This MLP Is Poised To Increase Its Dividend 20%
A big part of my job as managing editor of StreetAuthority involves talking with our premium newsletter experts to get a sense of what they like in the market, where they think it’s headed and how they plan to help their followers profit.
I want to share some of that wisdom. I’m featuring insights and top picks from each of our experts over the next couple of weeks as a way of saying thanks for being a StreetAuthority.com reader.
Today’s pick comes courtesy of Elliott Gue.
The real-money portfolio in StreetAuthority’s Top 10 Stocks advisory actually consists of 15 holdings at the moment, which is a good thing: 14 of those stocks are in the green, with gains ranging as high as 93.5% since the launch of the advisory a little more than two years ago. One of the current holdings — and a stock that’s recommended in the following section — is an energy partnership, a sector that’s right in Elliott’s wheelhouse.
A few years after launching a highly acclaimed energy newsletter in 2005, the official program of the Group of Eight (G-8) summit in Tokyo referred to Elliott as “the world’s leading energy strategist.”
Here’s more from Elliott:
This Partnership May Grow its Dividend by 20% a Year
Since the beginning of May, the yield on the 10-year Treasury has soared more than 100 basis points (1%) to around 2.7% due to growing fears that the Federal Reserve will announce plans to taper the pace of its quantitative easing program as soon as this September. With bonds now offering more attractive yields, the knee-jerk reaction earlier this summer was for investors to sell off stocks offering high yields.
But not all income-oriented stocks underperform in a rising rate environment, and the recent sell-off is an ideal opportunity to buy into some names such as master limited partnership (MLP) MPLX (NYSE: MPLX).
Refining giant Marathon Petroleum (NYSE: MPC) is the general partner of MPLX and owns close to half of the outstanding units. In fact, Marathon placed some of its assets in MPLX before the initial public offering last October. The list of assets includes an ownership stake in 962 miles of crude oil pipelines and 1,819 miles of refined product pipelines located across seven Midwestern states, Texas and Louisiana. In addition, MPLX owns a crude oil barge loading dock on the Mississippi River in Illinois, oil and refined products storage facilities in Illinois and Indiana, and a butane storage cavern in West Virginia.#-ad_banner-#
Pipelines and storage facilities are some of the lowest-risk assets an MLP can own, and Marathon Petroleum, MPLX’s “Rich Parent,” guarantees cash flows from its current assets through a series of five- to 10-year contracts with guaranteed minimum fees.
For assets covered by these contracts, MPLX has no exposure to commodity prices — whether oil is at $50 per barrel or $150, Marathon still pays a fixed fee to MPLX for the right to utilize its storage and transportation assets.
Best of all, Marathon owns 5,000 additional miles of oil and product pipelines, three liquefied petroleum gas storage terminals in West Virginia, 62 refined product terminals, a significant fleet of crude oil barges, and a minority stake in the pipelines now controlled by MPLX.
These assets are worth more than MPLX’s $2.6 billion market capitalization and would be a perfect fit for the MLP’s portfolio. I believe Marathon will gradually sell the majority of these assets to the MLP in a series of drop-down deals over the next three to five years. In fact, these drop-downs have already started: In May, MPLX purchased an additional stake in a series of crude oil pipelines and barge loading docks from its parent, Marathon, for $100 million.
This deal was immediately accretive to cash flows and allowed MPLX to boost its quarterly distribution to 28.5 cents, equivalent to a 3.2% annualized yield. I’m looking for MPLX to grow its payout at a 20% annualized pace over the next few years, an advantage that fixed-income products like bonds can never offer. Buy MPLX under $36.50 a share.
P.S. — Like MPLX, some of the most successful MLPs often have a wealthy and powerful company backing them — or what I like to call a “Rich Parent.” These “Rich Parent” stocks are one of my favorite ways to profit in the market right now. One is a low-risk play that has already returned 333% since going public in 2008, while another yields nearly 10%. To find out how to get the names of 20 of my favorite “Rich Parent” MLPs, click here.