AllianceBernstein L.P.: Managing for Yield

The recent market turmoil has hit shares of financial services firms very hard. As such, many fine stocks are back 'on sale' right now.

Because AllianceBernstein L.P. (AB) is a master limited partnership [MLP] it pays a very low tax rate and must distribute almost all its annual income to its UNIT HOLDERS [not SHARE holders].

M.L.P.s generate K-1 forms at year-end that are a big pain at tax time. Retirement accounts are exempt from reporting requirements and thus well suited to this type investment.

Most people should only considered AB units for NON-TAXABLE accounts such as IRAs, Keoughs and SEP Plans.

• AllianceBernstein Holding L.P. (AB) price [3/19 2:40 PM]: $59.53/share
• 52-week range: $53.63 [Jan. 22, 2008] - $94.94 [Apr. 23, 2007]
• Yield: 7.47% [expected year ahead distribution = $4.45/unit]
• 2007 actual distribution: $4.75

Alliance Capital [AC] was formed in 1987 from a subsidiary of AXA Financial. AC merged with Sanford Bernstein in October of 2000 to form the current configuration of AllianceBernstein. Because of their reduced tax status as a master limited partnership these are UNITS rather than shares but for all practical purposes [other than taxes] they are just like shares of other companies.

AB is one of the largest institutional money management firms with year-end 2007 Assets Under Management [AUM] of $800.4 Billion. With the crappy market action to start this year AUM dipped to $751 Billion as of February 29, 2008.

Alliance Bernstein is not Bear Sterns. They do not hold any bad paper, they do not own a bank or make mortgage loans. They strictly run money. About 25% of their assets are in fixed income management of customer funds.

Total debt stood at $163 MM as of last September against over $1.9 Billion in treasury cash. Earnings and distributions to unit-holders fluctuate with AUM changes and market performance.

AB has shown excellent long-term results. Earnings/unit were $1.66 in 1998 and grew to $4.32 in 2007. Distributions /unit went from $1.60 to $4.75 during that 10-year span. Revenues per unit kept pace going from $5.77 to $17.25.

Value Line gives AllianceBernstein a financial strength rating of $B++ and an earnings predictability score of 75th percentile [very high for this industry].

With market conditions bad right now the AUM figure has regressed and the expected distribution for 2008 is estimated to be $4.45 versus last year's $4.75. At Wednesday's $59.53 price that provides a current yield of 7.47% - about double the best CD rates available today. Even if the Units stayed unchanged in price this could be a reasonable return within a tax-sheltered account.

I think the underlying value is much higher. AB units have had a very steady normalized P/E of around 15x. In hot markets it can go higher and in bear markets it sometimes goes lower. At present, AB's P/E is just 13.8x trailing earnings - its lowest level since the horrible bear market of 2002.

At the exact lows in 2002 AB units were 11x earnings and yielding 9.9%. Buyers back then saw their units go from $23.20 to $94.90 in under 5 years - this on top of AB's excellent annual cash payouts.

If the markets continue to deteriorate AB units may well go lower. Whenever the markets pick up these units have good upside. The 7.47% yield makes the waiting easier. Three different sources of estimates all center on around $4.52 - $4.56 in per unit earnings this year.

A fifteen multiple on even $4.50 would bring AB back to $67.50 or up 13.3% from the current price. Add in the 7%+ distribution and you have a moderate risk, fairly predictable 20% total return. If things improve in stocks this will probably end up way too low a target.

Is $67.50/unit attainable? AllianceBernstein actually traded at $82.90 in late 2006 and $94.94 in April 2007. Revenues, earnings and book value have all gone up since those prices were touched. The yearly LOW for all of 2007 was $71.30 and the absolute low hit in 2006 was $55.40 - not too far below Wednesday's price.

A company director thought AB cheap enough to buy 5000 units in the open market on March 10, 2008 @$58.10 for a $290,500 investment.

Large Holders as of Dec. 31, 2007:

YE Price: $75.25 /unit

• Royce & Associates..............3.44%
• Mac-Per-Wolf Company.........2.69%
• FMR [Fidelity Funds].............2.57%
• Cincinnati Life Ins.................2.15%
• U.S. Bancorp......................1.62%
• Bank of America..................1.60%
• Neuberger & Berman...........1.27%

Guru Ron Baron added to his position in 4Q 2007.
AXA Financial holds around 60% of the units and is a 1% General Partner.

AllianceBernstein units look like a good choice for TAX-SHELTERED accounts willing to take a play on an overall market recovery over time. The total return potential is excellent with over 7% expected from quarterly cash distributions plus an eventual rise in unit price to $65 - $90.

Disclosure: I bought AB units for my IRA on 3/19.

Comments

[User 166630]

It would be nice to have all on your Dividend Stocks in tax sheltered accounts but why would it not be ok to have growth & high yield stocks like AB in non sheltered accounts? Does AB carry a different tax penalty? Thanks for your reply.

[Whisper On The Wind]

This may be a stupid question, but what is the difference here between a unit holder and a share holder?

[Jan Sopoci]

Lately, I've seen several contributors to Seeking Alpha advising holding MLPs in tax advantaged accounts (IRAs, 401s, etc.). Be careful, since at $1k in annual income, the Unrelated Business Income Tax kicks in. At least, that's the way things are set up now. (Obviously, the tax code can, and does, change).

Jan

[Les Mitchell]

Jan is correct. You need to seek tax advice from a professional as you may have to report the Unrelated Business Income and your IRA manager pay the tax for you from IRA funds.

[greatdane]

The article mentions that because Master Limited Partnerships generate a k-1 they are best suited for retirement accounts. An article posted on Seeking Alpha on March 10 [Investing in High Yield U.S. Income Limited Partnerships] stated ""you should never, ever put an MLP into a retirement plan because of the UBTI or unrelated business taxable income problem, which could put the tax-deferred status of your retirement account in jeopardy". Can someone explain which is correct -am I missing something?

[Otto]

If you buy a MLP in a tax deferred account, you are losing the the tax advantage of the MLP. The K1 is not a big deal for most people who are managing their own investments.

[badger]

greatdane,

In a way both are correct. K-1s are a pain,though I found TurboTax helpful in sorting out all the various amounts. If you can keep your investments small enough so that UBTI is < $1k, you don't have to deal with that issue if in retirement accounts, and you don't have to deal with the K-1 issues at all. Question is how do you figure out ahead of time what that amount will be? Good luck and perhaps a tax 'expert' will comment further.

[Nasrudin]

Does anyone know what the rules for Keough Plans are?

[d_teller]

UBTI is reported in Item 20 of a K-1 as a code " V ". If the total of UBTI in your sheltered acct's /yr is > $1000.00, they will be "disqualified", i.e., become taxable. Not good. But you can bet that any financial MLP or PTP (Publicly Traded Partnership) at some time or other will have UBTI, whereas an agricultural futures trader (DBA) probably won't ever. You need to query the Partnership for this info.

& FWIW, all the capital losses and return of capital -so useful in taxable accounts - do absolutely nothing for the value of the IRA, since there's no losses allowed, and all payouts are taxed at a marginal, not cap gains, rate.

[Jack Swanson]

Somebody just address if AB is a buy or not??