Bill Gross made a name for himself (and a lot of money) by investing in bonds. Nicknamed the "Bond King," Gross ran Pimco's Total Return Bond Fund for decades, enriching himself (he's worth an estimated $2.5 billion) and investors in that fund.
Today, Gross dabbles more in equities. One asset class he likes is master limited partnerships (MLPs). While MLPs can complicate your taxes (they send K-1s instead of 1099-DIVs), they supply tax-deferred income, which Gross likes. His current favorite is Western Midstream Partners (WES -0.03%). Here's why.
Gross makes the case for this high-yielding MLP
Bill Gross has been highlighting the value proposition of MLPs for a while now. He noted that the oil and gas pipeline operators offer hefty dividend yields, with much of that income tax deferred. That makes them compelling investment opportunities, especially in today's seemingly overheated market, where the S&P 500 and Nasdaq 100 trade at lofty multiples (23.5 times earnings for the S&P 500 and over 31 times for the Nasdaq). Investors have driven up the value of most stocks, especially the "Magnificent Seven," due to euphoria over AI and other catalysts.
On the other hand, MLPs are relatively unknown. They fly under the radar of many institutional investors because legal constraints prevent most mutual funds and ETFs from investing in these entities. Despite that, Gross pointed out: "Higher oil prices have led to 28% average gains, along with 9% to 10% tax-deferred yields since 2023. Better total return than the S&P 500 over the same time period."
Given the more recent outperformance, Gross is more cautious about MLPs as a whole. However, he recently said: "I do like Western Midstream, though. The market doesn't seem to know about its recent 40% hike in its dividend and its current yield of 10.1% -- tax deferred."
Drilling down into Western Midstream
Western Midstream Partners is an MLP originally formed by oil and gas producer Anadarko Petroleum to support its operations. It became part of Occidental Petroleum (OXY -0.15%) after the oil giant acquired Anadarko in 2019.
The companies signed agreements in December of that year to enable Western Midstream to operate as a stand-alone business. Occidental still owns its general partner, a 49.8% interest in the MLP, and a 2% interest in Western Midstream Operating (a company the MLP controls at a 98% ownership interest).
Occidental is currently exploring the sale of its interest in Western Midstream Partners. A sale of some or all of its interest in the MLP could give it the cash to repay the debt it plans to take on to fund its $12 billion acquisition of CrownRock.
However, a potential sale isn't why Bill Gross likes Western Midstream. He noted that the MLP recently hiked its base distribution level by nearly 40% to at least $3.20 per unit this year. The MLP sees the potential to pay out $3.50 per unit this year, a more than 50% increase.
Fueling that increase is the company's capital recycling strategy. Last year, it closed its $885 million all-cash acquisition of Meritage Midstream Services. That deal significantly transformed and expanded its existing Powder River Basin operations. The highly accretive deal initially drove its view that it could increase its annual distribution by $0.05 per unit.
The MLP has since agreed to sell several non-core assets for $790 million, including $400 million of joint venture interests, to fellow MLP Enterprise Products Partners (EPD 0.45%). That deal will be immediately accretive to Enterprise's cash flow per share. Because of that, it should give the MLP the fuel to continue growing its big-time distribution.
Meanwhile, the sales will give Western Midstream the cash to repay debt, repurchase units, and fund organic expansion projects. Those catalysts will drive material free cash flow growth, enabling the MLP to significantly increase its distribution.
As Gross pointed out, the new distribution yield will be around 10%. That's several times above the S&P 500's current dividend yield of around 1.3% (and higher than rival MLPs like Enterprise Product Partners' current 7.1% yield). Further, that monster income stream is largely tax-deferred until investors sell their MLP units.
That big-time distribution could continue rising as Western Midstream grows its free cash flow. That, of course, assumes the MLP remains an independent publicly traded company following Occidental's sale. Another pipeline company like Enterprise Products Partners or a private equity fund might seek to acquire the entire company rather than simply buying Occidental's stake. However, if they did, they'd likely need to offer a premium to the current market price to get a deal done.
A potentially high-return investment opportunity
Bill Gross likes MLPs, especially Western Midstream Partners. The company is significantly hiking its already high-yielding distribution, which could continue in the future as it grows its free cash flow. Meanwhile, there's an additional upside catalyst from its acquisition potential. These factors make it a compelling investment opportunity for those seeking high total return potential and understand the tax complexities of investing in MLPs.
