Tag Archives: income

MLPY: Now Yielding 12.6% With Reduced Upstream Exposure

Summary With the recent carnage in the energy sector, the yield of MLPY has increased to 12.6% on a ttm basis. MLPY offers more diverse exposure to energy-related MLPs compared to the most popular MLP funds, which are dominated by midstream MLPs. MLPY has significantly reduced exposure to upstream MLPs compared to six months ago, which may offer some protection against further declines in crude prices. Introduction Energy-related stocks and funds have been hammered recently as the price of oil continues to fall. The chart below shows the recent price action of crude oil, the U.S. energy sector (via the Energy Select Sector SPDR ETF (XLE )), and the popular midstream MLP fund, the JPMorgan Alerian MLP ETN (NYSEARCA: AMJ ). WTI Crude Oil Spot Price data by YCharts In a previous series of three articles, I covered characteristics of three lesser-known MLP funds: the Morgan Stanley Cushing MLP High Income Index ETN (NYSEARCA: MLPY ), the Yorkville High Income MLP ETF (NYSEARCA: YMLP ) and Global X Junior MLP ETF (NYSEARCA: MLPJ ). I was attracted to these funds due to their high yields as well as their more diverse stock mix compared to the most popular MLP funds such as AMJ and the Alerian MLP ETF (NYSEARCA: AMLP ). Besides midstream MLPs, those three funds also contained exposure to GPs, upstream MLPs, diverse MLPs, variable MLPs, and “other” MLPs, as defined by the CBRE Clarion Securities MLP Master List . Moreover, those three funds had a much lower average market capitalization than the two large-cap MLP funds AMJ and AMLP. Unfortunately, this diversification acted against those three funds over the past several months. Small-cap and upstream MLPs were especially hard-hit as investors fretted over the financial health of such companies. AMJ Total Return Price data by YCharts With the decline in MLPY’s unit price, its yield has now increased to an alluring 12.6% on a trailing twelve-months [ttm] basis. With the July rebalance also having recently been completed, I thought that now would be a good time to provide an update on this fund to determine whether it is still a good investment. Moreover, this article describes the inclusion and weighting methodology for MLPY, something that I did not do in my previous article. MLPY methodology MLPY contains 30 MLPs and the methodology for their inclusion is reproduced below from the fund website . The 30 MLPs in the Index are tiered as follows: [I] the first tier includes those 10 MLPs that have the highest current indicative yield and a market capitalization of $1 billion or more, with each first tier constituent assigned a 5% weighting; [II] the second tier includes those 10 MLPs that have the highest current indicative yield and a market capitalization of $750 million or more, with each second tier constituent assigned a 3.5% weighting; [III] the third tier includes those 10 MLPs that have the highest current indicative yield and a market capitalization of $500 million or more, with each third tier constituent assigned a 1.5% weighting. This methodology favors high-yielding MLPs, but has conditions on market cap to ensure that the index is not dominated by small-cap holdings. Specifically, a company has to have a market cap of $1B or more to be assigned with a 5% weighting, a market cap of $750M or for a 3.5% weighting, and a market cap of $500M or more for a 1.5% weighting. MLPs with less than $500M capitalization are excluded, which is why we don’t see companies such as Atlas Resource Partners L.P. (NYSE: ARP ), yielding a fantastic 38% but with a market capitalization of only $300M, in the index. Additionally, there is an additional criterion for dividend stability: Each constituent security candidate must have maintained or increased its distributions over the previous four fiscal quarters. An exception will be made for new listings or issuers that move to a national securities exchange from another dealer market or over the counter exchange. Such issuers must maintain the above standards moving forward from the new or re-listing date. While excluding dividend-cutters sounds like a perfectly reasonable filter, it should be noted that a dividend cut is often accompanied by a severe damage to the unit price of the MLP (see Linn Energy (NASDAQ: LINE ) for the most recent example). This means that the fund will have no choice but to “sell low” as it removes the dividend-cutters from the index during its quarterly rebalancing event. In fact, the aforementioned ARP was a 5%-weighted constituent of MLPY as recently as six months ago. Composition The constituents of MLPY are given in the table below. Also shown is the % assets, current yield, market cap and type of each constituent . Note that as an ETN, the holdings of MLPY are not publicly available on a daily basis. The % assets are obtained from the company while the current yield and market cap are obtained from Seeking Alpha. In categorizing the type of company, I have used the classification types in the CBRE Clarion Securities MLP Master List website, which considers these following MLP or MLP-related classes: [i] traditionally structured midstream MLPs, [ii] upstream MLPs, [iii] traditionally structured other MLPs (“other”), [iv] variable distribution MLPs (“variable”), [v] MLP GP holding companies (“GP”), [vi] other publicly-traded companies that own GP interest in an MLP (“diverse”), and [vii] other MLP-related securities. Name Ticker Assets / % Yield / % Cap / B Type NGL Energy Partners LP (NYSE: NGL ) 6.43 