Master Limited Partnerships Essay

2235 words - 9 pages

Equity Research Report
Sector: Master Limited Partnerships (MPLs)
Stock: MarkWest Energy L.P. (NYSE: MWE)

The sector that this research report will cover is Master Limited Partnerships (MLPs) and the stock within this sector is MarkWest Energy Partners, L.P. (MWE). Master Limited Partnerships is a business that has the tax structure of a partnership, but the ownership equity of the business trades on an exchange. In the MLPs sector, a unitholder is someone who owns stock in the company, making them part owner of the business. MLPs have two different kinds of partners, general partners and limited partners. General partners manage the daily operations of the business and own a ...view middle of the document...

The latest qualified source to be added to this list was in 2008, when the Emergency Economic Stabilization Act added carbon dioxide, biofuels and other alternative fuels.
Most MLPs offer a high dividend rate because it allows for a tax deferment at the entity level. MLPs are able to have a pass-through tax structure that helps lower the cost of capital. Since taxation is on a pass-through basis, MLPs do not corporate tax and all taxable items flow through to the unitholders, who get taxed at their own rates. MLPs are able to distribute all available cash to investors seeking regular quarterly income. The table below is an example of taxation at the MLP’s level, and the unitholders level to invest in an MLP. Since the MLPs do not pay Federal or State taxes, they are able to offer a larger dividend to their investors.

Master Limited Partnership offers their investors income through quarterly cash distributions while most MLPs strive to continually grow their business so they can increase their regular cash distributions. MWE has either maintained or increased their dividend payout each quarter. This support is shown in the MarkWest Energy Historical Cash Distributions chart and Chart 1. Chart 1 helps to demonstrate the power of compounding interest with the power if reinvesting MWE’s dividend payout back into your principle balance. If $10,000 were invested in MWE in 2002, fourteen years later the investment would grow to over $28,000. After reinvesting the dividend payout, more shares can be bought. This growth does not take into account the appreciation of MWEs stock over this time period.
Tax- deferred quarterly cash distributions are one of the biggest advantages of investing in MLPs. MLPs investors typically enjoy a yield that is hard to find in corporate stocks, Treasury’s, or investment grade bonds. The median yield for MLPs as of March 31, 2014 was 6.4%. The chart below shows that average spread on an MLP to a 10-year Treasury note is 351 bps higher, and on investment grade bonds MLPs are 125 bps higher. The chart supports the fact that MLPs are a great source of quarterly income for investors seeking a regular return on their money. MLPs are a more risky investment then Treasury’s or bonds, but MLPs provide you with the yield to support the risk.

One of the many benefits of investing in MLPs is they are a tax-advantaged investment, while investors are responsible for paying tax on their share of the partnership’s income. Their taxable income is lowered because they can write off their share of the partnership’s deductions and losses. The cash distributions MLPs pay to their unitholders are not taxed as current income, but are considered a return of capital. The greatest advantage is that the unitholders are not taxed until the partnership units are sold.
MLPs can add diversification and stability in an investor’s portfolio. While most MLPs are concentrated within the energy sector, they cover a wide range of businesses...

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