MLPs: Attractive Current Yields and Potential Tax-Cut Beneficiary
Midstream Master Limited Partnerships (MLPs) currently yield close to 7% (see chart below). What’s more, on April 26, President Trump revealed his plan to reduce the tax rate on pass-through businesses to 15%, from a top rate of 36.9% now. In a pass-through business, the taxes are not paid by the business itself, but instead pass through to owners and are taxed at their individual rates.
With energy prices on the move and fiscal policy in the air, we caught up with Portfolio Manager, Libby Toudouze, of Cushing Asset Management for an update. Cushing manages multiple Funds for MainStay Investments.
Patience Is a Virtue
Libby was quick to acknowledge the current environment has its share of moving parts. However, investors in MLPs – which operate the pipelines and storage tanks that transport energy from producers to users – currently receive a relatively attractive yield, while they wait and access unfolding events. If the tax cuts materialize, this would have the potential to enhance an already attractive asset class, as far as taxes are concerned.
Current Yield Comparison
Source: Bloomberg, as of 4/26/17. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index. MLPs are represented by the Alerian MLP Total Return Index (AMZX Index). REITs are represented by the FTSE NAREIT All Equity Total Return REIT Index (FNERTR Index), a free float-adjusted market-cap weighted index, including all tax-qualified REITs listed on the NYSE, AMEX, and NASDAQ. Telecom, Utilities, and Consumer Staples are represented by the S&P 500 Total Return capitalization-weighted GICS Level 1 sector indices – SPTRTELS Index, SPTRUTIL Index, and SPTRCONS Index, respectively. 10-Year U.S. Treasury is represented by U.S. Generic Govt 10-Year Yield Index (GT10 Govt), where rates are comprised of generic United States on-the-run government bill/note/bond indices. Moody’s Seasoned Baa Corporate Bond Yield is an investment bond that acts as an index of the performance of all bonds given a Baa rating by Moody’s. Dividend yield is the 12-month dividend yield calculated by Bloomberg. It is the sum of gross dividend per share amounts that have gone ex-dividend over the prior 12 months, divided by the current stock price.
Oil Slips Below $50 a Barrel
Finally, Libby stresses there is another issue to consider: the recent pullback in energy prices. Oil prices reached fresh four-week lows 1, as the U.S. government reported a 3.4 million barrel build in gasoline inventories. Inventories are one of the three signposts we are watching to signal firming energy prices in the months ahead, the other two signposts being OPEC production and rig counts.
Even though MLPs are a volume-based business, investors often treat them as though their cash flows are a function of both volume and price. This can create opportunities when MLP share prices disconnect from their underlying cash flows.
MLPs currently yield nearly 7% and have the potential to benefit from possible tax cuts on pass-through businesses.
- Source: Bloomberg, as of 5/1/17.
This information is provided as a resource for information only. Neither New York Life Insurance Company, New York Life Investment Management LLC, their affiliates, nor their representatives provide legal, tax, or accounting advice. You are urged to consult your own legal and tax advisors for advice before implementing any plan.
All investments are subject to market risk, including possible loss of principal.
MLPs and other natural resources sector companies are subject to certain risks, including, but not limited to, fluctuations in the prices of commodities; the highly cyclical nature of the natural resources sector may adversely affect the earnings or operating cash flows of the issuers; and a significant decrease in the production of energy commodities would reduce the revenue, operating income, and operating cash flows of MLPs and other natural resources sector companies and, therefore, their ability to make distributions or pay dividends.
Midstream MLPs gather, process, and transport natural resources.
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