A new opportunity for income growth

Master limited partnerships constantly have to raise new money, which explains why Western Gas is selling 5 million units.

By Jim J. Jubak Jun 20, 2012 6:15PM
Western Gas Partners (WES) dropped 4.96% Tuesday on news that the master limited partnership has filed to sell 5 million units Friday at a price of $43.88 each. The units closed at $43.15 Tuesday. (Western Gas Partners is a member of my Jubak's Picks portfolio.)

Now I understand why stocks (or in this case master limited partnerships) fall when the company decides to sell more shares or units. The current stream of profits going to investors will in the future have to be spread over 5 million more units. That's dilution of about 5.2% on the 95.78 million units outstanding. And certainly nobody wants to pay more for units -- they closed at $45.40 the day before the announcement -- than the new units being sold command.

But master limited partnerships are a little bit different than your normal run of the mill stock and I think the market's reaction to the new offering creates an attractive opportunity for investors looking for income now and income growth in the future.

Because master limited partnerships distribute most (and sometimes more than all) of their earnings to investors, they don’t much in the way of retained earnings to reinvest. (Frequently, master limited partnership distributions exceed earnings since the distributions are based on cash flow and take advantage of depreciation and other items that would lower taxable income. In 2011, for example, Western Gas Partners earned $1.60 a unit but distributed $1.66.)

That all means that to grow their business, master limited partnerships constantly have to raise new money when they think there are good opportunities to invest in (and when money is cheap as it is now.) As a unit holder, you’d like to see the master limited partnership raise new money because it means that management has identified new investment opportunities that will increase distributions to unit holders in the future. I think that’s the case with Western Gas Partners and its sale of new units this week.

I'm not raising my current target price of $49 a share but I am extending the schedule from June 2012 to December 2012. The appreciation from the June 19 close at $43.15 to my target is 13.6%. Add onto that a dividend yield of 4.25%.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Western Gas Partners as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: energyinvesting strategyJim JubakWES
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Ice Cold Sangria
Jun 20, 2012 10:40PM
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People get locked into phrases and axioms.  My favorite has always been:  "Bonds are the house you live in."

 

Yes, that's true.  But, nowadays with Europe imploding, the new phrase is:

 

"United States utility companies who only do business in America and post government-approved dividends are the house you live in."

 

I know a lot of investors whose entire portfolio is utility stocks.  They will never set the world on fire, but they pay the "utility bills" every month.

 

The whole world is moving towards investing in "America Only" stocks.

 

The general consenus is that at the age of 55, it is time to go conservatize your portfolio.  Move away from equities to bonds, treasuries, CD's, muni's, all that.  And it's true.  I've got a bucket full of utility stocks.  I'm not a teenager anymore, and this is the way I go.

 

Security in a "security" is important when you get to my age.  That's why I never fly on an Airbus plane.

 

 

 

 

Active RIA
Jun 21, 2012 12:30AM
avatar

ok, fun post to read but that no-equities strategy????

 

1.  qualified dividends are currently abundant and are taxed at either ZERO or FIFTEEN    PERCENT MAX.

 

2.  your bonds will be taxed.  treasuries pay you virtually nothing.  CD's pay you virtually nothing.  muni's are ok, but have significant future credit risk and of course interest rate risk.

 

3.  what if you live to be 95 (more and more common)?  that means you have 40 more years to go at age 55 and must earn over that span enough total return to pay taxes AND offset the effects of inflation, which will likely be rising sharply in the next decade due to the currency debasement.

 

penny wise and pound foolish?  see a professional for at least some counseling before adopting your strategy as a long-term plan.  ask them to explain long-term asset allocation and the wonderful returns provided by a balanced portfolio with opportunistic rebalancing" of the account.

 

just sayin ..... 

vineyard60
Jun 21, 2012 10:32AM
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Last gap rally for FRAUD STREET ! MARKET COLLAPSE ! TAKE YOUR MONEY AND RUN ! IT IS SAFER UNDER YOUR BED !
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