Author Topic: Anyone investing in MLPs  (Read 14499 times)

Fred

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Re: Anyone investing in MLPs
« Reply #15 on: August 18, 2013, 12:58:39 PM »
Another caution is that MLPs will likely fare poorly in a rising interest rate environment.

I guess when "required rate of return" increases, the NPV decreases.
How did MLP's fare in the recent yield curve move?  I would assume it probably has more to do with demand for interest rate and not the required rate of return of the specific asset class.

"demand" --> "required"?

When interest rates rise, it will cause yield rise in other other asset classes: mortgage, corp bonds, high-yields, etc. 

Some MLPs investors may reach a conclusion to switch from MLPs to, say, high-yield bonds because the yield may be equal but the risk is lower?
 

neals384

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Re: Anyone investing in MLPs
« Reply #16 on: August 18, 2013, 02:07:52 PM »

since early May, 5 Year Treasury rates have doubled from .75% to over 1.5%.  The Wells Fargo MLP Index (MLPW) hit a peak of 33.59 in late May and closed Friday at 32.39, a 3.57% decline.

How did MLP's fare in the recent yield curve move?  I would assume it probably has more to do with demand for interest rate and not the required rate of return of the specific asset class.

neals384

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Re: Anyone investing in MLPs
« Reply #17 on: August 19, 2013, 11:04:54 AM »
The American Association of Individual Investors briefly discussed MLPs in a July article entitled Protect Your Capital:  Never Chase High Yield.  They point out one additional risk of MLPs:  political risk. 

'Washington is looking ofr revenue, and anything that focuses on higher-income households seems a target as a "loophole".'

They point out that no changes are likely with the current balance of power in Congress. 

'However, watch the 2014 election polls in advance.  If the president's party were to win both houses of Congress, the odds of getting comprehensive tax reform legislation passed improve.'

It wouldn't be surprising to see a significant drop in MLP share prices right after the election, even before reform legislation is passed.  REITs could be affected in the same way.

Here's a link to the article, but AAII membership is required.
http://www.aaii.com/journal/article/protect-your-capital-never-chase-high-yield



DutchNurse

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Re: Anyone investing in MLPs
« Reply #18 on: September 05, 2013, 05:18:47 PM »
I've owned Plains All American and Terra Nitrogen on and off for a couple of years. Generally your going to see a nice yield and a somewhat higher level of stability. These are typically my holdings I think of as inflation hedging. Natural resources, pipelines etc... PAA made me about 30% earlier this year, though I am not long on it right now.

I know theres a little extra work, but scottrade just does it for me (mostly, a few things are mailed out which I bring as well if your a shareholder on occasion) and I bring the sheets to my CPA. I hate anything to do with taxes and just pay the few hundred bucks to get it done from a professional.

AnilG

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Re: Anyone investing in MLPs
« Reply #19 on: September 05, 2013, 07:46:04 PM »
Thanks DN for the info. I haven't invested in MLPs yet. Most probably by the end of the year I will dip my toes in MLPs.

I've owned Plains All American and Terra Nitrogen on and off for a couple of years. Generally your going to see a nice yield and a somewhat higher level of stability. These are typically my holdings I think of as inflation hedging. Natural resources, pipelines etc... PAA made me about 30% earlier this year, though I am not long on it right now.

I know theres a little extra work, but scottrade just does it for me (mostly, a few things are mailed out which I bring as well if your a shareholder on occasion) and I bring the sheets to my CPA. I hate anything to do with taxes and just pay the few hundred bucks to get it done from a professional.
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DutchNurse

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Re: Anyone investing in MLPs
« Reply #20 on: September 06, 2013, 01:59:03 PM »
A little more about MLP's now that I have a little more time.

These can be shell companies as well. Or subsidiaries.

Terra Nitrogen - I mentioned earlier (TNH) is almost entirely owned by CF Industries.

There are IMPORTANT tax savings that happen which can cause interesting effects in both stock - the MLP and the parent.

So, to be an MLP you must meet an SEC requirement that most of your revenue I think its even above three quarters of the gross, must be from 'real assets'. I use that term somewhat lightly, but basically these are generally assets pretty far removed from the effects of the daily whims of a consumer. That DOES suppess the beta a bit. These aren't wild swinging stocks. The 'real assets' are things like commodities (includes pipelines and SOME chemical companies that supply underlying reagents in large quantity) and, energy, real estate.

The basic principle here is that an MLP needs to be owned in large part also by the parent - which again gives up price performance stability.

The way this works is the parent - lets use CF Industries (a huge fertilizer player) provides the capital for Terra Nitrogen Holdings to survive. Terra nitrogen now fulfills a key in the CF Industries game plan. Infact TNH is just this big whopping nitrogen plant in Oklahoma.

CF Industries then, is the general partner. Terra Nitrogen is the master limited partner.

So why would CF Industries do this? Well first, TNH, like all MLP's pays a good dividend.

As a Master Limited Partner, TNH is mandated to return most of its profits to the General Partner who provided the start up costs and manages some of the administrative affairs. TNH (MLP) returns capital to CF (general partner) through its dividend.

This is the reason for its large yield. By returning capital through a dividend, CF Industries is essentially taxed at a lower rate than it would be if it conducted business in the open.

Using our example companies again, another added benefit is that if CF Industries ever needed to raise capital in an emergency, they can unload TNH stock. By making the MLP a publically traded, it is of course liquid.

Important to note here is that this would obviously cause depression in stock price, but it also provides a cushy opportunity. Watch the parent companies financial health. If it ever gets scary, you can unload your MLP and wait to pick it up at a discount after the parent floods the market with shares. This could (I've seen it happen) provide you with a HUGE yield on a security. I'm talking 10+% that is stable. The parent will later go fishing to pick up stock in the MLP at a later date when the dust settles and their cash flow picks up. Then your winning on both ends.

MLP's are also never going to be the target of a takeover.

As far as the example right now I'd steer clear of nitrogen. There is some problems with world potash supply related to Russia and its really gumming things up for the industry players. Everything in that sector though is WELL depressed... So keep it on the radar if you like value.

« Last Edit: September 06, 2013, 02:01:05 PM by DutchNurse »