Income Investors: The Second Wave Of 5% To 9% Yields In May, Plus 3 More Tax Deferred High-Yield Trades

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Includes: CEQP, ENBL, MMP, NS, OMP, WMB
by: Double Dividend Stocks
Summary

This article covers five more high-yield vehicles going ex-dividend in May, and one in early June.

The yields range from 5.4% to 9.2%.

We also detail three tax deferred high-yield trades.

We wrote about 10 high-dividend stocks going ex-dividend in May. This article follows up on that one, featuring six more high yielders, all of which are in the midstream sub industry of the energy patch.

They're all MLPs, and they issue K-1s at tax time.

Williams Companies (WMB) has the largest market cap in the group, at $34.3B, followed by Magellan Midstream Partners LP (MMP) at $14.16B, and Enable Midstream Partners LP (ENBL) at $6B.

NuStar Energy LP (NS), at $2.9B, Crestwood Equity Partners LP (CEQP) at $2.6B, and newcomer Oasis Midstream Partners LP (OMP) with a $675M market cap, round out the group.

Performance:

Four out of six of these LPs have beaten the market so far in 2019, gaining much more than the S&P 500's 16.54% year to date gain. CEQP leads the pack, with a 31.46% gain, followed by NS, up 29.91%, WMB, up 28.48%, and OMP, up 24.64%. MMP, up 8.68%, and ENBL, up 2.88%, have under-performed in 2019, and over the past year.

Distributions:

CEQP, MMP, and NS all go ex-dividend next week, on 5/7/19. OM and ENBL should go ex-dividend later in May, on ~5/16/19 and ~5/21/19, respectively, while WMB should go ex-dividend ~6/7/19.

MMP is, by far, the dividend growth champ in this group with a five-year dividend growth rate of 12.58%. Its management has raised the quarterly payout 68 times since MMP's IPO. NS shows a negative distribution growth rate, due to its early 2018 IDR swap deal, in which the distribution went to $.60/quarter, from $1.095, where it had been since August 2011.

CEQP dropped its distribution from $1.375 to $.60 in Q2 2016, after its yield reached 30%-plus.

ENBL has held its quarterly payout steady at $.318 since Q3 2015, opting for stronger coverage, vs. payout growth.

WMB's payout dropped from $.64 to $.20 in Q3 '16, and has since improved to $.38.

Newcomer OMP just started paying distributions in Q1 '18, and has had four straight hikes. OMP's management also is targeting 20% annual distribution growth over the next three years. That $.45 May payout listed in this table will probably be more like ~$.47.

Valuations:

The market likes MMP's distribution growth - it's giving MMP a premium valuation of 12.63 for price/distributable cash flow, vs. the ~10X average price/DCF we've seen for other midstream high yield vehicles.

CEQP and WMB are also getting higher price/DCF valuations, at 11.54 and 11.90, respectively, although their price/book ratios are lower than average.

OMP is in the middle of the pack, with a lower than average price/DCF of 9.62, and price/book and price/sales figures which are roughly in line with the group averages.

ENBL and NS look undervalued on several metrics - price/DCF, price/book, and price/sales. Additionally, they have the second and third best coverage factors in this small group, trailing only WMB, which has an out-sized 1.69 coverage ratio.

ENBL's 9.13% yield, and NS's 8.82% yield trail only OMP's leading 9.22% yield.

Analysts' Targets:

Although it's up over 24% in 2019, OMP has the biggest spread, 34.89%, between its price and analysts' average target price. ENBL also has a large spread of 21.39%, followed by WMB, at 13.81%.

CEQP and MMP have more modest price spreads of 7.86% and 4.95%, while NS is 5% above analysts average $25.86 price target.

Both ENBL and MMP were up a bit after their earnings reports, ~1%, while CEQP and WMB were down ~-1%, following their reports. OMP and NS will report next week. (We'll be delving more into these Q1 '19 earnings reports in future articles.)

Options:

In one of our articles last week, we detailed four potential tax-deferred, high yield options trades. We've found an additional three such trades this week, for WMB and MMP.

The idea works as follows: Even though you receive the option premium money in 2019, if the option isn't exercised or closed in 2019, you won't have to pay taxes on the gain until mid-April 2021.

Following this strategy, we selected three trades, which each expire in January 2020.

Our Covered Calls Table can give you more details for the following two covered call trades, plus over 35 others, all of which we update throughout each trading day.

Here's the blurb from the IRS site:

source

With MMP just ~5% below analysts' average price target of $65.68, we looked at the Jan. 2020 $65.00 call strike, which pays $1.55, ~half of what MMP will pay out in distributions over the next three quarters.

This table details the three main profitable scenarios for this trade, but the assigned scenario has two additional possibilities.

Static - If MMP doesn't rise to or above $65.00 you'd have a profit of $4.57 - the combo of the $3.015 in distributions, plus the $1.55 in option premium.

Assigned - The final profit would be less, $3.97, if your MMP units were assigned prior to the May 7 initial ex-dividend date. However, given that there are only two days left before May 7, it could be that MMP won't rise to or above $65.00 prior to the first ex-dividend date.

In that case, the units wouldn't be assigned before the initial ex-dividend date, and you'd qualify for the May $1.005 distribution. After that, the potential for having the units assigned would proceed to the following ex-dividend dates, in August and November.

If the MMP units were assigned before the August ex-dividend date, your profit would be $4.975, since it'd include the May payout. If the units were assigned before the final November ex-dividend date, your profit would be ~$5.98. If the MMP units weren't assigned until after the final November ex-dividend date, your assigned profit would be $6.99.

If you don't have much faith in the $32.05 price target for WMB, and you want to increase your income on it, on a relatively short term basis, this January 2020 covered call trade offers a $1.21 premium for the $30.00 call strike.

The $1.21 call premium is slightly higher than WMB's next three distributions, which total $1.14. The potential assigned price gain is $1.84 - the spread between WMB's $28.16 price/unit and the $30.00 call strike.

Alternatively, if you'd prefer to get a lower breakeven, vs. jumping into a position on WMB, maybe you should consider selling cash secured puts below WMB's price/unit.

WMB's January 2020 $27.00 put strike pays $1.96, much more than the $1.14 in distributions between now and January. It also gives you a breakeven of $25.04, which is 21.87% below WMB's average target price of $32.05.

Our Cash Secured Puts Table can give you more details for this put-selling trade, plus over 35 others, all of which we update throughout each trading day.

Financials:

This table is ranked by ascending amounts of net debt/EBITDA leverage, which shows OMP as having the least leverage, at 1.75X, by far, followed by MMP, at 3.13X, and ENBL, at 3.98X, on up to WMB, which has the highest net debt/EBITDA ratio, at 4.80X.

Net debt/EBITDA in the midstream pipeline space generally runs somewhere around ~4X to 5X, with companies' leverage varying quarterly, rising as they fund new growth projects, and then falling as those projects start contributing to earnings.

MMP and OMP also have the best ROA, ROE, and operating margins in the group:

All tables furnished by DoubleDividendStocks.com unless otherwise noted.

Disclaimer:

This article was written for informational purposes only and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure: I am/we are long OMP, ENBL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.