Recently I've covered dividend growth investments that I think are excellent for retirees. These include Kinder Morgan (KMI -0.51%), Enterprise Products Partners (EPD 0.10%), and Linn Energy (NASDAQ: LINE), and its non-MLP equivalent, LinnCo (NASDAQ: LNCO).
As I explained in these articles, these MLPs offer income investors three strong tools that studies have proven are powerful ways to build long-term income and wealth: high-yield, consistent distribution growth that's likely to continue for many years.
However, an opportunity has presented itself that I want to call to your attention because it involves several lesser known but equally high-quality names in the MLP industry that I think you should be aware of.
Targa Resources merger generating several opportunities
On Oct. 13 Targa Resources (TRGP -0.77%) and its midstream (pipelines, processing and storage facilities) MLP, Targa Resources Partners (NYSE: NGLS), announced it was purchasing competitor Atlas Pipeline Partners (NYSE: APL) and its general partner, Atlas Energy (ATLS), in a $7.7 billion deal.
Atlas Energy will divest its non-midstream assets and be merged with Targa's midstream operations.
| Company/MLP | Current Yield | Historical Distribution/ Dividend Growth Rate |
Projected 5 Year |
Distribution Coverage Ratio |
| Targa Resources Corp | 2.30% | 37.60% | 32.78% | na |
| Targa Resources Partners | 5% | 8.14% | 21% | 1.43 |
| Atlas Pipeline Partners | 7.00% | 1.44% | 17.21% | 1 |
| Atlas Energy | 5% | 8.04% | 18.21% | na |
| Enterprise Products Partners | 3.80% | 6.51% | 6.96% | 1.6 |
| Kinder Morgan Inc | 4.50% | 7.14% | 10.59% | 1.1 |
| S&P 500 | 1.94% | 5.05% | 5.05% |
Sources: Yahoo Finance, Fastgraphs, Multpl.com
As this table shows, Targa Resources Corp. and Targa Resources Partners both compare favorably to Kinder Morgan and Enterprise Products Partners when it comes to dividend/distribution growth, both historically and projected future growth.
My purpose in showing you this table isn't just to compare Targa Resources Corp. and its MLP with other great retirement investments, but to explain two ways this merger can create opportunities for long-term investors to profit from the high, secure, and growing yields these companies and MLPs offer.
Three Reasons to consider Targa Resources
There are three principle reasons why I like Targa Resources and this merger.
1) Targa Resources Partners' generous distribution is one of the safest in the industry and the merger is expected to enhance this. This is from a combination of two things. First, a distribution coverage ratio of 1.43 (anything above 1.1 indicates a safe distribution ready to grow) and a strong balance sheet.
For example, Targa Resources Partners' current ratio, a measure of short-term liquidity, is a solid 1.1 and its debt/EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is projected to be 3.3 after the merger, which is expected to be completed in the first quarter of 2015.
This debt/EBITDA is 39% less than the industry average and makes increase the security of Targa Resources Partners' payout in the event of an economic downturn or market crash.
In addition, if Targa can maintain a net debt/EBITDA ratio of less than 4.5 times, then it improves the changes of receiving an investment grade credit rating, which means more favorable credit terms and reduces its cost of capital. This will improve both its profitability and long-term growth prospects. While the merger doesn't quite get Targa to an investment grade rating , Atlas's growth prospects mean that the combined company may be able to achieve an investment grade rating in the future.
2) I like how the merger of Targa and Atlas will improve Targa's presence in several key shale oil and gas formations.
Source: Targa Resources Corp. merger presentation
After the merger Targa Resources will have a strong footprint in four of the five most active oil and gas formations in America but that's not the only benefit. It will also have a diversified three pronged growth runway consisting of midstream support for natural gas, oil, and natural gas liquids.
How big of an opportunity do these three approaches represent? Well, natural gas liquids is at the heart of a $176 billion petrochemical boom, while oil and natural gas investment over the next 12 years is expected to total $890 billion according to analyst firm IHS. This is expected to fuel $640 billion of investment in midstream infrastructure through 2035, a long runway for many years of payout growth at Targa Resources Corp. and its MLP.
3) Targa Resources Corp. and Targa Resources Partners have 13 and 14 consecutive quarters, respectively, of dividend/distribution growth under their belts. This kind of consistent payout growth is sign of strong management that is executing well on its growth plans.
The merger is expected to fuel strong dividend/distribution payout due to its accretive nature. For example, Targa Resources Corp. and Targa Resources Partners is projecting dividend and distribution growth in 2015 of 35% and 11% to 13% respectively.
Takeaway
The acquisition of Atlas Pipeline Partners and Atlas Energy by Targa Resources and its MLP offers you two great ways to supercharge your dividend retirement portfolio by investing in Targa Resources Corp. or its MLP Targa Resources Partners. The post-merger Targa Resources represents an excellent way for long-term income investors to participate in America's coming decades long energy mega boom. Their generous yields and excellent payout growth prospects greatly increase the chance of not only safe, growing income, but market beating total returns as well.
