Barrons ran an article on January 2, 2017, that suggested investors should steer clear of MLPs in 2017. They suggested that when using traditional valuation metrics, MLPs look expensive compared to electric utilities and telecoms. They also commented that for many MLPs to continue paying their “generous” distributions, they would have to access the capital markets which have been unfriendly. To quickly evaluate how their recommendation turned out, let’s look at what happened in the sector over the past month. Exactly zero MLPs cut their distribution while several raised it. Also, since their article ran, the Alerian MLP index has been up 7.6%.
This weekend, Barron’s ran an article with a much different take on the sector titled “Is It Too Late to Get In on MLPs’ Latest Bull Run?”[i] In a clear change of heart, the article comments that “MLPs make money when crude and natural gas flow through their pipelines and volumes are likely to increase with President Donald Trump making US energy development a priority.”[ii] Although the index is up 75% from the low, it is down 40% from its high and is attractive on a historical basis. According to the article, “MLPs yield 6.8% on average, more than most other dividend stock sectors and more than many junk-rated corporate bonds, and distributions are growing at the rate of 4 to 5% on average. Add up the average dividend, growth forecasts, and an expansion in multiples, and portfolio managers see gains in the mid-teens for the next few years.”[iii]
In their previous article suggesting avoiding the sector, they painted the idea of 5% distribution growth as a negative, as it the number is down from historical averages. Now, however, Barrons seem to have adjusted their lenses and are now seeing how the combination of growth, yield, and fundamentals portend a much brighter future for MLPs than they believed a month ago.