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Recent Distribution Cut Has Produced A Buying Opportunity For TYG

Summary

  • MLP closed-end funds offer a way to invest in MLPs and get a 1099 instead of multiple K-1s.
  • TYG has become quite cheap because of a recent distribution cut.
  • The TYG distribution yield is 12.19%.
  • TYG is considering a possible merger with NTG which would be favorable for TYG shareholders.
  • TYG has announced $35 million in share buybacks in 2020.
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It's funny how much things can change in ten years. If you turn the clock back ten years, Energy Master Limited Partnerships or MLPs were one of the hottest and best-performing asset classes at the time. MLPs had a very high Sharpe ratio and terrific risk-adjusted performance.

Now, move the clock forward ten years, and you will find that MLPs have been one of the worst-performing asset classes over the last five years. But a contrarian investor may believe that good performance going forward could follow the extreme underperformance we have seen.

Valuation has gone from being somewhat pricey five years ago to dirt-cheap today. Compared to extremely low yields (or even negative yields) on fixed income securities, higher quality MLPs are probably the highest-yielding securities available today.

Here are some reasons why you may want to consider adding MLPs to a bond portfolio:

  • Possible attractive total return potential going forward
  • High Yield
  • Portfolio diversification
  • Low correlation with other asset classes
  • Tax-advantaged

There are several ways to own MLPs. You can buy the individual issues, or purchase closed-end funds, ETFs and ETNs.

If you directly purchase a portfolio of MLPs, you will receive K-1s, and may be subject to unrelated business taxable income (UBTI). You may also need to file tax returns in several states. Because of this, some investors may prefer owning a closed-end fund that owns MLPs.

Here are some key characteristics of MLP closed-end funds:

  • You will receive one Form 1099 instead of multiple K-1 forms.
  • MLP closed-end funds are organized using a C-corp structure, not the usual registered investment company (RIC). CEFs are not structured as RICs because no more than 25% of a RIC can be invested in MLP securities (American Job Creation Act of 2004).
  • MLP CEF dividends are considered qualified dividend income (QDI) and

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This article was written by

George Spritzer, CFA profile picture
4.46K Followers

George Spritzer, CFA is a registered investment advisor who specializes in managing closed-end funds for individuals. George also shares his understanding of how to profit from investing with special situations as a catalyst.

George is a contributor to the investing group Yield Hunting: Alt Inc Opps, a premium service dedicated to income investors who are searching for yield without the high risk of the equity market. The group manages four portfolios with a range of yield targets, a monthly newsletter, weekly commentary, rankings of CEFs based on yield, trade alerts, and access to chat for questions. Learn more.

Analyst’s Disclosure: I am/we are long TYG. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (48)

l
now no dividends distributed for the rest of the year to allow the fund to accumulate shares...I like it
D
bought at 2.52. and 3.19....

have seen unbelievable discount to NAV of 28 % recently

recent price has been rising rapidly due both assets rising from very low levels and now it looks like the discount is shrinking

I believe the discount will shrink to 16 % today
George Spritzer, CFA profile picture
Good timing, Damien! ET is up after-hours, so TYG may have another good day tomorrow.
FROGBERT profile picture
@George Spritzer, CFA I wonder if you might update your view on the impact of the deferred tax asset liability since the price crash and delevering
cef.tortoiseadvisors.com/... Rob Thummel with Tortoise was on CNBC this morning singing the praises of MLP pipeline co's for having less commodity exposure and thus dividend sustainability...while he was clearly talking his book..at least it wasn't negative..and relatively speaking he's certainly correct..as I post this USO is -31% while AMLP is -1.8%,,interesting times.
George Spritzer, CFA profile picture
Because of the drop in prices, they now have a small deferred tax asset. It works in reverse and reported NAV is a bit overstated. To adjust, subtract the deferred tax asset from the NAV to get an adjusted NAV.
FROGBERT profile picture
Started a small position @1.61 down 50% from yesterday
FROGBERT profile picture
Deleveraging and the unwind of MLPQ into a falling market has produced self-reinforcing cycle..and this liquidation cycle probably applies to many leveraged assets.
George Spritzer, CFA profile picture
Great timing, Frog! You almost doubled your money in one day.
FROGBERT profile picture
Thanks George..It was a good bit of luck..If I'd been following it closely, I likely would have bought earlier..If I hadn't owned it before, wouldn't have known it well enough to catch the falling knife..actually added to the initial buy at 1.27 lowering the cost to 1.53. Your article was helpful catch up on the fundamentals.
FROGBERT profile picture
@George Spritzer, CFA Seeing massive drops not only is MLP CEF's TYG -20% as I write, but also TPVG a BDC way below NAV. I wonder if this is related to the liquidity Repo crisis the Fed has tried to address. Down ~60% since @movetohawaii posted about it being a steal on 3/9. And MLP's weren't supposed to be exposed to the oil price...somebody is in forced liquidation.
I did a chart compare of TYG with MLPI & AMLP..they were hand in gloae 2/2 through 3/6..after that TYG was down 75% vs -50% for the other 2.
George Spritzer, CFA profile picture
Yes, there have already been forced liquidations by several other MLP funds due to de-leveraging. TYG has probably started some de-leveraging already, but it may not be over yet . One way to track this is to follow their top 10 holdings and look for extremely high volume. When that occurs, the 'flush" may finally be over. This is certainly not for widows and orphans, since there is a very small possibility the fund could go to zero.
On the other hand, if you can catch the bottom, it could easily be a three or four bagger from that level.
Triple F Fred profile picture
@George Spritzer, CFA Definitely not for the faint of heart! I am doing some deep research in several situations including the Nuveen MLP funds...
They could possibly roll some of these up together...Remains to be seen.
Ouch! Down 31% today. If it was a good buy Friday, it must be a steal today.
George Spritzer, CFA profile picture
I added some shares today. My position is still fairly small, and I plan to gradually scale in on down days over the next few weeks if the price stays near these levels or below. One advantage of zero commissions is that it allows you to place many small trades over time.
fanofgk profile picture
TYG asset to leverage ratio is required to be 300%. After this last bloodbath it is now down to 150%, I believe. They have thirty days to fix it from the end of a month when it occurs which puts it at April 30. Question is can they get some extension on this from their lenders to wait for the price to recover, or will they be selling assets to get back in compliance. If assets are sold to pay down the leverage, will there be a negative feedback loop that they cannot escape. Anyone seen this play out before?
George Spritzer, CFA profile picture
fanofgk- Tortoise put out an update on this a few days ago:

cef.tortoiseadvisors.com/...
XXthCentMan profile picture
Nice piece as always, but market developments are sobering. TYG seems to continue to max out its allowable leverage such that any decline in nav impacts it leverage capacity. THe recent drops in navs have to be forcing close looks at how to trim leverage to keep it within covenant limits. This could easily result in a vicious circle for TYG. A drop in nav forcing sales to trim borrowings which then undermine the pricing used to calculate nav. Once leverage i slost its practically impossible to restore it.
George Spritzer, CFA profile picture
XXthCentMan- Yes, there were very large NAV drops on Friday and I wonder if there was some forced selling. The NAV for TYG dropped 9% which was about average for the group. The biggest drop was DSE where the NAV dropped 13.94%.
c
Thank you for this article. I will look at TYG and NTG.
1) I am concerned the total dividends were too small to make up for the share price drop the past few years.
TYG was about $17/share in mid February 2020 (before the recent big price drop).
- 50% = share price drop between mid February 2017 and 2020.
-$18.50 = share price loss between mid since February 2017 and 2020.
$8.32 = total dividends between February 2017 and 2020.
/
2) If a portion of dividends are classified as return of capital, does that increase the capital gains tax due when the shares are sold?
/
George Spritzer, CFA profile picture
corvid- When you receive return of capital, it lowers your cost basis. So yes, it does increase the capital gains tax due if you sell or reduce the capital loss.
c
Thanks.
j
I always enjoy your articles. Good reasoning, common sense, and research. I considered TYG recently but bought MLPX instead. Several pipelines have converted to C corps one wonders if this is the start of a trend. I had concerns about using leverage in a crazy market too despite discounts. With MLPX I get both C corps and MLPs.


You briefly touched on ETFs in the MLP sector. I would be grateful for your thoughts on MLPX. Thanks!
George Spritzer, CFA profile picture
jason jones- MLPX is not a bad choice if you want lower volatility. TYG offers the chance to buy depressed assets at a discount.
j
Down 60 cents this am. So much for price stability. I think we are all in for a wild ride in this market! Thanks for the feedback!
I
If I look at cefconnect, Annualized Total Returns it is for 10 year -1,2 percent.

For 5 years it is -14 percent. If that includes the payment of the distribution, it seems like a bad stock to own?
George Spritzer, CFA profile picture
International Investor- Thanks for commenting. TYG does not have good performance looking backward. if you buy it, you are betting on a turnaround going forward. Some pretty sharp investors like Sam Zell have recently started to look for bargains in the energy sector.
j
Brookfield has also said they are looking here.
Triple F Fred profile picture
@jasonjones

Brookfield stepped into the MLP arena with the purchase of CEN not too long back...the current environment might be more lucrative than when they moved into CEN.
j
Lots of good information, thanks for taking the time. Long TYG. I just hope there isn't another cut.
George Spritzer, CFA profile picture
jon1111- Thanks for commenting. i doubt there will be another cut any time soon. If necessary, they can just use ROC to make distributions.
c
Thanks for the encouraging write-up. Long TYG
George Spritzer, CFA profile picture
clethodim- Thanks for commenting. The bottom may not be in yet, but dollar cost averaging into TYG here may work out well over the longer term.
SaltyDog62 profile picture
Hope so. Bought 1000 shares each TYG NTG FEN
George Spritzer, CFA profile picture
SaltyDog62- Good luck on your purchase!
L
Hi George-Thank you for your writeup.
Can you please comment on the 30% drop on Monday? Was that in line, or is there something else going on.
George Spritzer, CFA profile picture
It was in line with other MLP CEFs. This was one of the worst days for the underlying portfolio in the last 10 years, but some of the weakness was likely due to forced selling/margin calls etc, both in TYG and in the underlying portfolio stocks.

In the article, I suggested gradually scaling in to TYG over time. I added some more shares today and will probably add more over the next few weeks on down days unless there is a massive V-shaped recovery.
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