June: 25.01|
Historical MLP Month-End Distribution Yields for EPD:
|Jan 06: 7.16%||Feb: 7.21%||Mar: 7.09%||April: 7.19%||May: 7.06%||June: 7.15%|
|July 06: 6.79%||Aug: 6.76%||Sept: 6.77%||Oct : 6.70%||Nov: 6.51%||Dec: 6.35%|
|Jan 07: 6.32%||Feb: 6.13%||Mar: 5.88%||April: 5.86%||May: 6.07%||June: 5.97%|
|July 07: 6.11%||Aug: 6.54%||Sept: 6.38%||Oct : 6.13%||Nov: 6.27%||Dec: 6.15%|
|Jan 08: 6.42%||Feb: 6.46%||Mar: 6.73%||April: 6.40%||May: 6.71%||June: 6.87%|
|July 08: 6.82%||Aug: 6.99%||Sept: 7.99%||Oct : 8.57%||Nov: 9.78%||Dec: 10.08%|
|Jan 09: 9.52%||Feb: 9.82%||Mar: 9.53%||April: 8.99%||May: 8.27%||June: 8.62%|
|July 09: 7.76%||Aug: 8.07%||Sept: 7.70%||Oct : 7.88%||Nov: 7.42%||Dec: 7.04%|
|Jan 10: 7.30%||Feb: 6.84%||Mar: 6.48%||April: 6.40%||May: 6.76%||June: 6.42%|
|July 10: 6.01%||Aug: 6.22%||Sept: 5.80%||Oct : 5.44%||Nov: 5.54%||Dec: 5.60%|
|Jan 11: 5.42%||Feb: 5.41%||Mar: 5.48%||April: 5.52%||May: 5.74%||June: 5.53%|
|July 11: 5.82%||Aug: 5.74%||Sept: 6.02%||Oct : 5.40%||Nov: 5.39%||Dec: 5.28%|
|Jan 12: 5.25%||Feb: 4.91%||Mar: 4.91%||April: 4.81%||May: 5.13%||June: 4.90%|
|July 12: 4.79%||Aug: 4.76%||Sept: 4.74%||Oct : 4.82%||Nov: 5.02%||Dec: 5.19%|
|Jan 13:||Feb:||Mar:||April:||May:||June: 4.31%|
|July 13: 4.38%||Aug: 4.58%||Sept: 4.46%||Oct : 4.36%||Nov: 4.38%||Dec: 4.16%|
|Jan 14: 4.22%||Feb: 4.17%||Mar: 4.04%||April: 3.96%||May: 3.80%||June: 3.63%|
For Enterprise Products Partners, the current yield of 3.63% is well below the June 2007 yield of 5.97%. But in one very important way, EPD is a totally different animal now. At the end of June in 2007, EPD was paying out 87.56% of projected 2007 DCF. For a large cap midstream MLP with strong DCF visibility, that was and is a safe payout ratio. At the end of June in 2014, EPD is paying out 67.62% of projected 2014 DCF. The margin of safety has gone from good to "beyond good". It is logical that such a shift would be reflected in the valuations for EPD. The only point of contention is the degree to which that shift is being reflected. EPD has become more of a "bond like" equity. While that shift has helped EPD's current valuation, it is a shift that should hurt future price appreciation when bond prices begin to fall. On the other hand, near 6% distribution growth offers some insurance that EPD's yield will not be falling significantly.
In the valuation system that I use, a stock with higher earnings visibility and a smaller than average payout ratio is perceived to have a safer distribution - and that results in the stock having a lower RRR (or Required Rate of Return) for its equity. The lower RRR results in a lower yield. Stocks with higher distribution CAGRs (or distribution projected Compound Annual Growth Rates) also - and logically - have lower yields. But this valuation system treats all 6% CAGRs as being equally certain. What happens when the payout ratio shrinks to the point that the certainty in the CAGR projection is increased? EPD is entering that unusual territory.
