Subscribe Feed (RSS)Top 10 Lowest Standard Deviation MLPs
August 30th, 2008 by Mark | Filed under Equities, Fixed Income.MLP Defined
A MLP is a master limited partnership. MLPs are publicly traded limited partnerships and operate in the natural resource, financial services, and real estate industries. MLPs have a significant tax advantage over other public companies; MLPs are not subject to the double taxation of public corporations. Instead they pass through the income, meaning owners of MLPs are personally responsible for paying taxes on their individual unit of the MLP’s income, gains, losses, and deductions.
Evaluating an MLP
Since MLPs are required to pay out their income to unit holders the size and visibility of future cash distributions are the largest contributing factor in the value of MLP units. Consequently, it is particularly important for investors to evaluate whether an MLP is able to meet its current distribution obligations and whether it will be able to continue or raise its future distributions. To judge this the distributable cash flow coverage ratio of used.
Cash Flow Coverage Ratio = (Net Income + Depreciation, Amortization & Other non-cash expenses - maintenance Capital Expenditure) / Total Distributions
The ratio measures compares total distributable cash flow to the amount paid out to shareholders. If the ratio is below 1.0 the firm is not generating enough cash to cover its distributions.
The Screen
When searching for MLPs it is very difficult to screen for high cash flow coverage ratios directly. Each MLP will have different portions of their Capital Expenditures geared towards maintenance of continuing operations – you will need to examine the note in their 10k.
However, the ability of a MLP to maintain and grow their distributions will be factored into the MLP’s stock price via its standard deviation and dividend yield. In theory, more unsecured distributions will correlate with a higher standard deviation, and the dividend yield will likely be higher to compensate for this risk.
I have prepared a screen of the 10 lowest yield standard deviation MLPs and highlighted this with their dividend yield and past one year return (excluding the dividend yield).
| Ticker | Company Name | Div Yield | 1 Year Return |
| KMP | Kinder Morgan Energy Partners LP | 6.89% | 14.83% |
| EPD | Enterprise Products Partners LP | 6.99% | -0.27% |
| EEP | Enbridge Energy Partners LP | 8.16% | -4.02% |
| TCLP | TC PipeLines LP | 8.25% | -7.99% |
| MMP | Magellan Midstream Partners LP | 7.40% | -11.86% |
| BPL | Buckeye Partners LP | 7.97% | -12.54% |
| PAA | Plains All American Pipeline LP | 7.45% | -17.52% |
| TPP | TEPPCO Partners LP | 8.85% | -20.35% |
| NS | NuStar Energy LP | 7.98% | -24.31% |
| AHD | Atlas Pipeline Holdings L P | 6.81% | -26.49% |
The screened MLPs represent low risk and adequate yielding investment options within the MLP space.
Disclosure: Long EPD
I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.
Tim Ramsey
Generally, energy pipeline MLPs have a stable revenue base and so unless they are badly mismanaged can payout their dividends consistently. If they are expanding their operations, then they will be able to increase their dividends over time consequently leading to an increasing share price. However, what is referred to as the peak oil phenomenon may change the stability of these companies because there will be literally less oil to pipe from one point to another. However, this may be compensated for by increasing volumes of natural gas. It’s also important to point out pipeline companies are compensated based on the volume of the oil or natural gas they deliver so changes in the price of oil or natural gas have no direct effect upon their operations.
Mike,
You are 100% correct. I have owned EPD for some time now on the thesis you laid out. I would not be too concerned that oil volumes will run these firms out of business. Natural gas will more than make up for the loss, especially if Boone Pickens gets his way.
If oil volumes do slow, it will happen gradually. Investors will know well in advance and be able to react accordingly.
Thanks for the comment.
Mark Barath
Author, CapitalistCow.com