My regular readers know that I have been lightening up in some high yield sectors, especially in real estate investment trusts (REITs) with the exception of the lodging sector which continues to see improving business fundamentals. I believe interest rates are more likely to rise by the end of the year than fall, producing a headwind for the sector.
Most of my income portfolio is now in energy partnerships. The country continues to experience a huge boom in fossil fuels like oil & gas - despite tepid support from the current administration. Hundreds of billions are also being spent in building out the infrastructure necessary to get this newfound bounty to growing end markets. Two trends I think are supportive of future growth.
In addition, Kinder Morgan's (NYSE:KMP) recent consolidation of its various entities showed that there is still value to come to surface in the space and also could ignite a merger wave. Already MarkWest Energy Partners (NYSE:MWE), a mid-cap upstream partnership I profiled Monday, has become the target of buyout rumors.
I bought some Buckeye Partners (NYSE:BPL) yesterday near the close for just a tad over $76 a share. Buckeye operates some 6, 000 miles of pipeline and over 100 fuel terminals that transport liquid petroleum products. The stock was off yesterday as the partnership price a secondary consisting of some three million units. I picked up the stock near the lows of the day.
This is a common practice for me in this space. As I recently outlined, secondary offerings are the primary way these entities raise funds given they have to pay out the vast majority of cash flow as dividends to remain a tax exempt structure. I like to buy these entities the day of the secondary offering provided the stock goes below the price of the secondary - a nice discount to pick up I have found historically.
There are a couple rules I use with this strategy. The secondary has to take place at an entity I find attractive obviously. Second, the funds raised must be used to buy additional cash flow producing assets or to reduce debt - the primary purpose of Buckeye's secondary yesterday. If secondary is being used to cash out existing shareholders I will take a pass.
Buckeye is not a home run stock in any way, shape or form. The entity has been around as a public company for almost two decades - quite old in this space. Buckeye pays a 5.5% distribution yield on a quarterly basis that has consistently and incrementally been raised over the years. Company is seeing earnings growth in the 10% to 15% annual range.
Boardwalk Pipeline Partners (NYSE:BWP) is a larger midstream play with over 14,000 miles of pipeline delivering natural gas and natural gas liquids to myriad customers. The company has been in the news this year as it slashed its distribution payout by 80% in February - which cratered its stock naturally.
However, this midstream has started to pick up fans recently. The company was upgraded at Credit Suisse, J.P. Morgan, Bank of America/Merrill Lynch and Raymond James in April. Earlier this week, the Mad Maestro of Mad Money, put an endorsement on Boardwalk which caused the stock to rally. Jim Cramer believes in the entity's growth story and cited Boardwalk's over $1 billion in acquisitions over the past two years which should generate great synergies, and thinks new projects underway, such as plans to reverse a pipeline between Ohio and Louisiana, could boost the bottom line.
More importantly to me, is Boardwalk has easily stepped over top and bottom line expectations in its two reported quarters since it cut its distribution payout. The shares only pay a 2.3% distribution payout at the current time, but that should rise significantly over the next few years if its recent investments pan out.
Disclosure: The author is long BPL. 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.