The Top 10 Lowest Standard Deviation MLPs

MLP Defined

A MLP is a master limited partnership. MLPs are publicly traded limited partnerships and operate in the natural resource, financial services, and real estate industries. MLPs have a significant tax advantage over other public companies; MLPs are not subject to the double taxation of public corporations. Instead they pass through the income, meaning owners of MLPs are personally responsible for paying taxes on their individual unit of the MLP's income, gains, losses, and deductions.

Evaluating a MLP

Since MLPs are required to pay out their income to unit holders, the size and visibility of future cash distributions are the largest contributing factor in the value of MLP units. Consequently, it is particularly important for investors to evaluate whether a MLP is able to meet its current distribution obligations and whether it will be able to continue or raise its future distributions. To judge this the distributable cash flow coverage ratio of used is:

Cash Flow Coverage Ratio = (Net Income + Depreciation, Amortization & Other non-cash expenses - maintenance Capital Expenditure) / Total Distributions

The ratio measures compares total distributable cash flow to the amount paid out to shareholders. If the ratio is below 1.0 the firm is not generating enough cash to cover its distributions.

The Screen

When searching for MLPs it is very difficult to screen for high cash flow coverage ratios directly. Each MLP will have different portions of their Capital Expenditures geared towards maintenance of continuing operations – you will need to examine the note in their 10k.

However, the ability of a MLP to maintain and grow their distributions will be factored into the MLP's stock price via its standard deviation and dividend yield. In theory, more unsecured distributions will correlate with a higher standard deviation, and the dividend yield will likely be higher to compensate for this risk.

I have prepared a screen of the 10 lowest yield standard deviation MLPs and highlighted this with their dividend yield and past one year return (excluding the dividend yield).

The screened MLPs represent low risk and adequate yielding investment options within the MLP space.

Stock position: Long EPD.

Comments

[Augustus:]

Take a look at BSR. It is an ETF of the Energy MLP offerings. Nice diversification in one product. It would be interesting to get your evaluation of that one.

2008 Aug 31 11:23 AM

[Greg Pinelli:]

I like the effort..however, a few things to consider. Std Dev and Div Yield may or may not be reflective of Coverage..prospective resource development, prospective infrastructure development and the risk associated with those two elements...general market fears that might assymetrically affect MLPs in certain geographical locations..etc...
I'd be more inerested in simply seeing a comprehensive screen for MLPs and Canadian Trusts that deals strictly with the coverage ratios..I'll draw my own conclusions.

2008 Aug 31 12:08 PM

[jamookey:]

MLPs provide a great return for those seeking income from their investments.With bond yeilds low,interest rates too low,they seem like the best alternative.I have owned OKS,EPD,NS,and others since '02.They also provide a safe place to put money in a bear market.The author has provide a nice guide to help investors choose which ones might be right for you.

2008 Aug 31 12:15 PM

[Steven Ward:]

The article is good but only hints at a real problem faced by all Trust and MLP investors--Total Return.

It does little good to receive a whopping yield when the unit price drops from purchase point that results in a lower return. MLP and Trust investors seem to chase yield with no regard for total return. Nevertheless, a good article.

2008 Aug 31 02:14 PM

[jjason:]

Thanks for the article. I am long TCLP and I track all of these mlp's.

Another thing to keep track of is does the company own any of the products it handles and if the company is involved in speculation in oil or NG futures. TCLP does not speculate and is well run.

I believe that Goldman Sacks is involved in Buckeye (BPL) as the GP ( general partner ) and I wonder why?

2008 Aug 31 03:11 PM

[jamookey:]

Total return is hardly a concern for MLP investors.Each time the dividend is paid it is subtracted from the buy price.At 7-8% per quarter one only needs hold the units for several quarters and soon they find that total return the poster is talking about.Entry point is still a consideration,but the longer one holds the less total return is a problem.For example my purchase price for EPD is 19$ per share.originally I purchased at 23-24$.EPD has been as high as 32-33$,but if income is the goal,why sell?If one is looking for quick gains and turnover,then these might not be the right place to be.

2008 Sep 02 09:47 AM

[AJ30:]

Does anyone have any ideas on how Mr. Obamma's stated policy of increasing business taxes will affect MLP holders. I would hate to be required to use two tax rates.

2008 Sep 03 10:14 PM

[Bobcheesedo...:]

AJ30, Partnerships are pass-through entities. As such, they are not subject to taxes at the partnership level. The income passes through to the partners and is taxed at the partner level. If your annual income is less than 200-250 thousand dollars, you will pay less taxes under Obama than you are paying now.

