This Dividend Cut Was Easy to Spothttp://www.fool.com/investing/general/2013/10/29/this-dividend-cut-was-easy-to-spot.aspx Matthew DiLallo
October 29, 2013
The income-focused investors of Eagle Rock Energy Partners (NASDAQ: EROC) received some bad news this week. The master limited partnership announced that it was slashing its distribution to shareholders from $0.22 per unit to $0.15 per unit. Quite honestly, it was easy to see this distribution cut coming.
Two early warnings signs
Revenue streams weren't rock-solid
For an MLP, having revenue that's locked in is critical to maintaining and growing a distribution. Enterprise Products Partners (NYSE: EPD), for example, boasts a fee-based gross operating margin projected to be around 81% this year. Those secure cash flows are one reason why Enterprise Products Partners has been able to raise its payout for 37 straight quarters. On top of that, the company has retained a significant chunk of cash flow each quarter by maintaining a distribution coverage ratio of 1.4 times or better. Enterprise Products Partners has reinvested that cash to grow its business instead of sending it back to investors.
Debt was weighing Eagle Rock down
Fellow Fool Amiee Duffy has done a great job of explaining the virtues of an MLP having an investment-grade credit rating. It's a designation that is becoming more important to the management teams of MLPs.