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Benefit from the Sell-Off in
MLPs Before the Opportunity is Gone |
Published:
December 30,
2007
Talk
about throwing the baby out with the bathwater -- of all the
sectors in the high-yield universe, master limited partnerships
(MLPs) have been the most unfairly tarnished by the subprime
mortgage mess. The benchmark Alerian MLP Index (AMZ) of 50 major
pipeline and energy-related partnerships has fallen off nearly
-12% from its July peak, and many individual MLPs have pulled
back even further.
Investors are fleeing the sector largely on concerns that the
tight credit markets won't provide enough capital for these firms to
maintain their distributions or keep growing. For many
MLPs, nothing could be further from the truth.
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Most MLPs own oil and natural gas pipelines or other stable
assets. Apart from normal maintenance, these assets generally
don't require large infusions of capital to generate cash flow
in good times or bad. For example, most pipeline operators have
little to no competition, and their revenues are based on the
volume of oil or natural gas transported, not changing oil and
gas prices. As such, the dividends of most MLPs are powered by a
steady, reliable stream of cash flow, regardless of whether
fresh capital is available to continue growing.
Still, what makes this sector so attractive is its history of
strong dividend growth. Over the past decade, MLPs have grown
their dividends an average of +8-9% a year. To achieve this
dividend growth, the companies must increase their cash flow by
developing existing assets or buying new ones. Pipeline
operators, for instance, grow by expanding the capacity of
existing pipelines, building new pipelines, or acquiring
additional pipeline systems.
Since MLPs pay out most of their cash flow to shareholders, they
need to rely on external funding sources for growth. But
financial liquidity is NOT a problem for most MLPs, as
investment banker Wachovia (NYSE: WB) notes in a recent report.
Despite tight lending markets or the so-called "credit crunch,"
many MLPs are already well capitalized, with firmly established
credit lines and plenty of cash reserves. Some also raise
additional cash by issuing bonds, preferred shares, or new
partnership units.
Magellan Midstream (NYSE: MMP) is a case in point. MMP's shares have fallen -15% since
April. Meanwhile, the firm has raised its dividend each and
every quarter, not only this year, but for a string of 26
straight quarters. Total payouts in 2007 are more than +9%
higher than a year ago and give MMP an average dividend growth
rate of +15% a year since going public in 2001.
These dividend increases are powered by growing earnings, which
the company now expects to come in at $2.57 per share in 2007,
up nearly +15% from last year. And the future looks equally
promising. With $750 million in long-term notes and another $550
million in a revolving line of credit, the company plans to
spend $190 million on expansion projects in 2008, up from $160
million in 2007. These projects should help keep earnings
growing an average +7% a year for the next five years, just as
they have over the past five years.
And Magellan Midstream is not alone in its stellar dividend
performance...
Important Note: Throughout
the remainder of this article,
High-Yield Investing editor Carla Pasternak provides
a list of 16 MLPs that are experiencing a short-term pullback, and
have yields ranging from 5.9% all the way up to 8.6%. However,
in order to view the remainder of this article, you'll need to
subscribe to our premium income investing newsletter --
High-Yield Investing. After you subscribe, you'll
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Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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