Monday, April 16, 2012

MLP’s deliver consistent distribution increases

The list of dividend increases over the past week was dominated by Master Limited Partnerships. Most of the MLPs are pipeline companies, which are engaged in the transportation of oil and natural gas from the source to the final customer. Pipeline MLPs have shown a consistent growth in quarterly distributions as a group, despite the economic turbulence we have lived under over the past five years. This is mostly due to the fact that most pipelines are natural monopolies in a given area, and they typically manage to increase fees each year at least by the rate of inflation. In addition, while prices of the commodities they transport fluctuate on a daily basis, aggregate volumes of oil and gas in the US is pretty stable year over year.

The following dividend growth companies raised distributions over the past week:

Plains All American Pipeline, L.P. (PAA), through its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquid petroleum gas (LPG) products in the United States and Canada. The company operates in three segments: Transportation, Facilities, and Supply and Logistics. This dividend achiever raised quarterly distributions to $1.045/unit, which was 7.70% above the distribution paid in the same time in 2011. Plains All American Pipeline has increased distributions for 12years in a row. Yield: 5.30%

Genesis Energy, L.P. (GEL) operates in the midstream segment of the oil and gas industry in the Gulf Coast region of the United States. It operates through three divisions: Pipeline Transportation, Refinery Services, and Supply and Logistics. This MLP raised quarterly distributions to 45 cents/unit, which was 10.40% above the distribution paid in the same time in 2011. Genesis Energy has increased distributions for 9 years in a row. Yield: 5.80%

Targa Resources Partners LP (NGLS) provides midstream natural gas and natural gas liquid (NGL) services in the United States. The company operates in two divisions, Natural Gas Gathering and Processing, and Logistics and Marketing. This MLP raised quarterly distributions to 62.25 cents/unit, which was 11.70% above the distribution paid in the same time in 2011. Targa Resources Partners has increased distributions for 7 years in a row. Yield: 6.10%

Tanger Factory Outlet Centers, Inc. is a REIT, which engages in acquiring, developing, owning, operating, and managing factory outlet shopping centers. The company raised its quarterly dividend by 5% to 21 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 2.90%

Healthcare Services Group, Inc. (HCSG), together with its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and dietary services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. It operates in two segments, Housekeeping and Dietary. The company raised its quarterly dividend to 16.25 cents/share, which was 3.20% above the distribution paid in the same period in 2011. Healthcare Services Group has raised dividends for 10 years in row. Yield: 3.20%

While MLPs have been great performers over the past decade, several factors could bring a halt to their distribution growth. Since most MLPs distribute all of their cash flows to unitholders, the only way they could grow is by selling additional debt or units in the markets. If interest rates increase, this will increase the cost of capital for these companies, and will reduce investor appetite for the sector.

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