One MLP You Should Have In Your Portfolio
This weekend I was in Flagstaff for a horse show. The weather was beautiful, and a little chilly. When we got to the stables Sunday morning, the temperature was 44 degrees. I guess I should’ve brought a jacket! It was a nice departure from the heat wave hitting Phoenix.
Early Sunday afternoon we started the 2+ hour drive back to the valley.
Towing the horses makes the drive a bit slow. Linda was driving. It gave me time to stare out the window and contemplate the landscape speeding by. We were descending into Black Canyon City when I noticed something strange.
A huge scar was cut across the beautiful desert.
For miles, a hundred foot swath of desert had been stripped from the earth. It was a massive undertaking. All of the vegetation was gone. Only a bare strip of brown dirt remained.
Linda knew immediately what it was…
A new high pressure natural gas line had been installed. It took crews months to dig the trench, lay the pipeline, and cover everything back up. I was sad to see the destruction this process created. But, it’s amazing to think in just a year or two Mother Nature will reclaim the dirt. In time, nobody will know the pipeline’s even there.
Even more amazing is the massive undertaking an installation of this type requires. Just think of the engineering, logistics, permitting, and other challenges.
It was one of those cartoon moments. Sitting in the car, a giant light bulb over my head flipped on. I had an investment idea…
When I got home, I rushed to the computer and spent several hours researching a very specific type of company. I was focusing on companies that own natural gas pipelines. What I found was a great business with amazing profit margins, limited competition, and eye popping dividends (they call ‘em distributions).
The majority of companies owning natural gas pipelines are MLPs.
If you don’t know, MLP stands for Master Limited Partnership. It’s an investment vehicle for purchasing energy related assets… like pipelines. The businesses run the assets and distribute most of the profits. Here’s the cool part… most of the distributions are tax free.
There’s one MLP in particular that I like.
Believe it or not, it’s the same company installing the pipeline I noticed on my drive from Flagstaff.
Who am I talking about?
Energy Transfer Partners (ETP). The company is a publicly traded partnership. They own and operate various pipelines throughout the American southwest including the states of Arizona, Colorado, Louisiana (not really the southwest), New Mexico, and Utah. They own more than 17,500 miles of pipeline.
But, pipelines aren’t their only business. They also own a natural gas processing plant and three storage facilities in Texas. ETP also sells propane to more than one million retail customers.
It’s an amazing business.
Their latest report in May covers the first quarter of the year. In just three months time, they generated $1.6 billion in revenue and $300 million in net income. Now revenue is down from the prior year, but earnings are remarkably stable.
With natural gas prices leveling off, the company will no doubt see performance stabilize and growth resume.
But that’s just scratching the surface. Take a look at the balance sheet. The company has more than $10 billion in assets and just over $5 billion in long term liabilities. As an MLP, they’re required to pay out earnings as a distribution to owners.
This year the company’s on track to payout more than $3.57 per share to owners… right now that’s a yield of more than 8%!
If you’re looking to add income to your portfolio, take a hard look at ETP. They deliver a needed service and their assets give them a near monopoly. Despite one of the worst economic environments in decades, they’ve maintained profitability levels. ETP’s distributions are income I believe you can count on in good times and in bad.
It looks like a great opportunity to me!
Category: Dividend Stocks
