This article is about Tallgrass Energy Partners (TEP) and why it's a buy for the income investor who can take the volatility. As the amount of oil and gas increase in the United States, TEP will have the services to move and store the energy products.
The stock is being evaluated for The Good Business Portfolio, my IRA portfolio of good business companies that are balanced among all styles of investing. The company has steady growth and has cash it uses to increase the dividends each year and expand their facilities.
When I scanned the five-year chart, Tallgrass Energy Partners has a poor chart going up and to the right in a fair slope for 2014-2015 and then it has had a flat period from 2016 through now. In a good economy, TEP shines like in years 2014 and 2015. In years 2016 and 2017 TEP was consolidating, but the 9-10% dividend kept being paid.
Fundamentals of Tallgrass Energy Partners will be reviewed on the following topics below.
- The Good Business Portfolio Guidelines
- Total Return and Yearly Dividend
- Last Quarter's Earnings
- Company Business
- Takeaways
- Recent Portfolio Changes
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review." These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.
Good Business Portfolio Guidelines
Tallgrass Energy Partners International passes 9 of 11 Good Business Portfolio Guideline, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.
- Tallgrass Energy Partners does not meet my dividend guideline of having dividends increase for 7 of the last ten years and having a minimum of 1% yield, with five years of increasing dividends and a 9.6% yield. Tallgrass Energy Partners is, therefore, a good choice for the dividend income investor considering it has only been public for five years. The five-year average payout ratio is high at 98%.
- I have a capitalization guideline where the capitalization must be greater than $7 Billion. TEP does not pass this guideline. TEP is a mid-cap company with a capitalization of $3 Billion. Tallgrass Energy Partners 2018 projected cash flow at $1.6 Billion is good allowing the company to have the means for company growth and increased dividends.
- I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.3% of the portfolio as income, and I need 1.8% more for a yearly distribution of 5.1%. The three-year forward CAGR of 12% meets my guideline requirement. This good future growth for Tallgrass Energy Partners can continue its uptrend benefiting from the continued strong growth in the economy.
- My total return guideline is that total return must be greater than the Dow's total return over my test period. TEP passes this guideline since their total return is 77.23%, more than the Dow's total return of 47.59%. Looking back almost five years, $10,000 invested five years ago would now be worth over $18,100 today. This makes Tallgrass Energy Partners a good investment for the total return investor looking back, that has future growth as the economy continues to grow. As an added plus we have President Trump cutting corporate taxes which will increase earnings.
- One of my guidelines is that the S&P rating must be three stars or better. TEP's S&P CFRA rating is a hold with a calculated target price to $44, passing the guideline. TEP's price is presently 8.6% below the target. TEP is under the target price at present and has a low PE of 16, making TEP a good buy at this entry point. If you are a long-term investor that wants good steady increasing dividends and future total return growth you may want to look at this company.
- One of my guidelines is whether I would buy the whole company if I could. The answer is yes. The total return is good for my test period, and the above average growing dividend makes TEP a good business to own for income. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a good income stream. Most of all what makes TEP interesting is the potential long-term growth of their business as the need for more energy increases. TEP gives you an increasing dividend for the dividend investor and good total return.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Tallgrass Energy Partners passes this total return guideline against the Dow baseline in my 52.0-month test. I chose the 52.0 month test period (starting January 1, 2014, and ending to date) because it includes the great year of 2017, and other years that had fair and bad performance. The good total return of 77.23% makes Tallgrass Energy Partners a good investment for the total return investor that also wants a steadily increasing income. TEP has a high dividend yield of 9.6% and has had increases for five years making TEP also a good choice for the dividend investor.
DOW's 52.0 Month total return baseline is 47.59%
Company Name | 52.0 Month total return | The difference from DOW baseline | Yearly Dividend percentage |
Tallgrass Energy Partners | 77.23% | +29.64% | 9.4% |
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Last Quarter's Earnings
For the last quarter on May 3, 2018, Tallgrass Energy Partners reported earnings that beat expected by $0.21 at $0.91 and compared to last year at $0.55. Total revenue was higher at $179.1 Million up more than a year ago by 24% year over year and missed expected revenue by $12 Million. This was a good report with the bottom line and the top line increasing. The next earnings report will be out August 2018 and is expected to be $0.62 compared to last year at $0.72. The range of estimated earnings is very large, but I expect they will beat the estimate.
Business Overview
Tallgrass Energy Partners is an energy transportation and storage business operating in the United States.
As per Reuters:
Tallgrass Energy Partners, incorporated on February 6, 2013, owns, operates, acquires and develops midstream energy assets in North America. The Company operates through three segments: Crude Oil Transportation & Logistics, Natural Gas Transportation & Logistics, and Processing & Logistics. The Crude Oil Transportation & Logistics segment includes the ownership and operation of a Federal Energy Regulatory Commission (FERC) crude oil pipeline system and crude oil storage and terminaling facilities. The Natural Gas Transportation & Logistics segment is engaged in the ownership and operation of FERC regulated interstate natural gas pipelines and integrated natural gas storage facilities. The Processing & Logistics segment is engaged in the ownership and operation of natural gas processing, treating and fractionation facilities; the provision of water business services primarily to the oil and gas exploration and production industry, and the transportation of natural gas liquids (NGLs). The Company's operations are located in, and provide services to the United States hydrocarbon basins, including the Denver-Julesburg; Powder River; Wind River; Permian and Hugoton-Anadarko Basins and the Niobrara; Mississippi Lime; Eagle Ford; Bakken; Marcellus, and Utica shale formations.
