Skin in the game. Eating one's own cooking. We have come up with so many different colloquialisms to preach the idea that those that manage money or give financial advice should follow the same rules with their own money. There is something slightly more reassuring about knowing that the person serving you that advice is doing the same.
So in the spirit of full disclosure, I thought I would examine my three largest stock holdings -- Enterprise Products Partners (EPD +0.42%), Magellan Midstream Partners (MMP +0.00%), and American Tower (AMT 0.45%) -- and why I feel strong enough in the prospects of these companies that they are my core holdings.
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Using the master limited partnership model the right way
Wall Street seems to fall in and out of love with master limited partnerships on a rather regular basis. The appeal of tax-advantaged, high yield investments seems incredibly attractive; especially when those businesses happen to facilitate America's booming energy business. The moment the market smells trouble, though, investors cut bait fast.
There are a fair share of analysts out there that say the corporate structure of MLPs sets them up for failure in the first place. They will say that it is a model that incentivizes rapid payout growth and incredibly high yields at the expense of balance sheet integrity. Eventually, this will lead to catastrophic blow-ups. Based on the past couple years of results, you might tend to agree. After all, the Alerian MLP index has lost more than 40% over the past five years and countless MLPs have cut distributions to its investors because of overleveraged balance sheets.
I don't necessarily agree with this thinking. The structure of master limited partnerships isn't an instant recipe for disaster. Rather, the way in which management teams have (mis)used them over the years and our demands for unsustainable payouts are the guilty culprits.
That's why two of my largest holdings are Enterprise Products Partners and Magellan Midstream Partners. Even though the two are master limited partnerships, they have eschewed the concept that MLPs absolutely have to pay out all available cash and post unsustainable growth rates. Instead, the management teams at these two pipeline and energy infrastructure companies focus on striking a balance between measured growth, financial health, and distributions to shareholders.
Both of these companies deliver an essential service for America's energy infrastructure. Enterprise is responsible for moving a vast majority of the nation's natural gas liquids, and Magellan's network of refined petroleum product pipelines deliver gasoline and diesel all over the central part of the country. These assets provide a stable revenue stream that requires minimal operating expenses and maintenance capital expenses.
Having a steady and reoccurring revenue stream isn't unique for MLPs, but Enterprise's and Magellan's decision to retain a decent chunk of that cash each quarter to reinvest in the business has made them both less reliant on external sources of capital such as the fickle equity market. As a result, the two have been able to maintain long streaks of quarterly payout increases without interruption.
EPD Total Return Price data by YCharts
Energy infrastructure businesses and the master limited partnership structure can be great investments when their caretakers are conservative management teams that don't try to promise gaudy growth rates. Enterprise and Magellan have shown over the years that their respective management teams fit this description, and that is why I'm willing to make a large investment in these MLPs and reinvest those payouts every quarter.
More crtical infrastructure with greater growth potential
With each passing day, internet connectivity becomes more important for our everyday lives. The more ubiquitous the role smartphones play in our lives means that we're demanding more and more data. Between 2012 and 2016, total reported wireless data traffic in the U.S. increased from 1.4 terabytes to 13.72 terabytes, and almost all signs point to data usage growth will remain on this track for some time.
In order to ensure fast, reliable service to their respective customers, wireless communications providers spend billions on network infrastructure. That infrastructure needs to go somewhere, and that is where American Tower comes in. The company is a real estate investment trust that owns towers and other properties on which wireless companies can lease space for their equipment rather than owning the property themselves. For wireless companies, this means less capital tied up in property and physical structures while American Tower gets to be wireless company agnostic and sell space to whomever wants it.
This business has a lot of the qualities that I like about Enterprise and Magellan despite being in an entirely different industry. It provides an essential service that generates consistent revenue streams to facilitate growth or return to investors. What sets American Tower apart, though, is the growth opportunities it has both domestically and internationally. Even though revenues in the U.S. have grown at a healthy high-single digit for several quarters, its recent investments in wireless tower properties internationally have led to 17 straight quarters of double digit growth.
With internet penetration rates much lower in emerging market economies and mature markets such as the U.S. posting incredible data usage rates, the growth runway for American Tower looks incredibly long. It's one of the longest tentured holdings in my portfolio, and it looks like it will remain a core position of mine for many more years to come.
