Before jumping at an attractive yield, investors should pause to consider its consistency.
In recent years, traditional MLP investors were victims of one of the greatest betrayals in U.S. financial history. Older, wealthy Americans were drawn to companies that paid out most of their cashflow in distributions. For years, America’s energy came from roughly the same places in the same amounts, which meant little need for pipeline operators to re-invest in the business. The Shale Revolution changed all this – new sources of oil and gas required new infrastructure (see Will MLP Distribution Cuts Pay Off?).
MLPs decided to grow, redirecting cashflows from payouts to new projects. K-1 tolerant, income seeking investors were the quintessential long term buyer sought by every CEO. All they wanted was stable income. Although for years MLPs provided this, in 2014-15 many of them seized the opportunity to be growth businesses, which redirected cash away from investors. Alignment of interests was lost. MLPs in aggregate demonstrated that Distributable Cash Flow would be paid to investors only as long as they didn’t have any better uses for it. Payouts were cut, trust was shattered. Today’s sector remains 28% below its August 2014 high, and its recovery offers something for everyone (see Growth & Income? Try Pipelines).
Stable and growing dividends remain highly valued. Although the Alerian MLP ETF (AMLP) has cut its distribution by 30% (see It’s the Distributions, Stupid!), Alerian used to post a chart with 6% average ten year distribution growth. Index components change, and Alerian was using the historic growth of existing index members regardless of how long they’d been in the index. This introduced a survivor bias, in that MLPs cutting distributions used to be dropped while the newly IPO’d ones they added were typically growing quickly. This confused many, because it failed to match actual investor experience. It seemed that everyone but Alerian knew MLP distributions were being cut. Facing growing criticism (see MLP Distributions Through the Looking Glass), Alerian revised their chart to better match reality.
