I had dollars from my sale of KMP sitting at the brokerage. It is so much easier to pull the trigger on a transaction when the money is already sitting there. Tiny things like that matter. And . . . . the due diligence I was doing in other sectors was resulting in finding lots of little things wrong with a heck of a lot of companies. The yields were too low for good companies. When I found OK yields, credit metrics were just average. Some lacked publicly traded debt and credit ratings. Generating historical EPS projection accuracy was a tough task. I was not finding multiple CAGR projections for many. Etc.
Then along comes a flood of reports on recent IPO VTTI Energy Partners LP (NYSE:VTTI). The minimum distribution is $0.27 - so let's use that as the beginning quarterly payout. At $25, the yield is 4.32%. The CAGR projections (I found multiple sources) were as low as 12% to as high as 18% (I'll use 15% for my CAGR at this point in time). So you have a yield + CAGR of 19.32%.
Other stocks yielding around 4% - (prices as of 8-01-14)
EPD 3.93% yield - 5.88% LTM dist growth
GEL 4..40% yield - 10.78% LTM dist growth
PPA 4.58% yield - 9.79% LTM dist growth
NGLS 4.65% yield - 9.09% LTM dist growth
VTTI at a 4.32% yield looked attractive if you can live with the added risk -- and changes in the risk assessment will also result in price volatility.
PRO - high percentage of fee based income on long term contracts
PRO - Its GP has lots of properties to drop down to VTTI
PRO - No K-1 - (you will see in the cons why I would not want to make a "married for life" commitment here).
CON - No tax deferral - but my expectation is that most of the total return will be from price appreciation
CON - Vitol (its co-GP) is the source of 75% of its income. As Vitol goes, so will VTTI. Vitol is an E&P and energy trader.
CON - Its predominantly foreign - and appears to predominantly be involved in international shipping from lots of South African countries.
CON - Currency volatility could become a problem
Summation - There is lots that "can" go wrong - so any decision needed to result in a lite weighting. But the "yield + CAGR" was too inviting to pass up. I purchased a little.
Be forewarned - the "equity RRR" that goes into the "yield + CAGR - RRR" equation" is going to be high for VTTI - it should higher than the RRRs that goes into E&P valuations. I have no idea (and will not have a good idea for a few years) what a good RRR for VTTI should be.
Disclosure: The author is long VTTI.