2008 Sep 11 05:16 PM

[madmax:]

AJ30, Here is some info from Humanevents.com link www.humanevents.com/ar... on tax policy of both candidates.
McCain calls for no changes to today’s low rates. Obama will revert to the pre-Bush tax cut regime. Bottom line: if you’re single, making $30,000, McCain will tax you $4,500. Obama will extract $8,400 from your wallet -- almost double the take! Single making $50,000: McCain’s tax is $12,500; Obama’s is $14,000. Single making $75,000: McCain’s tax is $18,750. Obama will bite you for $23,250.

And it’s no better if you’re married. Married making $60,000: McCain’s tax is only $9,000. Obama will hit you for $16,000. Married making $75,000: McCain’s tax is $18,750, Obama’s $21,000. Married making $125,000: McCain’s tax is $31,250. Obama’s hit -- $38,750. Ouch, Obama!

So much for Obama’s plan to tax the “filthy rich”. Now we know just what that means: everyone in the middle class.

Well, you say, what about capital gain taxes?

Again, McCain says he’ll make no changes. The maximum rate will stay at 15%. Obama is all for change. He’ll roll back this tax cut to the pre-Bush rate of 28%, again almost doubling your taxes overnight. This plan is especially cruel to older folks who have planned to sell their bigger homes and count on using this income (after their homeowner’s exclusion) to help fund their retirement. Ouch again, Obama.

Then there is the dividend tax.

OK, you’ve been religiously saving over the decades and buying up blue-chip stocks whose dividends you now count on to carry you through your golden years. Or, you have your savings invested in an IRA or retirement plan, mutual fund or life insurance annuity. McCain’s dividend tax won’t change from the maximum rate of 15%. Obama will once again repeal the Bush tax cuts, bumping this tax rate up to 39.6%, an increase of -- hold your wallets -- over 160%. The impact on the middle class, much less our barely-growing economy -- are obvious. Really ouch, Obama!

Finally, when you die and have arranged to pass on your hard-earned savings to your family, the differences are truly staggering.

McCain’s proposal is, once again, stay the course. His tax rate is zero (Bush repealed the death tax). Obama promises to bring back the bad old days, which will hit the middle class but barely touch his billionaire supporters who’ve used sophisticated tax planning strategies to escape this tax. Under the Obama plan, the government will take up to 60% of your estate away from your children and family -- and pocket your money via the inheritance tax. For Obama, the politics of envy trumps common sense, fundamental morality and basic economics. So what’s new?

Unfortunately, the horror story above is only the start. The Democrats are calling for yet more new punitive taxes on the working and middle classes: 1) a higher federal gasoline excise tax, 2) new taxes on electricity and heating gas, 3) new retirement account taxes, and 4) taxes on “oversized” homes over, say, 2500 square feet are but a few of the wacky ideas being floated.

Of course, if these new taxes actually are passed, the US economy really will tank, and on the Democrat’s watch. The economy continues to grow because consumers still have money in their wallets to continue buying -- just. The Democrats would confiscate this money to fund more boondoggle and pork-filled government spending schemes like 3rd-world socialized medicine schemes, so-called global warming carbon credit schemes promoted by Al Gore’s profit-making carbon trading company, and ever-expanding government bureaucracy. Who will have any money left to buy that latest plasma TV, much less the $5/gallon gasoline and $10/pound hamburger?

So lots of Americans are dreaming of “change” in this presidential election year. Let’s pray that their nightmares don’t come true.

One real measure of personal freedom is how much money the government lets you keep to spend for yourself as you see fit. In the old Soviet Union, the communists took almost 100% of the people’s earnings in their “worker’s paradise”. They created a prison state of slaves. It’s an old axiom in politics -- and economics -- that the more you tax the people, the more you can control them. McCain’s policy is to continue the current relatively low tax program. Obama hopes that he will carry us all into the “Brave New World”, a world of draconian taxes that will crush our personal freedoms.

Of course, Obama’s words may be all rhetoric and political pandering designed to gain votes. In this case his followers are once again being hoodwinked into believing that his call for “change” is genuine. Let’s hope that’s the case. This would mean Obama may be cynical -- but rational in his populist strategy. However, suppose he really does believe that what we need is massive tax hikes? May God help us all.

2008 Sep 14 09:55 PM