Despite the market volatility over the last two weeks the long-term thesis and underlying rationale for owning master limited partnerships (MLPs) remains intact. I view investments in MLPs in part as a long-term inflation hedge. As opposed to inflation or currency debasement trades like gold and silver, which have embedded negative carry (owning physical metal requires storage), MLPs provide strong cash dividend yields. Investors create a hedge against currency debasement but also get paid to be in the trade through dividends. MLPS provide investors attractive current income with an embedded inflation hedge. MLPs combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.
MLPs provide investors income-generating assets with strong secular industry tailwinds. The majority of MLPs are pipeline businesses, which earn stable income from the transport of oil, gasoline or natural gas. Energy MLPs are defined as owning energy infrastructure in the U.S., including pipelines, natural gas, gasoline, oil, storage, terminals and processing plants.
Advantages of investing in MLPs:
- Contracts typically have inflation hedges embedded within them;
- Companies typically have monopolies in their specific region;
- Long-term demand is stable and relatively inelastic.
In a highly correlated, "risk-on, risk-off" world, MLPs provide access to asset classes that are less correlated to stocks and bonds. MLPs have only modest direct commodity sensitivity, as the company's business model is derived from fee-based contracts that are largely insensitive to commodity price fluctuations. The stable cash flows from fee-based contracts provide stable and strong dividends for shareholders.
MLPs are a limited partnership that are publicly traded on a securities exchange. MLPs combine the tax benefits of a limited partnership with the liquidity of publicly traded securities. MLPs provide access to a low beta asset class with rich dividend yields.
As opposed to a corporation, a MLP is considered to be the aggregate of its partners rather than a separate entity. MLPs provide for pass-through income, thus they are not subject to income taxes at the corporate level. Owners of an MLP are responsible for paying taxes on their percentage of the MLP's income. This eliminates the double taxation typically applied to corporations.
MLP screen criteria:
- Market capitalization greater than $3.5 billion
- Beta is below 1.0
- Dividend yield greater than 4.0%
Investors who are not interested in picking specific equities can buy a basket of MLPs with exchange traded funds such as the Alerian MLP ETF (AMLP).
Enbridge Energy Partners LP (EEP)
Market Capitalization: $9.1 billion
Dividend Yield: 6.8%
EV / EBITDA: 15.5x
ONEOK Partners, L.P. (OKS)
Market Capitalization: $12.0 billion
Dividend Yield: 4.4%
EV / EBITDA: 12.9x
El Paso Pipeline Partners, L.P. (EPB)
Market Capitalization: $7.1 billion
Dividend Yield: 5.8%
EV / EBITDA: 9.3x
Magellan Midstream Partners LP (MMP)
Market Capitalization: $8.1 billion
Dividend Yield: 4.6%
EV / EBITDA: 15.6x
Regency Energy Partners LP (RGP)
Market Capitalization: $3.8 billion
Dividend Yield: 7.6%
EV / EBITDA: 18.3x
Kinder Morgan Energy Partners LP (KMP)
Market Capitalization: $27.7 billion
Dividend Yield: 6.0%
EV / EBITDA: 13.8x
Disclosure: I am long KMP.