Investors Beware: Don't Buy the Next Boardwalk Pipeline Partners, LP

Boardwalk Pipeline Partners (NYSE: BWP  ) got crushed Monday, when management announced that it will cut the distribution 81% to a mere $0.10 per unit. It was a spectacular downfall for the master limited partnership, but it yields an important lesson for investors considering MLPs: Don't overthink these investments.

We live in a world awash with data, but when it comes to buying an MLP, investors don't need to work very hard to separate the wheat from the chaff. There are two numbers you want to consider: the distribution coverage ratio, and the number of consecutive quarters with a distribution increase. Today we'll examine this idea using Enterprise Products Partners (NYSE: EPD  ) , Sunoco Logistics Partners (NYSE: SXL  ) , Enbridge Energy Partners (NYSE: EEP  ) , and of course, Boardwalk Pipeline Partners.

Consistency matters
The number of consecutive quarters with a distribution increase is usually reported every quarter; if not, you can always check the dividend history link at Yahoo! Finance or the investor relations page of an individual MLP.

Let's look at distribution growth for our four MLPs over the past five years:

BWP Dividend Chart

BWP Dividend data by YCharts

Even before its pop in 2012, Sunoco Logistics grew its distribution reliably. Enterprise, too, displays a regular commitment to growth. In fact, these two MLPs rank among the top four of all MLPs for consecutive quarterly distribution increases. Enterprise is first, Sunoco Logistics is third, and both have records that stretch more than eight years.

It's quite a different story when you look at Boardwalk and Enbridge Energy Partners. Enbridge has kept its distribution flat for seven straight quarters, and before yesterday's cut, Boardwalk's quarterly payout had been flat for nine.

Your distribution is showing
Which brings us to our next set of data: distribution coverage. It's a simple calculation that indicates whether the MLP is generating enough cash to cover the distributions it pays out. To calculate the metric, locate your MLP's distributable cash flow and divide it by the distributions that will be paid for the corresponding quarter. If the resulting number is greater than 1.0, your MLP's distribution is safe. If it isn't, management has some explaining to do.

Back in November, I included Boardwalk in a simple coverage ratio exercise, expressing concern that the MLP was holding its distribution flat yet still couldn't cover its payments.

That is not a winning combination, and Enbridge actually has the same issue. Look at its coverage ratio performance for the past three quarters (the partnership reports Q4 results on Wednesday):

2013 Quarter

Coverage Ratio

Q1

0.79

Q2

0.70

Q3

0.64

Source: MLPData.com.

Again we have the pattern of an MLP that holds its distribution flat and cannot cover those payouts. Does this mean Enbridge is going to implode when it reports earnings tomorrow? Not necessarily, but why buy something like that when you could buy an MLP like Enterprise or Sunoco?

Let's take a look at their coverage ratio numbers for Enterprise:

2013 Quarter

Coverage Ratio

Q1

1.55

Q2

1.54

Q3

1.51

Q4

1.6

Source: MLPData.com

And for Sunoco Logistics:

2013 Quarter

Coverage Ratio

Q1

2.44

Q2

2.07

Q3

1.29

Q4

1.9

Source: MLPData.com

These are two MLPs that not only increase their payouts quarter after quarter, but also cover those increases with the same consistency.

Ultimately, what do these two factors indicate to investors? They show us management's ability to grow a solid, sound business. Yes, once you've narrowed down the field to the most reliable players, there are certainly other metrics and business factors to consider before buying. But don't overthink this. If an MLP doesn't pass these first two tests, it's probably not worth the risk in the long run.

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Read/Post Comments (6) | Recommend This Article (2)

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 February 10, 2014, at 7:08 PM, FrankoJames wrote:

    BWP is not the CMI (WPRT) of MLPs.

  • Report this Comment On February 10, 2014, at 7:35 PM, MyCruiseWright2 wrote:

    BWP was a company that the fools wrote a nice article on a few months ago when the stock price was around $30/share, good company and one of the possible big gainers. Well some of us got fooled by the fools. I have been a fool member for almost a year now and what I realize is the main objective of this company is to sell you all they can. You must be very careful with info they feed you they get quite a bit wrong, do your homework, buying good stocks after market corrections is the best way to invest. Long term investment is a good way to go and the fool touts this approach, unfortunately with some risky picks.

  • Report this Comment On February 10, 2014, at 10:30 PM, Montereyjackson wrote:

    Motley Fool has a lot of analysts who recommend a lot of stocks. Agreed: ya gotta do the homework. And buying after corrections is good. Buffet!

    I bought Boardwalk during the crash on the high recommendation of another service, not Motley Fool. Boardwalk had, and still has, a savvy main owner with resources to back it. I checked a map of its assets and noticed its geographic coverage of its pipelines wasn't the best. But I let my respect for ownership and the recommending service-- and lust for that high yield-- outweigh this concern. My bad.

    A rule for the road: have at least one original reason (a reason you didn't get from Motley Fool or anyone else) for buying and holding any stock you buy. And dividend lust is not a reason.

  • Report this Comment On February 11, 2014, at 6:10 AM, etione wrote:

    Stop fool us, you all make recommendation, we all losing the money, insability is the name of the game. that's what all of you like. thanks to all kind of Gurus... even now the main recommendation for BWP at Yahoo, is 27.5 USD, even with 45% plung we don't know nothing. Just get scared, most of the time 45% plung birings recovery in the same session, all we have to hope that we are in the bottom. Most of the time when stock plung bring opprotunity, but when you try to average the price... and you find yourself with a lot of shares... if the recovery will not come you're in deep trouble, but in a culture that one takes all who cares?

  • Report this Comment On February 11, 2014, at 8:19 AM, Ostrowsr wrote:

    I may be missing something here. The MF website didn't recommend the stock, just published someone's opinion. They always say "do your own research". In my opinion, the BWP "bad news" was bad but not as bad as the crash of it's price suggests. Still profitable, still growing. Maybe the technical numbers will show them to be a turnaround going forward. Curious that they have a 4 star rating among the Fools who do their own due diligence.

  • Report this Comment On February 11, 2014, at 3:54 PM, gjs40502 wrote:

    This company may have a problem with the bluegrass pipeline. It may be minor but they will lose some money if it is blocked.

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