Historical MLP Month-End Current Year P/E Ratios for KMP:
|Jan 06: 20.07||Feb: 20.64||Mar: 20.33||April: 19.76||May: 20.34||June: 19.90|
|July 06: 20.11||Aug: 19.99||Sept: 19.77||Oct : 21.86||Nov: 23.77||Dec: 23.83|
|Jan 07: 24.12||Feb: 26.39||Mar: 28.32||April: 32.81||May: 32.66||June: 32.85|
|July 07: 31.54||Aug: 30.30||Sept: 29.76||Oct : 32.01||Nov: 30.85||Dec: 32.92|
|Jan 08: 27.59||Feb: 27.63||Mar: 26.17||April: 25.90||May: 25.74||June: 24.55|
|July 08: 23.95||Aug: 23.26||Sept: 21.06||Oct : 22.52||Nov: 20.46||Dec: 19.30|
|Jan 09: 23.82||Feb: 26.96||Mar: 27.01||April: 35.38||May: 40.59||June: 40.57|
|July 09: 39.03||Aug: 38.87||Sept: 39.43||Oct : 38.03||Nov: 41.03||Dec: 42.94|
|Jan 10: 30.12||Feb: 31.83||Mar: 35.75||April: 39.70||May: 36.71||June: 38.50|
|July 10: 42.20||Aug: 41.62||Sept: 42.81||Oct : 47.26||Nov: 48.25||Dec: 48.12|
|Jan 11: 30.12||Feb: 38.69||Mar: 39.83||April: 40.06||May: 38.83||June: 38.01|
|July 11: 37.30||Aug: 37.32||Sept: 36.37||Oct : 40.42||Nov: 43.44||Dec: 47.19|
|Jan 12: 47.19||Feb: 34.77||Mar: 34.77||April: 34.49||May: 33.91||June: 34.02|
|July 12: 35.37||Aug: 36.46||Sept: 36.03||Oct : 37.86||Nov: 36.88||Dec: 36.10|
|Jan 13:||Feb:||Mar:||April:||May:||June: 32.47|
|July 13: 32.61||Aug: 31.86||Sept: 31.31||Oct : 32.02||Nov: 33.46||Dec: 33.19|
|Jan 14: 29.66||Feb: 27.71||Mar: 26.51||April: 27.43||May: 27.26||June: 29.68|
Historical MLP Month-End Distribution Yields for KMP:
|Jan 06: 6.61%||Feb: 6.77%||Mar: 6.64%||April: 6.98%||May: 6.86%||June: 7.05%|
|July 06: 7.03%||Aug: 7.24%||Sept: 7.38%||Oct : 7.26%||Nov: 6.68%||Dec: 6.76%|
|Jan 07: 6.59%||Feb: 6.55%||Mar: 6.30%||April: 5.99%||May: 6.01%||June: 6.02%|
|July 07: 6.27%||Aug: 6.60%||Sept: 6.72%||Oct : 6.70%||Nov: 6.96%||Dec: 6.52%|
|Jan 08: 6.41%||Feb: 6.40%||Mar: 6.73%||April: 6.29%||May: 6.60%||June: 6.89%|
|July 08: 6.71%||Aug: 6.89%||Sept: 7.61%||Oct : 7.55%||Nov: 8.41%||Dec: 8.92%|
|Jan 09: 8.23%||Feb: 9.11%||Mar: 8.99%||April: 8.79%||May: 8.21%||June: 8.22%|
|July 09: 7.91%||Aug: 7.95%||Sept: 7.77%||Oct : 7.78%||Nov: 7.21%||Dec: 6.89%|
|Jan 10: 6.90%||Feb: 6.53%||Mar: 6.42%||April: 6.34%||May: 6.74%||June: 6.58%|
|July 10: 6.26%||Aug: 6.51%||Sept: 6.36%||Oct : 6.39%||Nov: 6.30%||Dec: 6.32%|
|Jan 11: 6.32%||Feb: 6.14%||Mar: 6.10%||April: 5.90%||May: 6.12%||June: 6.28%|
|July 11: 6.53%||Aug: 6.56%||Sept: 6.73%||Oct : 6.05%||Nov: 5.93%||Dec: 5.46%|
|Jan 12: 5.46%||Feb: 5.61%||Mar: 5.61%||April: 5.63%||May: 6.13%||June: 6.11%|
|July 12: 6.15%||Aug: 5.94%||Sept: 5.96%||Oct : 5.88%||Nov: 6.18%||Dec: 6.32%|
|Jan 13:||Feb:||Mar:||April:||May:||June: 6.09%|
|July 13: 6.40%||Aug: 6.47%||Sept: 6.61%||Oct : 6.69%||Nov: 6.59%||Dec: 6.69%|
|Jan 14: 6.84%||Feb: 7.32%||Mar: 7.36%||April: 7.21%||May: 7.26%||June: 6.71%|
