10 Fairly Valued MLPs: Are The High Yields Worth The Risk And Effort?


A major goal of this series on sectors is to illustrate the reality that it is a market of stocks rather than a stock market. With this article I am technically covering the Industrial Services Sector. However, all the research candidates I will be presenting come from the Oil & Gas Pipelines subsector. There is probably no better example illustrating how different companies are from each other than an examination of the unique attributes of oil and gas pipeline companies.

For starters, there are important tax considerations to be considered when investing in MLPs. These entities issue a K-1 that must be included in the investor’s tax filing. This factor alone deters many investors from investing in MLPs. On the other hand, there are tax advantages associated with investing in them that are worth the aggravation of the K-1’s for other investors. However, it is not the objective of this article to delve deeply into the intricacies of the tax advantages or complications of investing in MLPs. Instead, they are offered as research candidates that provide high tax-advantaged yields that I also consider attractively valued currently. Although I do feel that it is appropriate that I mention these issues in this article, I leave it up to the individual investor to do their own due diligence.

There is an additional attribute that is common to MLPs that I believe is not discussed anywhere near enough. MLPs are very capital-intensive entities that require large capital investments to maintain and grow their revenues. Consequently, they are chronic issuers of new shares necessary to raise the capital they need to grow and expand their operations. This significant dilution associated with MLPs is a primary reason why I do not think it makes sense to value them based on earnings. A deep examination will show that most MLPs have earnings-based dividend payout ratios that are very high and often multiples of their earnings.

Other unique attributes of MLPs are significant capital investments leading to large depreciation schedules and significant increases in revenues. Therefore, I will be illustrating the valuation of the 10 MLP research candidates in this article based on EBITDA multiples rather than earnings multiples. The E in EBITDA stands for earnings. However, I see this as a soft form of cash flow because it is before interest, taxes depreciation and amortization.  Therefore, I would argue that EBITDA better reflects the per-share benefits to their shareholders than highly diluted and depreciated traditional earnings metrics.

In the analyze out loud video associated with this article, I will be covering these unique attributes more fully. Nevertheless, because of the complexity and nuisance of the K-1, the reality of the need to raise capital and the associated dilution, MLPs are not attractive to all investors. This is often in spite of the fact that there are very few investments that generate better cash flows and growth of those cash flows than MLPs.

A Sector By Sector Review

This is part 12 of a series where I have conducted a simple screening looking for value over the overall market based on industry classifications and subindustry classifications reported by FactSet Research Systems, Inc.

In part 1 found here, I covered the Consumer Services Sector. In part 2 found here, I covered the Communication Sector. In part 3 found here, I covered the Consumer Durables Sector and its many diverse subsectors. In part 4 found here, I covered Consumer Nondurables. In part 5 found here, I covered companies in the Consumer Services Sector. In part 6 found here,  I covered the Distribution Services Sector.  In part 7 found here, I covered the Electronic Technology Sector. In part 8 found here, I covered the Energy Minerals Sector. In part 9 found here, I covered the Finance Sector. In part 10 found here, I covered the Health Services Sector. In part 11 found here, I covered the Health Technology Sector.

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Disclosure: Long ET, EPD at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to ...

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