High yields can be found in MLPs (Master Limited Partnerships). Usually structured around a particular qualified business (often energy-related), MLPs do not pay a corporate income tax, as they pay pass profits on directly to the shareholders (technically unit-holders) on a quarterly basis. These payments, however, are not technically dividends–they are distributions, and as such have a special tax status. Unlike dividends, a large percentage of these distributions are considered to be “return of capital,” and therefore you only pay taxes on them once you sell the stock. This allows for interesting tax-deferral strategies.
The following three MLPs pay generous distributions and are well-regarded by most analysts. Would it be wise to initiate a position in any of them?
1). From a valuation standpoint, the company does not have a current P/E ratio, as earnings per share were negative last quarter. However, future P/E stands at 30.32.
2). Average analyst target price is $10.30, which implies a potential upside of 9.57% from current prices. Recent price targets, however, have been higher than the current average of $10.30. Mean current recommendation is 2.40 (with 1 being strong buy, and 5 a strong sell).
3). The distribution is $0.88/share, which works out to a very attractive 9.36% yield.
4). My take: Value-wise this stock is not very attractive: valuation ratios are either high or nonexistent. If the company is not able to return to profitability this year, then this stock will probably underperform. However, future prospects are good: a recent partnership with BP for gathering and processing in the Texas Panhandle should help the company’s cash flow, and a good contract strategy should keep the company relatively hedged from further natural gas price declines. With good growth prospects and attractive yields, investors should consider buying this MLP.
Mid-Con Energy Partners LP (NASDAQ:MCEP) : The company is engaged in the acquisition, development, and production of oil properties in the United States (mostly in Oklahoma and Colorado). Known for its water-flooding technique, the stock has risen 20% YTD, but still retains attractive valuation ratios and distribution yields.
1). While currently trading at a not-so-cheap P/E of 18.36, the forward P/E is a more attractive 11.14.
2). Analysts are generally bullish on the stock. They have an average price of $25.33 (which implies a potential price upside of +13.08%), and an average recommendation of 1.40.
3). With the recent price surge, the yield has dropped to 8.66%. While still a very high figure, the yield was in the double digits in December. At any rate, MCEP pays an attractive distribution of $1.94/unit.
4). My take: While not necessarily a value play, MCEP is certainly a growth play. Rapid increases in production, possible joint ventures, ample access to capital, smart hedging strategies, and attractive yields make this a stock definitely worth considering.
