MLPs: Attractive Current Yields and Potential Tax-Cut Beneficiary

by:
Portfolio Manager, Cushing Asset Management

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.

Conclusion

MLPs currently yield nearly 7% and have the potential to benefit from possible tax cuts on pass-through businesses.

  1. 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.

For more information about MainStay Funds®, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing.

New York Life Investments Management LLC engages the services of federally registered advisors. Cushing® Asset Management, LP is unaffiliated with New York Life Investments.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, New Jersey 07302.

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Libby F. Toudouze

Portfolio Manager, Cushing Asset Management

Libby F. Toudouze has over 30 years of experience in investment management and 15 years of Energy and MLP specific portfolio management experience. Before joining Cushing Asset Management, she established and ran a family office where her responsibilities included

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