Overall Tallgrass Energy Partners is a good business with 12% CAGR projected growth as the United States economy grows going forward, with the increasing demand for TEP's energy services. The high dividend income brings you cash as we continue to see further growth as the United States economy grows.
The Fed has kept interest rates low for some years, and on March 21 they raised the base rate up 0.25%, which was expected. I believe that they will not raise the rates three more times this year, but will go slow at 1-2 for the rest of 2018, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States' growth going forward with better economics for the consumer. The recent market volatility may slow down the FED.
Also as a tailwind, we have President Trump lowering corporate taxes on income. As the corporation foreign and domestic tax rate is lowered, earnings of Tallgrass Energy Partners business should increase.
From May 3, 2018, earnings call David Dehaemers (Chief Executive Officer and President) said:
The first quarter was another strong quarter for TEP with consistent performance in the natural gas and crude oil transportation segments and continued growth in our gathering and processing and terminaling segment. All this contributed to TEP's 19th consecutive quarterly distribution increase.
Again, we started out at $1.15 when we annualized, we went public in 2013, and today we're at $3.90 annualized. And then also TEGP's 11th consecutive quarterly distribution increase. Again, just as a reminder we were $0.53 annualized May of '15 money when we went public, and three years later we're $1.95 annualized.
Now let's review the first quarter financial results, which were the catalyst for these increases. Adjusted EBITDA for TEP was $165 million, and DCF was $146.2 million, producing robust coverage of 1.3 times for the first quarter.
TEP increased its quarterly distribution to $0.975 or like I said earlier, $3.90 annualized, which is an increase of 16.8% over the first quarter of 2017. TEGP increased its quarterly distribution to $0.4875 [ph] per quarter or $1.95 annualized, which again is an eye-popping increase of 69.6% over the first quarter 2017.
This shows the feelings of top management for the continued growth of the Tallgrass Energy Partners business and shareholder return with an increase in the future growth. TEP has good growth and will continue as the demand for energy and storage capabilities increase.
Takeaways
Tallgrass Energy Partners is a good investment choice for the income investor with its very high yield that also comes with a lot of ups and downs. Tallgrass Energy Partners will be considered in the future for The Good Business Portfolio but will not be considered right now but will be closely watched. If you want a growing dividend income and fair total return in the energy transfer business, TEP may be the right investment for you.
Recent Portfolio Changes
I was considering selling the small position in Kraft Heinz Corp. (KHC) that is 0.5% of the portfolio because of its bad performance, and I have better companies for investment. The last earnings showed growth, so I will wait another quarter to see if this continues.
- On March 29 increased position of American Tower (AMT) to 0.8% of the portfolio; I will continue adding to this position as cash is available.
- On March 29 sold entire position of L Brands (LB); it does not look good for the company going forward.
- On March 26 reduced position of L Brands to 1.5% of the portfolio.
- On March 23 increased position of Freeport-McMoRan (FCX) to 2.4% of the portfolio and will add to this position as cash is available.
- On March 20 increased position of Freeport-McMoRan to 2.2% of the portfolio.
- On March 20 reduced position of L Brands to 1.8% of the portfolio.
- On March 16 increased position of Digital Reality Trust (DLR) to 2.4% of the portfolio. I want to get this company to a full position of 4%.
- On March 1 increased position in AMT to 0.9% of the portfolio.
- On January 31 trimmed Boeing (BA) from 13.1% of the portfolio to 12.8%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow. The fourth quarter earnings report was fantastic beating estimates by $0.15 at $3.04 (not including tax gain) and with future estimates all showing good growth for 2018. The decrease in deferred costs for the 787 was $581 Million for 36 planes shipped, which was good.
The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in The Good Business Portfolio are Johnson & Johnson (JNJ) at 8.0% of the portfolio, Altria (MO) at 6.8% of the portfolio, Home Depot (HD) at 9.8% of the portfolio and Boeing at 13.6% of the portfolio; therefore BA, JNJ, and Home Depot are now in trim position with Altria getting close.
Boeing is going to be pressed to 13% of the portfolio because of its being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million, a big jump from the first quarter. The second quarter earnings were fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter earnings were $2.72, beating the expected by $0.06 with revenue increasing 1.7% year over year, another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expected at $2.64. I just can't bring myself to sell Boeing.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did not like it. JNJ has announced a dividend increase to $0.90/Qtr. which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure. Take this recent drop to pick up a great company in the medical products field.
For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 4th Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after this earnings season is over.
I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, Omega Health Investors, Digital Investors Trust (DLR) and Automatic Data Processing (ADP) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them on my list of previous articles.
Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.
