EC The 10 Highest Yielding MLPs Analyzed For Income Investors

Master Limited Partnerships, or MLPs, are fairly popular investment choices among income investors. It is easy to see why—MLPs pass through the bulk of their cash flow to investors. Their high yields of 5%+ are very attractive for investors who desire higher levels of income from their investments. And, with the S&P 500 Index on average yielding under 2%, the income potential of MLPs is even more appealing.

However, not all MLPs are worthy of investment. MLPs have unique risk factors, which investors should weigh carefully before investing. In addition, a high dividend yield alone is not necessarily reason to invest. A sky-high yield of 10% or more can be a warning sign that the company’s fundamentals are deteriorating, which could be a precursor to a dividend cut.

The following 10 MLPs are the highest yielding we track in the Sure Dividend MLP database, with market capitalizations above $1 billion.

High-Yield MLP No. 10: Icahn Enterprises (IEP)

Distribution Yield: 10.0%

Icahn Enterprises is a diversified holding company. It gives investors the opportunity to follow the investments of Carl Icahn, one of the most famous activist investors in the world. Over his long investing career, he has become famous for taking large positions in companies, and then pushing for board seats and major operational changes. Icahn is the largest shareholder of Icahn Enterprises, with a ~91% stake.

Icahn Enterprises focuses its investments in 10 market sectors, with over $28 billion in invested assets as of 12/31/17.

IEP Overview

Source: 2018 Investor Presentation, page 4

Icahn Enterprises has investments in many well-known companies. For example, among the automotive segment it has holdings in Pep Boys. Various other investments across Icahn Enterprises include railcar services, meat casings, metals recycling, rental real estate, and a mining operation in Brazil.

IEP Subsidiaries

Source: 2018 Investor Presentation, page 6

Icahn Enterprises recently made a significant change to its portfolio when it announced it will sell Tropicana Entertainment’s real estate to Gaming and Leisure Properties, Inc. (GLPI) and merge its gaming and hotel operations into Eldorado Resorts, Inc. (ERI), for a total sale price of approximately $1.85 billion.

Tropicana is a good example of the successful investment strategy employed by Icahn Enterprises over the years. Icahn made its first investment in Tropicana in 2008, when it was bankrupt. Icahn quickly installed a new CEO and management team, and the company recovered strongly after the Great Recession ended.

On 5/3/18, Icahn Enterprises reported first-quarter financial results. Adjusted earnings-before-interest-taxes-depreciation-and-amortization (EBITDA) increased 31% to $551 million, driven by strong performance of the company’s underlying portfolio investments and subsidiaries.

Icahn Enterprises has gotten off to a very good start to 2018, which allowed the company to recently increase its distribution by 17%. The company currently pays an annual distribution of $7 per unit, which represents a 10% yield.

Icahn Enterprises reported earnings-per-unit of $14.80 in 2017, which means the new distribution represents a payout ratio of 47%. A payout ratio below 50% indicates the distribution is secure, making Icahn Enterprises an attractive high-yield stock.

High-Yield MLP No. 9: Suburban Propane Partners (SPH)

Distribution Yield: 10.4%

Suburban Propane Partners is engaged in selling propane and related services and accessories. It has approximately 1 million residential, commercial, industrial and agricultural customers in 41 states.

SPH Overview

Source: Investor Fact Sheet, page 1

On 5/10/18 the company reported second-quarter earnings. Revenue of $536.3 million rose 19% year-over-year, but missed analyst expectations by $10.3 million. In addition, earnings-per-share of $1.73 also missed estimates, by $0.31 per share. This was a significant miss for Suburban Propane on both key metrics.

Revenue growth last quarter was due primarily to higher propane and higher volumes sold. However, Suburban Propane has struggled with a long-term trend of warm weather. Propane sales are closely tied to weather patterns. Over the first half of fiscal 2018, the company noted weather in its operating regions was 7% warmer than normal, based on average heating degree days over the prior 30 years.

Poor weather patterns contributed to a difficult year in 2017, which compelled Suburban Propane to cut its dividend by 32% on 10/26/17. Such a large dividend cut is never good to see, however the new distribution is much more sustainable for the company. Distributions paid over the first half of the current fiscal year represented a payout ratio of 52%, which is manageable.

If weather patterns normalize, we believe Suburban Propane can generate satisfactory returns moving forward. We forecast EBITDA growth of 3%-4% per year, on average, in a normal operating environment. In addition, the 10% distribution yield will add significantly to annual returns. Lastly, we believe the share price is undervalued. The stock trades for a price-to-EBITDA ratio slightly above 5, and we believe fair value is a price-to-EBITDA ratio of 8.

The impact of a rising valuation could add approximately 9% to annual returns over the next five years. As a result, we believe total returns for Suburban Propane could reach into the high-teens on an annual basis.

High-Yield MLP No. 8: Golar LNG Partners (GMLP)

Distribution Yield: 11.1%

Golar LNG operates marine-based liquefied natural gas (LNG) infrastructure. The company liquefies and transports natural gas. It also has exposure to the upstream exploration and production segment through a joint venture with Schlumberger (SLB).

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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