For Kinder Morgan Energy Partners, the current yield of 6.71% is 70 bps above the lows of 2007. But KMP had better growth prospects back then. The current CAGR projection is 3.2% compared to the June 2007 projection of 6.5%. The current yields are well above KMP's yield of late 2011 and early 2012. KMP closed 2011 at $84.95 compared to the current price of $82.21. In hindsight, it was a bad idea to be buying KMP in late 2011 when KMP was selling at such low yields. At the end of June in 2007, KMP was paying out 97.08% of projected 2007 DCF. For a large cap midstream MLP with strong DCF visibility, that was and is a high payout ratio. At the end of June in 2014, KMP is paying out 97.87% of projected 2014 DCF.
I am aware that some of my readers have a tough time believing that such a nebulous and uncertain thing like a CAGR projection or RRR assessment is a market moving force. To those readers, the best advice I can provide is to "listen to the numbers until they tell you their story". At the end of June in 2013, EPD had a projected distribution to DCF ratio of 69.79% compared to the current 67.62%. Why has EPD outperformed the market in 2014? EPD has a good CAGR (in the year of the growth MLP) and a slightly falling RRR (EPD's coverage is better, even its credit rating is up). At the end of June in 2013, KMP had a forward CAGR projection of 5.40% compared to the current projection of 3.2%. Why has KMP underperformed the market in 2014? KMP has a falling CAGR. CAGRs and RRRs not only explain current valuations - they also explain price movements. They are powerful stuff.
Spreads to the ten year treasury say it's an average time to buy.
Historical MLP to 10 Year Treasury Spreads:
|Jan 05: 178||Feb: 152||Mar: 156||April: 195||May: 216||June: 211|
|July 05: 159||Aug: 208||Sept: 174||Oct : 177||Nov: 230||Dec: 252|
|Jan 06: 206||Feb: 213||Mar: 171||April: 161||May: 164||June: 167|
|July 06: 161||Aug: 192||Sept: 206||Oct : 198||Nov: 198||Dec: 158|
|Jan 07: 123||Feb: 138||Mar: 122||April: 89||May: 65||June: 40|
|July 07: 71||Aug: 152||Sept: 167||Oct : 172||Nov: 269||Dec: 267|
|Jan 08: 319||Feb: 327||Mar: 401||April: 335||May: 338||June: 358|
|July 08: 420||Aug: 463||Sept: 694||Oct : 801||Nov: 1360||Dec: 1728|
|Jan 09: 1191||Feb: 1152||Mar: 1294||April: 1154||May: 634||June: 606|
|July 09: 491||Aug: 551||Sept: 488||Oct : 485||Nov: 443||Dec: 329|
|Jan 10: 305||Feb: 288||Mar: 251||April: 257||May: 341||June: 333|
|July 10: 294||Aug: 367||Sept: 337||Oct : 354||Nov: 321||Dec: 250|
|Jan 11: 250||Feb: 224||Mar: 219||April: 230||May: 289||June: 273|
|July 11: 341||Aug: 454||Sept: 518||Oct : 439||Nov: 472||Dec: 457|
|Jan 12: 457||Feb: 421||Mar: 421||April: 450||May: 570||June: 546|
|July 12: 534||Aug: 531||Sept: 511||Oct : 510||Nov: 546||Dec: 555|
|Jan 13:||Feb:||Mar:||April:||May:||June: 366|
|July 13: 360||Aug: 373||Sept: 378||Oct : 379||Nov: 347||Dec: 274|
|Jan 14: 327||Feb: 319||Mar: 304||April: 299||May: 300||June: 272|
The current 272 bps (or basis point) spread is lower than the quarter ending spreads of 2005 and 2006. And that time period proved to be a good period to buy MLPs. But the current Fed is actively manipulating the ten year interest rate. In the past, I was concerned if the spread fell below 150 bps. My current threshold of concern is 225 bps due to the Fed's manipulation.
