German Soccer Can Teach You About Retirement Planning

The recent World Cup victory by Germany was the product of a long-term plan that included fundamental skill development for young players. US investors can learn from this: Long-term investment horizons and a focus on a company's fundamentals often pay off, too. Here are three master limited partnerships with good business and financial fundamentals to consider for your retirement planning.

Jul 24, 2014 at 4:29PM

In an earlier article, we saw how the World Cup winning German soccer team was the product of 14 years of patience and fundamental skill development, and used these ideas to examine some quality energy investments for retirement planning. Here, we'll look at master limited partnerships, or MLPs. MLPs require a different set of metrics since they are required by law to pay out most of their profits to investors.

Specifically, we'll look at distribution coverage ratio (DCR), debt/EBITDA ratio, and price to distributable cash flow ratio (price/DCF). Of course, the core business needs a good look, too. Here are three MLPs to consider.

Classic midstream company
Moving resources from point A to point B -- many companies do that. What sets Magellan Midstream Partners (NYSE:MMP) apart is what it moves. Most midstream energy companies move crude oil and natural gas; Magellan mainly moves refined products. Magellan claims to operate the longest refined petroleum products pipeline system in the US. In fact, over 70% of Magellan's business is transporting refined products, with the balance being crude oil and marine terminal storage. 

Two business fundamentals makes Magellan attractive. First, over 85% of its business is fee-based, meaning a steady revenue stream with limited exposure to commodity price fluctuations. Second, the company plans organic growth rather than acquisitions. This growth includes expanding its crude oil capacity in the productive Permian Basin and Eagle Ford plays. Additionally, the company is building a condensate splitter at its Corpus Christi facility. This splitter can produce a variety of products, including high-sulfur diesel for export to Latin America.

Augmenting these business advantages are excellent financial metrics. For MLPs, debt is a constant feature since profits are mostly paid out. Typically, a debt/EBITDA ratio of 4.0-4.5 or lower is desirable. For Magellan, the ratio is 3.0. Looking at DCR, a ratio of 1.0 indicates sustainable distributions and Magellan's DCR comes in at 1.1 to 1.4 over the past year -- no problems there. For valuation, look for a price/DCF ratio of 16. Magellan sells at a ratio of 26.9, indicating an expensive MLP. It also indicates a lot of investor confidence, however.

The ultimate "pick and shovel" play?
Hydraulic fracturing needs sand -- lots of it -- and Hi-Crush Partners (NYSE:HCLP) supplies some of the most popular types of sand used in hydraulic fracturing. Beyond just digging sand out of the ground, Hi-Crush transports its sand to some of the most active oil and gas plays in the country.

Hi-Crush offers investors constant growth. Every month it seems the company announces another new or expanding long-term contract to supply sand to yet another customer. The latest new customer is C&J Energy Services. This growth translates into growing distributions, with the latest distribution growing 9.5% over the previous quarter's distribution.

The financial fundamentals look good, too. Hi-Crush boasts a low debt load with a debt/EBITDA of 1.9. The growing distribution is covered by a DCR of 1.0-1.2. Like Magellan, investors have noticed Hi-Crush's strong business basics and are willing to pay a 31.8 price/dcf for the company. The stock has more than doubled over the past year.

Natural gas liquids for home and abroad
Another midstream MLP to consider is Targa Resources Partners (NYSE:NGLS). This company stores, transports and exports crude oil, natural gas, and natural gas liquids such as butane and propane. The main focus of the company is on natural gas and natural gas liquids. One important trend in Targa's business model is the increase in fee-based contracts. In 2010, roughly 25% of Targa's business was fee-based. Today it's closer to 60%, and by the end of the calendar year, Targa aims for 65% fee-based contracts.

Targa has $1 billion in expansion projects coming online in 2014. These projects include increasing processing capacity in the Bakken, Permian Basin, and Barnett shale plays; increasing storage capacity at its Mont Belvieu facility; and increasing export capacity at its Galena Park Marine Terminal. By the end of 2014, Targa's export capacity should grow by 50%. These 2014 projects follow roughly $1 billion worth of growth in 2013.

Regarding financial metrics, Targa holds one advantage over Magellan and Hi-Crush: its price/DCF is only 18.4, making Targa a better value. The other metrics hold up as well: Targa's debt/EBITDA typically runs 3.7 with its latest quarter coming in at 3.0. The DCR is 1.6, indicating not only some buffer for distribution increases, but some cash in the bank to pay for expansion.

Final Foolish thoughts
Fourteen years of teaching young players the fundamentals of the game helped Germany win a World Cup. Paying attention to fundamentals and having a long-term investment horizon can pay well when retirement comes. While all three MLPs here offer attractive returns, Targa's low valuation makes it stand out. The core business, particularly its exports of natural gas liquids, should grow and propel distributions by 7% to 9% a year. This company has room to run and could take your retirement income with it.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Robert Zimmerman owns stock in Hi-Crush Limited Partnership. The Motley Fool recommends Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers