Follow-Up To MLPs Outside The Margin Of Safety

Includes: BPL, EPD, KMP
by: Clay King

At the end of last year I submitted an article pointing out that the historical levels of valuation, as measured by yield and PE, reflected poor valuation in the shares of Kinder Morgan Energy (NYSE:KMP), Buckeye Partners (NYSE:BPL) and Enterprise Products (NYSE:EPD). Since that date, the market as measured by the S&P500, has climbed approximately 9%, while two of these stocks, even adjusted for dividends have fared worse. This article is an update on the status of the current valuation of these companies. Investors should be aware that ownership of shares of MLP's require additional tax filings due to the tax consequences of distributions paid to stockholders.

As I stated in my first article the purpose was not for one to sell these securities if owned, but to postpone a purchase until the shares approached a better valuation, thereby increasing the margin of safety. To date the valuation levels are better due to higher yields, lower price's, and increased dividend payouts. The table below highlights the price performance of the shares that includes dividends paid to the investor.

Return of Shares Since December 2011

Company Return Including Dividends Price Return of Stock S&P 500 Return Including Dividends Relative Return to S&P 500
Buckeye Partners


-21.18% 9.11% (27.3%)
Kinder Morgan (.067%) -3.4% 9.11% (9.17%)
Enterprise Products 11.37%


9.11% 2.26%

The table shows that both Buckeye Partners and Kinder Morgan vastly underperformed the market while Enterprise gained 2.26% in excess of the market. The average return of the three is -11.4%. A comparison of the yields today compared to 12/28/2011 best illustrate the difference in valuation and why one was better off waiting to buy the shares.

Comparison of Current Yields

Company 12/28/2011 Yield Current Yield
Buckeye 6.61% 8.2%
Kinder Morgan 5.51% 5.9%
Enterprise 5.3% 5%

The yields on a Buckeye has climbed the most, largely due to a poor earning report recently. Kinder, with one dividend increase, yield is .4% higher and Enterprise yield has dropped .3%. Below are current PE and yield charts for Buckeye and Kinder Morgan. I mistakenly deleted the data for Enterprise from my data base so I cannot re-post the historical value, though it clearly would be worse than the previous period. Charts are created in Excel from a personal data base.

The PE on Buckeye is based on the current estimates for 2013. As one can see on the chart the current yield has now risen up to the 8.2% level, which is in the high zone since the early 1990's, except for the market lows of 2008. It is my opinion the shares represent value in the top 40%. It is at a level that peaks my interest.

(Click to enlarge)

Kinder still trades at a level in valuation that does not interest me in additional shares. Despite the lagging performance of both Buckeye and Kinder Morgan I see little reason to be aggressive in accumulating shares of either. Enterprise is more over valued than in December, so I remain on the sidelines of it also. Since the viewpoint in this article solely relates to the valuation of the shares, investors should carefully examine the fundamentals of each company prior to purchase.

Disclosure: I am long BPL, KMP.