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).

The screened MLPs represent low risk and adequate yielding investment options within the MLP space.

Disclosure: Long EPD

Tags: features, MLP, Stocks, Yield

Many of us including myself have decided to raise cash during these volatile markets. I have put together a few pointers for the best cash management:

• Spread your money around
  • It’s safe to put up to $100,000 in a single FDIC-insured bank account. To protect yourself, spread your cash around several institutions, not all of which need be banks. Many people learned his the hard way from the collapse of IndyMac.

• Use short term CDs
  • Keep CD maturities short so you can roll it over at a better rate, when the Federal Reserve raises short term interest rates. These rates are likely to start heading higher by year’s end as the Fed is now becoming increasingly concerned about rising inflation and the falling dollar.

• Use an online bank as these FDIC insured accounts still pay above average CD and saving’s rates.

Using these tips I have searched for the best yielding short term CDs and saving’s rates, which are shown below.

 Remember that in the short term, cash can indeed be king. But in the long term, cash is almost sure to lose purchasing power because of inflation.

Tags: Cash, Yield

As a shareholder of Enterprise Products, I can’t say that I was excited by the stock’s reaction to is earnings release last week, but after looking beyond the surface EPD presents a compelling buying opportunity for the medium-long term investor seeking a safe yield.

Earnings
For the second quarter, Enterprise Products earned 52 cents per share, compared with or 26 cents per share, in the year-ago quarter. The results beat Wall Street expectations by 16 cent. This large earnings surprise comes after an 18 cent earnings surprise in their first quarter. If these results were not astounding enough, EPD produced the results while its Independence Hub was impaired for 66 days during the quarter.

Distributions
Additionally, earlier this month EPD raised their cash distribution to shareholders by 1.5% over the first quarter 2008. Its increased distribution brings EPD shares payout to $2.06/unit annualized and is currently yielding 7.1%.

EPD’s total liquidity equaled $1.3 billion, which should give confidence to further distribution increases. EPD’s ability to tap multiple sources of capital (retained distributable cash flow, equity capital, debt capital raising and potential asset sales) should rest any concerns of a decrease in its distribution, which has not happened since going public in 1998.

Outlook
Going forward, EPD should have no difficulty maintaining its strong momentum as it has three large organic growth projects scheduled for completion in the second half of 2008, which will boost growth into 2009. These projects are outlined below.

• Meeker natural gas processing facility - Will double processing capacity to 1.5 Bcf/d and increase NGL extraction capability to 70,000 barrels per day
• Sherman extension to the Texas intrastate natural gas pipeline
• Exxon central treating facility - Will ship up to 1.1 Bcf/d of natural gas from the Barnett Shale region.

Valuation
Current 12-month analyst price targets for EPD average $35.00, which can be derived trough a basic Discounted Dividend Model. Using its current distributions and conservative forward estimates, a $35.00 price target is more than reasonable.

With its current shares trading at $28.95 this price would reflect a 27% 12 month return.

Summary
With two quarters of spectacular growth and increasing prospects for continued operational success, one would expect EPD’s stock to have increased drastically on this release. This is incorrect – EPD was down 11 cents on the day of its earnings release, giving medium-long term investors a compelling entry point.

Tags: Dividends, EPD, Equities, MLPs, Oil, Yield