Western Gas is too expensive

Even with the partnership's projected 15% increase in distributions, the yield will climb to just 4.4% by the end of 2013.

By Jim J. Jubak Nov 5, 2012 6:32PM
Financial Stock Chart -- Kick Images, Photodisc, Getty ImagesI like everything about Western Gas Partners (WES) but the partnership's unit price of $51.43 at the close on Nov. 2. The stock fell another 1% Monday to $50.92.

That's above my $49 target price. I’m therefore selling Western Gas Partners out of my Jubak’s Picks portfolio Monday with a 40.7% price gain (plus dividends) since I added it to the portfolio on Nov. 16, 2011.

I’ve said repeatedly that in the current extended environment of low interest rates, investors should look for MLPs (master limited partnerships) with a pipeline of attractive projects where they can put borrowed money to work and earn a hefty return. Those returns, then, flow back to investors in the form of increased future distributions.

That exactly describes Western Gas Partners. On Oct. 31, the partnership told investors that it had a pipeline of dropdowns from former parent Anadarko Petroleum (APC) and new projects of better than $1 billion. Distributions to investors would grow by "at least" 15% by the end of 2013. That would bring distributions to $2.254 a partnership unit by the end of 2013 from a projected $1.96 in 2012.

That problem with that, however, is that the runup in the unit price -- 13.4% in the last three months from a July 1 price of $45.37 -- has reduced the projected end of 2012 yield on Western Gas Partners to 3.81%. Even with the projected 15% increase in distributions, the yield climbs to just 4.4% by the end of 2013.

That's less than I’d like in yield right now. As I wrote on Oct. 30 in my post, "A strategy
for profiting from the U.S. fiscal cliff -- just in case,"  I think there’s a good chance that post-election fears of the U.S. plunging over the year-end fiscal cliff created by automatic budget cuts from the debt ceiling deal and the expiration of Bush administration tax cuts will take a bite out of stock prices. In that environment I’d be looking especially hard to see if any dividend-paying stocks or partnerships sold off heavily enough to push yields above my 5% target for a paranormal market.

Western Gas Partners has shown enough volatility -- the 52-week range is from $34.25 to $53.17 -- to make it a potential target in fiscal-cliff volatility. I think it’s worth selling the units here and seeing if I can pick them up with a lower price and a higher yield on volatility in December or January.

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 not own shares of Western Gas Partners as of the end of September. 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. 


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