MLPs are well known as yield vehicles, but too little attention is paid to the sufficiency of operating capacity to support the distribution in many discussions. This article looks at 16 infrastructure MLPs in terms of the ratio of the total distribution to the Cash Flow From Operations.
The traditional earnings payout ratio doesn't work for highly sheltered investments such as MLPs and REITs. They have so much depreciation and other non-cash expense that earnings do not effectively reflect how they are doing.
The Cash Flow From Operations from the Sources And Uses statement is one measure that we think is useful. The Cash Flow From Operations payout ratio, eliminates borrowings or asset sales that might have been used to support a distribution.
This table presents the total distribution paid in each of the 7 prior fiscal years as a fraction of the Cash Flow From Operations for each year; and also the cumulative 3-year, 5-year and 7-year ratios. The symbols are ordinated by the 7-year cumulative ratio.
Once you have an MLP with a distribution ratio that is satisfactory to you, then the question of distribution growth rate and consistency, become important. Put differently this comes after looking at how well the distribution is supported, because a nice distribution growth rate and consistency isn't valuable if it is not sustainable.
These four charts from YCharts.com plot the 5 year history of the dividend amount for the 16 MLPs in groups of 4.
After you are satisfied with both the sustainability of distributions and the growth rate and consistency of distributions, then it makes sense to think about the yield.
We suggest looking at yield last not first in this exercise, because it is too easy to become enthralled with a yield, that could emotionally bias use or interpretation of other filter criteria.
|WPZ||Williams Partners L.P.||5.8|
|EPD||Enterprise Products Partners LP||4.7|
|DPM||DCP Midstream Partners, LP||5.8|
|MWE||Markwest Energy Partners LP||5.9|
|XTEX||Crosstex Energy, L.P.||8.6|
|SXL||Sunoco Logistics Partners L.P.||4.0|
|KMP||Kinder Morgan Energy Partners||6.0|
|MMP||Magellan Midstream Partners, LP||4.3|
|ETP||Energy Transfer Partners LP||8.4|
|OKS||Oneok Partners LP||4.4|
|PAA||Plains All American Pipeline,||4.8|
|BPL||Buckeye Partners, L.P.||8.7|
|EEP||Enbridge Energy Partners, L.P.||7.4|
|BWP||Boardwalk Pipeline Partners, LP||7.6|
|GEL||Genesis Energy, L.P.||5.5|
|NS||NuStar Energy L.P.||8.6|
There are, of course, other qualitative and quantitative criteria to consider, but these three are near or at the top of the list.
How you evaluate the price charts depends on your own style with respect to value, trend and momentum; but that should be a consideration made after the fundamental matter of sustainability, growth and consistency are known.
Qualitatively, it is important, among other things, to consider the mix of gathering, processing, transport and storage in the portfolio of each MLP; and also what fluids they handle and where.
Since the MLPs are like toll roads, their revenue is highly sensitive, if not primarily dependent, on throughput. That means the relative demand for the particular fluids they handle at the end points they serve is key. The fluids are predominantly oil, gas and refined products, but CO2 and ammonia are also pushed through pipelines.
In our own case, for various reasons, we rely at this time on active and passive portfolios of MLPs instead of individual MLP holdings, but have held individual MLPs in the past, and may do so in the future.
Disclosure: QVM has no positions in any mentioned security as of the creation date of this article (October 9, 2012). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.
General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.
Additional disclosure: Disclosure: QVM has no positions in any mentioned security as of the creation date of this article (October 9, 2012). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.