Is This the Best MLP Distribution out There?

Master limited partnerships have been luring investors with their high yields and reliable distributions for years now. Yield is especially alluring these days, given the seemingly interminable low interest environment we're in; it's easy to get too caught up in it and forget how important a reliable distribution really is. Today we're illustrating that point with Enterprise Products Partners (NYSE: EPD  ) . This diversified midstream MLP currently sports a 4.5% yield, which isn't particularly high in the world of MLPs.

Got it covered?
To get an idea of an MLP's ability to pay its distributions every quarter, we want to take a look at its distribution coverage ratio. The ratio is simply a partnership's distributable cash flow divided by the total sum of distributions it paid out.

The numbers we're evaluating today come from the second-quarter earnings releases for each of the partnerships listed below.

Company

Distributable Cash Flow

Distributions Paid

Coverage Ratio

Enterprise Products Partners  (NYSE: EPD  )

$925

$620

1.49

Kinder Morgan Energy Partners (NYSE: KMP  )

$505

$546

0.92

Energy Transfer Partners (NYSE: ETP  )

$442

$468

0.94

ONEOK Partners (NYSE: OKS  )

$185

$158

1.17

Boardwalk Pipeline Partners (NYSE: BWP  )

$149

$136

1.10

Source: Company filings. Dollar figures in millions.

Though Enterprise doesn't have the highest yield among its peers, at 1.49 times distributions, it does have one of the strongest coverage ratios. If you're an investor relying on distributions for income, that coverage matters a lot. If you need further proof of the partnership's fiscal fitness, you only need to track down its league-leading 36 consecutive quarterly distribution increases.

Kinder Morgan Energy Partners announced that the timing of a tax payment was to blame for the less than full coverage of its distribution payment for the second quarter. The partnership alerted investors of this issue in advance, and fully expects to finish the year above 1.0 times coverage.

Energy Transfer Partners actually holds the longest current streak for keeping its distribution flat at $0.89375 for 21 straight quarters. Its coverage ratio is certainly an indicator of that, though the partnership recently announced a deal to increase its distribution, and is now targeting a presumably achievable 1.05 times coverage ratio.

Boardwalk Pipeline Partners has found itself in a similar position to Energy Transfer, as the partnership has held its own distribution flat for the last six quarters. Boardwalk is rapidly trying to get back into investor's good graces, and posting 110% coverage of its distribution is a good place to start.

One thing to note is that because distributable cash flow is not covered by the generally accepted accounting principles, or GAAP, each partnership may calculate it in a slightly different way. For example, in its earnings release, ONEOK Partners announced that distributable cash flow was $251.9 million, providing 1.17 times coverage. If you dig into its data tables, however, you will see that the coverage ratio is based on $185 million, which subtracts out the general partner's share of cash flow.

Bottom line
Enterprise is solid proof that yield isn't everything. But remember that the distribution coverage ratio is not the only metric that should be taken into account when evaluating possible investment opportunities. It is important, though, and should be an integral part of any investment thesis when it comes to MLPs.

Dividend stocks can make you rich, but stability is really important and not all stocks that pay dividends are worth buying. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2013, at 1:06 PM, longinvest wrote:

    Dividends are not the holy grail. Yes, they are a good addition to a diverse portfolio, but rock solid growth, good managment and P/E ratios are more important, in my opinon. That's why I'm long on KMP. Plus they have the infrastructure in their industry to sustain growth and beat competition.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2594956, ~/Articles/ArticleHandler.aspx, 8/23/2014 2:44:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement