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Will MLP Distribution Cuts Pay Off?

Mar. 09, 2018 4:03 PM ETAMJ, AMLP3 Comments
SL Advisors profile picture
SL Advisors


  • MLP Distributions are down 30%.
  • Many cuts were justified to fund growth.
  • Will that reinvested cash show results?

It’s surprisingly difficult to find out what MLP distributions have been doing. Alerian claims that their index has been growing its payouts at a 6% average annual rate for 10 years, with growth continuing in 2016 (it’s not yet updated for 2017). However, their methodology is odd. They take the trailing growth rate of the current index constituents, which are regularly updated. This tends to bias the growth rate up, because they dump poor performers and add good ones. We examined this in a recent blog (see MLP Distributions Through the Looking Glass).

Because Alerian doesn’t publish the actual experience of its index investors, it’s necessary to look at how investment products tied to those indices have done. Not surprisingly, payouts have fallen. As the chart shows, for the JPMorgan MLP ETN (AMJ) and for the Alerian MLP Fund (AMLP), two of the largest vehicles in the sector, dividends are down approximately 30% from their highs in 2014-15. This is what MLP distributions have been actually doing – falling, not rising — in spite of what is sometimes implied. Perhaps coincidentally, the cut in payouts is similar to the drop in the sector (38%) from its August 2014 highs.

As we’ve written before, the Shale Revolution induced many MLP managers to pursue growth opportunities (see More on the Changing MLP Investor). The need for growth capital pressured financial models that historically distributed 90% of Distributable Cash Flow (DCF), when growth needs were minimal. Leverage rose, growth projects were favored over reliable payouts, and distributions were cut. Investors felt let down if not deceived.

Although the big picture is simple, at each company level there are more detailed reasons why growth plans that were not expected to threaten payouts nonetheless led to cuts. Plains All American (PAGP) saw its Supply

This article was written by

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Following 23 years with JPMorgan, in 2009 Simon Lack founded SL Advisors, LLC, an SEC Registered Investment Adviser. SL Advisors manages investments in energy infrastructure, including the Catalyst MLP & Infrastructure Fund (MLXIX), the American Energy Independence Fund (USAI), and separately managed accounts. Prior to this, much of Simon Lack’s 23-year career with JPMorgan was spent in North American Fixed Income Derivatives and Forward FX trading, a business that he ran successfully through several bank mergers ultimately overseeing 50 professionals and $300 million in annual revenues. Simon Lack sat on JPMorgan’s investment committee allocating over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that took economic stakes in emerging hedge fund managers. Simon chairs the Memorial Endowment Trust Investment Committee of St. Paul’s Episcopal Church in Westfield, NJ. He is the author of The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, published in 2012 to widespread praise from mainstream financial press including The Economist, Financial Times and Wall Street Journal, and Bonds Are Not Forever: The Crisis Facing Fixed Income Investors (September 2013). Simon is a CFA Charterholder and a member of the New York Society of Security Analysts’ Market Integrity Committee, and makes regular media appearances discussing energy infrastructure. Simon is also a contributor to Forbes.com.

Analyst’s Disclosure: I am/we are long KMI, PAGP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (3)

SL Advisors profile picture
You could look at the American Energy Independence Index, which we publish. http://bit.ly/2GbOAUJ.
Is there a list, new index, or new ETF of the MLPs that converted to C-corps? I’ve been sticking with the ETFs, because it’s annoying having to input all of the K schedules during tax season.
Hobbyfarmer2 profile picture
DividendInvestor.com has a pretty good list of MLP's that shows if they are a 1099 or K1 entity. http://bit.ly/2vFOgrk
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