9.3 2.88 Midstream Ferrellgas Partners LP (NYSE: FGP ) 5.46 9.5 1.88 Other Calumet Specialty Products Partners LP (NYSE: CMLP ) 5.44 10.3 2.01 Other Energy Transfer Partners LP (NYSE: ETP ) 5.39 8.2 25.2 Midstream Golar LNG Partners LP (NASDAQ: GMLP ) 5.12 11.2 1.27 Other Teekay Offshore Partners LP (NYSE: TOO ) 5.03 12.8 1.55 Other Memorial Production Partners LP (NASDAQ: MEMP ) 5.00 24.6 0.75 Upstream DCP Midstream Partners LP (NYSE: DPM ) 4.62 10.5 3.40 Midstream Williams Partners LP (NYSE: WPZ ) 4.39 7.5 27.3 Midstream Crestwood Midstream Partners LP 4.27 17.2 1.80 Midstream Seadrill Partners LLC (NYSE: SDLP ) 3.85 19.1 1.09 Other Crestwood Equity Partners LP (NYSE: CEQP ) 3.84 15.2 0.68 GP Exterran Partners LP (NASDAQ: EXLP ) 3.64 11.1 1.21 Other Targa Resources Partners LP 3.52 9.4 6.33 Midstream Navios Maritime Partners LP (NYSE: NMM ) 3.47 17.5 0.84 Other Martin Midstream Partners LP (NASDAQ: MMLP ) 3.46 11.3 1.02 Midstream ONEOK Partners LP (NYSE: OKS ) 3.22 10.1 8.03 Midstream Capital Product Partners LP (NASDAQ: CPLP ) 3.16 12.4 0.80 Other Alliance Resource Partners (NASDAQ: ARLP ) 2.96 11.1 1.81 Other Summit Midstream Partners LP (NYSE: SMLP ) 2.58 7.8 1.72 Midstream Transocean Partners LLC (NYSE: RIGP ) 1.72 11.5 0.87 Other AmeriGas Partners LP (NYSE: APU ) 1.60 8.0 4.27 Other NuStar Energy LP (NYSE: NS ) 1.59 8.0 4.29 Midstream Suburban Propane Partners LP (NYSE: SPH ) 1.59 9.5 2.27 Other Global Partners LP (NYSE: GLP ) 1.50 8.8 0.97 Other CSI Compressco LP (NASDAQ: CCLP ) 1.48 13.9 0.48 Other Teekay LNG Partners LP (NYSE: TGP ) 1.46 10.5 2.10 Other Hi Crush Partners LP (NYSE: HCLP ) 1.46 12.1 0.58 Other Foresight Energy LP (NYSE: FELP ) 1.44 18.4 1.05 Other SunCoke Energy Partners LP (NYSE: SXCP ) 1.33 15.4 0.59 Other We can see from the table above that in addition to midstream MLPs (39%), MLPY also contains a significant proportion of “other” (52%) MLPs. According to CBRE, “other” MLPs include all MLPs that are not midstream MLPs, but are structured like midstream MLPs (with a minimum quarterly distribution). These include coal, compression, shipping, oilfield services, wholesale distribution, and everything else. (Note: other authorities classify wholesale distribution as midstream). Examples of “other” MLPs in MLPY include Capital Product Partners, a diversified shipping company in the seaborne transportation of fuels and other cargoes, Ferrellgas Partners, a supplier of propane, and Alliance Resource Partners, a diversified coal producer and marketer. The allocations of MLPY are depicted in the chart below. How does this composition compared to six months ago ? The following chart shows the former, current and changes in the four categories of MLPs in MLPY from six months ago to now. We can see from the chart above that the proportion of midstream holdings in MLPY has remained relatively constant. However, there has been a big decrease (-24% in absolute terms) in the proportion of upstream MLPs in fund, which has been accompanied by a large increase (+20% in absolute terms) of “other” MLPs. Examples of upstream MLPs that have been removed from the fund over the past six months include ARP, LINE and Vanguard Natural Resources (NASDAQ: VNR ), while examples of “other” MLPs that have been added include RIGP, GMLP and TOO. For investors who are worried about a prolonged period of crude oil prices, this shift away from upstream MLPs and towards “other” MLPs is a welcome change. With only 5% of upstream MLP exposure, the fund should now be “relatively” more protected against further declines in crude prices compared to six months ago. Distribution Since my last article, MLPY has paid out 3 more distributions. While the first of these was the highest-ever in the history of MLPY, the most recent two have unfortunately shown a declining trend. This is not surprising as several higher-yielding upstream MLPs were removed from the index due to dividend cuts. While a comprehensive analysis of the dividend sustainability of each individual MLP is beyond the scope of the article, it is hoped that a reduced exposure to upstream MLPs will increased the stability of the distribution from MLPY going forward. Risks MLPY contains companies that are smaller in size compared to those found in the large-cap funds AMLP or AMJ. Moreover, energy-related MLPs are (to various extents) acutely sensitive to commodity prices, and the 12.6% distribution may or may not be sustainable. Additionally, MLPY’s expense ratio is 0.85%, which is the same as that for AMLP and AMJ. Finally, MLPY is an ETN, which means that investors are exposed to the credit risk of the issuer, in this case Morgan Stanley. Conclusion Since six months ago, MLPY has significantly increased its exposure to “other” MLPs while significantly decreased its exposure to upstream MLPs. With only 5% exposure to upstream companies remainder, MLPY can be considered to be more protected against further declines in crude oil prices compared to its situation six months ago. Moreover, MLPY’s yield now sits at an attractive 12.6% on a ttm basis. The reason I have chosen MLPY as an investment is because I am not comfortable with picking individual energy MLPs, especially in such as volatile environment as right now. Moreover, by having a significant exposure to “other” MLPs, which although are energy-related should be less acutely sensitive to crude prices compared to upstream MLPs, provides nice diversifying element to the fund. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MLPY over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