Spreads to the high yield bond index funds say it's an average time to buy.
Historical MLP to JNK or Lehman U.S. High Yield Index Spreads:
|Jan 08: -96||Feb: -139||Mar: -71||April: -136||May: -151||June: -225|
|July 08: -175||Aug: -145||Sept: +06||Oct : -163||Nov: +154||Dec: +165|
|Jan 09: +64||Feb: -103||Mar: +63||April: -02||May: -409||June: -489|
|July 09: -480||Aug: -439||Sept: -412||Oct : -413||Nov: -450||Dec: -478|
|Jan 10: -461||Feb: -444||Mar: -432||April: -375||May: -355||June: -286|
|July 10: -283||Aug: -259||Sept: -344||Oct : -299||Nov: -277||Dec: -278|
|Jan 11: -253||Feb: -279||Mar: -211||April: -185||May: -148||June: -166|
|July 11: -104||Aug: -101||Sept: -137||Oct : -105||Nov: -97||Dec: -104|
|Jan 12: -97||Feb: -66||Mar: -66||April: -61||May: -34||June: -28|
|July 12: -46||Aug: -14||Sept: -10||Oct : +01||Nov: +33||Dec: +83|
|Jan 13:||Feb:||Mar:||April:||May:||June: -16|
|July 13: +04||Aug: +43||Sept: +30||Oct : + 1||Nov: +28||Dec: - 14|
|Jan 14: + 9||Feb: -11||Mar: -9||April: -15||May: -28||June: -39|
Historical MLP to HYG or iBOXX High Yield Index Spreads:
|Jan 08: -78||Feb: -87||Mar: -52||April: -28||May: -07||June: -33|
|July 08: -14||Aug: +08||Sept: +113||Oct : +62||Nov: +398||Dec: +433|
|Jan 09: +426||Feb: +279||Mar: +395||April: +271||May: -191||June: -101|
|July 09: -133||Aug: -96||Sept: -174||Oct : -159||Nov: -220||Dec: -248|
|Jan 10: -220||Feb: -206||Mar: -210||April: -258||May: -248||June: -288|
|July 10: -275||Aug: -236||Sept: -244||Oct : -200||Nov: -215||Dec: -204|
|Jan 11: -182||Feb: -208||Mar: -194||April: -190||May: -146||June: -158|
|July 11: -103||Aug: - 99||Sept: -119||Oct : -89||Nov: -82||Dec: -77|
|Jan 12: -77||Feb: -53||Mar: -53||April: -50||May: 01||June: 09|
|July 12: -13||Aug: 9||Sept: 12||Oct : 32||Nov: 64||Dec: 101|
|Jan 13:||Feb:||Mar:||April:||May:||June: -18|
|July 13: +04||Aug: +33||Sept: +22||Oct : +44||Nov: +32||Dec: - 2|
|Jan 14: -06||Feb: -08||Mar: -17||April: -17||May: -29||June: -20|
My threshold of concern on the spreads between the yields of sector average MLPs and the high yield bonds is negative 200 bps. We are well below that threshold.
