Members of the 7% Dividend Club
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Master limited partnerships offer investors high yields with potential tax advantages. Yes, you have to report on your taxes several lines from a K-1 form, but considering MLP distributions may receive more favorable tax treatment than dividends from common stock, it may be worth the hassle. Below, I’ll review three different MLPs in three different businesses All pay over 7% in distributions, all have their assets and liabilities.
Leading off, a specialty refining company, Calumet Specialty Products Partners (NASDAQ: CLMT). I find this firm interesting for a number of reasons. First, its distribution yield is currently around 7.4% and the distributions just keep growing.
Second, it's a slowly diversifying company. Calumet’s current product mix ranges from jet fuel to asphalt to solvents to gels used in personal hygiene products. More recently, crude oil transportation appeared on Calumet’s radar, possibly adding another dimension to its business. Oil transportation is a steady growing business and would likely provide a steady growing source of revenue for the company. Above all, this diversity represents safety.
Third, the company is growing by acquisitions. This past 16 months saw three refinery operations added to Calumet’s portfolio, helping reduce the risk of lost revenue should any one refinery shut down. These acquisitions should also contribute nicely to Calumet’s bottom line.
Lastly, the company is looking to make its own oil from natural gas. Using cheap Marcellus shale gas, Calumet is looking to use Fischer Tropsch technology to custom make oil for its fuel refinery operations. Like any refiner, Calumet’s profits hinge on the price difference between crude oil and its finished products. A spike in crude oil prices could crimp cash flow and distributions.
Energy Transfer Partners (NYSE: ETP) looks like an interesting turn-around story. A natural gas pipeline company paying about a 7.5% dividend, Energy Transfer spent a pile of money recently on its Sunoco acquisition and spent $3.1 billion over the past couple of years building the company. Additionally, the company began paying down debt through the sale of its propane operations to AmeriGas.
Most importantly, Energy Transfer is working on both increasing its distribution and transitioning to a more dependable fee-based leasing model. Management seems to understand distributions are important to investors. And investors are not happy that distributions haven’t increased since 2008. Management also seems to understand that oil is where the action is at the moment and the Sunoco acquisition gives them exposure to Eagle Ford shale oil.
Some analysts believe revenues and distributions should increase from these efforts. However, they haven’t yet. If the company can pull off its transition to a fee-based leasing model and its Sunoco acquisition generates revenues, then investors will likely see capital gains on top of a solid distribution yield.
Not all analysts are sold on the idea of Energy Transfer delivering improved revenues and distributions. I personally think this would be a good company for immediate income needs. Just watch it to make sure distributions don’t suffer during this time of transition. Capital gains would be the proverbial cherry on top.
Linn Energy (NASDAQ: LINE) and its common stock counterpart, LinnCo (NASDAQ: LNCO), produce oil and gas from sites around the US. The company pursues a unique two-pronged approach in its business. First, it acquires stable producing assets. While this means production growth may not explode from year to year, it doesn’t crash and burn, either.
A great example is Linn’s activity in the Granite Wash oil play in the Texas panhandle. A company spokesman confirms Linn has drilled 25 wells in the Hogshooter Wash alone and the results keep the company focused on this little part of the world. These steady productive assets allow Linn to generate dependable cash flow to fund additional acquisitions. And acquire it has, spending almost $3 billion on new assets in 2012 with at least that much activity projected for 2013.
Second, Linn hedges its oil and gas production to insure cash flow and protect against fluctuations in commodities prices. Linn CEO Mark Ellis describes this hedging activity as “core to our business model.” Others simply refer to it as Linn’s “secret sauce” for its success over the years. Call it what you want, the practice brings in revenue in good times and bad. Currently, Linn has hedged its gas production until 2017 and its oil production to 2016.
Final Foolish Thoughts
Of the three stocks above, I’m most keen on Linn and Calumet. Linn provides a growing stream of distributions but limited capital gains. Calumet provides high initial income with a track record of capital gains, but is a relatively small company and a spike in oil prices will likely hurt its revenues. Energy Transfer pays a steady 7.5% distribution and is transitioning to would should be a more profitable business model. The risk, of course, is what happens if the transition doesn’t pan out or takes longer than anticipated.
dylan588 owns shares of LINE and CLMT, but no position in any other stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!