3 Best Vanguard Funds for Stability

By Kent Thune, InvestorPlace Contributor If stability is what you crave, you can’t go wrong with Vanguard. While the crowd tries to squeeze out bigger gains and chase higher yields, you can sit back and go about your life while your conservative Vanguard funds quietly win more in the long run by losing less in

Attractive Valuations And Potential To Outperform Peers Are Highlights Of American Electric Power

Summary Stock should trade at a 5%-10% premium to its peers’ average forward P/E. Company’s business fundamentals remain strong and efforts to strengthen regulated operations will bode well for stock price. As AEP increases regulated operations, its cash flows will become more certain, which will support dividend growth. American Electric Power (NYSE: AEP ) has strong business fundamentals and its future financial performance is expected to be solid. The stock stays an attractive investment prospect for income-seeking investors, as it offers a solid yield of 3.9% . Moreover, the company’s future growth is expected to stay strong, which will be mainly driven by its capital spending, directed at strengthening and expanding its regulated business operations. The company’s focus on regulated business operations is gaining significant traction, and it expects to achieve long-term growth of 4%-6%. Moreover, an important decision American Electric has to make in the next 3-6 months is regarding the faith of its merchant assets; either the company will sell the assets or continue to operate them. Furthermore, the stock’s current valuations are attractive. Strong Performance and Growth Catalysts American Electric has been delivering a strong financial performance, which is expected to continue in future, mainly driven by its increased focus on regulated operations. The company reported EPS of $0.88 for 2Q2015, beating consensus of $0.81. Also, rate increases and cost control initiatives positively affected American Electric’s performance for the quarter. In 2Q2015, the company secured a $123.5 million annual revenue increase and ROE of 9.75% in West Virginia, along with a $45.4 million annual revenue increase and ROE of 10.25% in Kentucky. Given the strong performance in the first half of 2015, the company increased its mid-point of 2015 EPS guidance by 2%; increased 2015 EPS guidance from $3.4-$3.6 to $3.5-$3.65 . In recent times, the company increased its focus on regulated operations, as the performance of unregulated/merchant operations has stayed weak and volatile because of low forward power prices. The company has a robust capital spending outlook, which will fuel its revenues and earnings growth in future years; American Electric plans to incur capital spending of $12.3 billion from 2015-2017. As the company has increased its focus on strengthening its regulated operations, 96% of the planned capital spending will be allocated to regulated business. Also, the company increased its 2015 capital spending guidance from $4.4 billion to $4.6 billion ; as the company continues to make progress with its cost control measures under its continuous improvement program, it freed up an additional $200 million for capital investment for 2015. The following chart shows the breakdown of the company’s planned capital spending. (click to enlarge) Source: Investors Presentation As forward power prices remain weak and volatile, utility companies in the U.S. are taking initiatives to reduce their merchant power operations. American Electric is also considering different strategic options for its 7,900MW of competitive fleet. I think that in the next 3-6 months, the company will make a decision regarding the future of its merchant assets, as currently it waits for the PJM auction results and for the pending Ohio PPA proposal. I think the best option for the company is to sell its merchant assets, as it will allow it to completely focus on regulated operations, which will improve its revenues and cash flow stability, and will augur well for the stock valuation. Moreover, I believe the company’s merchant assets sale value could range from $2 billion to $3.2 billion, depending on the outcome of the PJM auction prices, which are expected to settle by mid-August. Also, if the company chose to sell its merchant assets, it can direct the sale proceeds to increase its planned capital spending for future years, which will have a positive impact on the stock price. Other than the robust capital spending profile, the company has been making consistent efforts to improve its credit outlook. The company has successfully managed to reduce its total debt to total capitalization ratio from 57% in 2010 to 54.3% in 2Q2015. Also, the company’s qualified pension funding stands at 101% in 2Q2015, up from 96% in 1Q2015 and 97% in 2014, as displayed below in the figures. (click to enlarge) Source: Investors Presentation Valuation and Summation The stock’s current valuation stays attractive, as it is trading at a forward P/E of 15.08x , in contrast to its peers’ average forward P/E of 15.5x. Given, the company’s solid financial performance and robust capital spending profile, which will fuel its future growth, I think the stock should trade at a 5%-10% premium to its peers’ average forward P/E. Also, the company’s business fundamentals remain strong and the company’s efforts to strengthen its regulated operation will bode well for the stock price. And if the company chose to sell its merchant assets, its business risk profile will improve, as revenues and earnings will become more stable. Moreover, as the company is increasing its regulated operations, its cash flows will become more certain, which will support its dividend growth. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.