10 Fairly Valued MLPs: Are the High Yields Worth the Risk and Effort? Part 12


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.