Given the above information, what is an investor to do?
In the last 30 days, I have sold. Many of my MLPs have had huge price appreciation in 2014. That appreciation is responsible for shrinking my portfolio average yield below its target. And that appreciation has caused my allocation to MLPs to grow beyond my target percentage. I sold to get closer to my target percentage of 25%. And I purchased something that would prop up my portfolio yield. The issue of "what is the optimum MLP allocation?" is something I would not want to go into in this article. That issue is context sensitive. I will provide my context. I am a big believer in diversification. At the same time, I am also a big believer in investing in what you know. I know MLPs reasonably well. My 25% allocation fits with someone who knows MLPs well. I am a retired investor who needs to pry income from his portfolio. MLPs meet that need. I also want to have a weighted average of 5% income growth. MLPs meet that need. And this investor specifically likes tax deferred investing. MLPs offer deferral until they are sold - and there are several MLPs with which I am comfortable with holding for the rest of my life. MLPs uniquely fit this investor.
Is there a reason for the market to keep on buying when I am lightly trimming? I believe that the answer is yes. I'll start with the trivial and idiosyncratic, and work up to the more important reasons.
Financial research tells us that most investors trade too often. Due to the tax deferral attribute, MLP ownership should logically discourage trading. If you track the tax consequences of your investing and are sensitive to those consequences - and if you think you trade too often - then having more MLPs could be just the prescription you need for that ill.
Going by current advertising, most investors do not know if they will outlive their portfolio. MLPs still offer acceptable current income that can grow over time. You don't have to delete your savings as you age if you can pry loose sufficient income from your savings. MLPs can be the prescription that cures part of that uncertainty.
Over the last five years, MLPs as a group have not beaten the market. But "growth" MLPs have beaten the market. 2014 has been the year of the growth MLP. But even before the start of 2014, growth MLPs have beaten the market. There are not that many investors who do not have a desire to beat the market. Growth MLPs can fulfill that desire.
I personally would not mind if MLPs stopped or slowed their price appreciation. The thing that matters to me is the income (or yield) and income growth (or projected distribution CAGR) that comes from my current portfolio. As my fellow boomers retire, there will be more and more investors who think as I do. Even with MLPs being currently over valued compared to historical metrics, they still sell at attractive "yield + CAGRs".
Energy looks to be one of the best growth stories of this decade - and the decade is still young. We (the USA) are still at the point where we are slowing our energy imports. We are on the cusp of being exporters to an energy hungry world. And that will only boost the use of the infrastructure that the MLPs provide. This growth story appears to have some endurance. This growth story will be in the news - and investors strongly tend to buy the companies that are in the news.
I am not aware of any stats that will tell us if the average investor owns MLPs. I strongly suspect (given the size of the MLP market) that the answer is no. MLPs are the potential answers to a lot of investor problems. With the market both spitting out new MLPs and new MLP funds, the market is responding to investor needs for quality investments and MLP needs for growth capital to build expanding infrastructure needs. It is my perception that you need to get to your "right" level of allocation. You were better off if you arrived at the allocation last year. It is my perception that the "better off if you arrived last year" condition will persist for a number of years. But 2015 may not be one of them.
In summation - MLPs are currently overvalued, but some of you will be better off if you keep on buying. For those of you in or near retirement, it should be the "yield + CAGR" that is the most important issue. The issue should not be a guess at the next twelve months' unit price appreciation. You can still find MLPs with "yield + CAGRs" that are still relatively attractive. At the current prices, you can afford to take your time to buy in wisely. For this investor, it has been the quality of my decisions and not the timing of my decisions that has mattered most. I believe in the hyperbole that it is rarely a bad time to buy a good stock. There are great stocks in this sector.
Disclosure: The author is long CMLP, DPM, EPD, GEL, MMP, KMP, MWE, WES. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.