By Rebecca Chen
Investors have always referred to underperforming stocks as "dogs." One of history's most well-known dividend value investing strategies is known simply as "the Dogs of the Dow." With the recent re-pricing of energy stocks, primarily master limited partnerships ("MLPs"), I've gone in search of some real dogs. Here's what I've found.
Take a look at a chart of the Alerian MLP Exchange Traded Fund (NYSEARCA:AMLP)
Shares of this popular ETF track the performance of a basket of the most widely held energy MLPs traded. And as the energy sector crashed, no one was spared. The price of the fund was basically cut in half at the darkest point and, while AMLP has recovered by well over 50%, it's still trading at an attractive 21% discount to the 52-week high.
In all, AMLP holds a basket of 24 different energy MLPs. On average, the top ten MLPs in the fund are trading at around a 21% discount to their 52-week highs. I decided to drill deeper.
I identified the three names trading at the deepest discounts to their 52-week highs (all prices as of closing price on Friday, July 8):
|Source: Yahoo Finance|
While strategies like the "Dogs of the Dow" focus on selecting a handful of the highest dividend yielders in the index, I'm focusing on the deepest price discount. As you can see, the blended yield of these three is already above 8.5%, which is comparable to AMLP's yield. Here's a breakdown of each name.
MPLX LP (NYSE:MPLX): Formed in 2012, MPLX was a partnership formed by Marathon Petroleum (NYSE:MPC) to own, acquire, develop and operate pipelines and other midstream energy assets. MPLX properties are located primarily in the Midwest and Gulf Coast regions. Despite the challenging environment, the company turned in a decent report for Q1 of 2016 that included $302 million in EBITDA and higher gathering and processing volumes. MPLX also completed a $1 billion preferred stock offering raising much needed equity capital.
Declaring a first quarter distribution of 50 cents per unit, MPLX anticipates a full-year distribution of $2.05 per unit which would be a 12.6% increase over 2015's $1.82.
Plains All American Pipeline, LP (NYSE:PAA): PAA focuses mainly on transportation, storage and marketing of crude oil and NGL (natural gas liquids) products such as butane and propane. Like MPLX, PAA had an upbeat Q1 with adjusted EBITDA of $621 million, 10% better than Q4 2015's report of $563 and a 7.6% beat of management's guidance of $577 million for Q1. The company has also completed nearly $500 million in asset sales year to date.
PAA units paid a Q1 distribution of 70 cents and are expected to pay a total of $2.80 for the year.
Williams Partners LP (NYSE:WPZ): Waist deep in the natural gas value chain, WPZ owns and operates more than 33,000 miles of pipeline and moves nearly 20% of the natural gas in the United States used for power generation, home heating and industrial use. Like PAA and MPLX, WPZ grew Q1 EBITDA by nearly 16% over Q4 2015 with $1.06 billion versus $917 million. The company also invested $468 million in growth projects with another $2.6 billion left for the remainder of the year.
The company increased its distribution 38% in Q3 of 2015 from 61.5 cents to 85 cents per unit which is expected to hold steady.
Risks To Consider
Although things in the oil patch have improved considerably, the macro trend is still downward. The world is awash in oil and gas and it will take some time to soak up the supply. Investors should still prepare themselves for regular volatility in energy-related investments. Despite depressed energy prices, these companies concentrate on moving the products rather than exploration and production. Natural gas still needs to get from Beaumont, TX to Jacksonville, FL, and these guys move it. That does bring a defensive nature to the profile of the stocks.
Also, from a taxation standpoint, MLPs may not be suitable for all investors. MLPs may generate unrelated business taxable income (UBTI) for some investors, even in tax-exempt accounts.
While holding the AMLP ETF is not a bad idea, I think it's possible to make more money cherry-picking some of the best values of the basket. On average, these three MLPs trade at a 39% discount to their 52-week highs, nearly twice that of the ETF, with a blended yield of nearly 9%. Based on improving fundamentals in all three names individually and the industry space as a whole, gains of 15% are not out of the question. Combined with distributions, investors could enjoy total returns of nearly 24%.
This article was originally published on StreetAuthority.com.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.