“Boost Dividends with ‘Drop Down’ Assets” from “your New ‘Rich Uncle'”

Sniffing out the high yielder teased by Elliott Gue for MLP Profits

By Travis Johnson, Stock Gumshoe, June 20, 2012

CORRECTED — I originally published this article with the wrong solution, due to, well, simple idiocy as I wrote the wrong ticker down and didn’t backtrack to check myself. Many apologies if I confused anyone, the revised article follows:

Sheesh, just using the phrase “rich uncle” is probably enough to get my message to you today clogged up in a spam filter somewhere — but such is the plight of an ever-vigilant Gumshoe. How can we explain what the teasers and toutsters are talking about, after all, without borrowing their words?

This one’s from the folks at MLP Profits, which is team-edited by ELliott Gue and Roger Conrad over at Investing Daily … and that immediately focuses the mighty power of the Thinkolator on just one little sector of Master Limited Partnerships. But of course, even within that group there’s a pretty wide variety of stocks — mostly in the energy infrastructure business other than a few oddballs (cemeteries, asset management, amusement parks), but varied in the quantity and type of assets they own.

So which MLP is Gue touting today? Well, as implied in our borrowed headline above, it’s one with a “Rich Uncle.” Here’s how Gue gets our tease going:

“Income investors: Meet Your New “Rich Uncle”

“Wouldn’t you love a rich uncle who sends you big, fat checks, lavishes you with expensive gifts and guarantees your financial success?

“Guess what? Finally, it’s your turn to enjoy the ‘rich uncle experience’…

“Your rich uncle experience starts with a company my colleague Roger Conrad and I believe is one of the shrewdest, best-run outfits in the entire energy sector.

“The way this company operates makes every investor feel as if a wealthy benefactor is looking out for their financial future.

“By the way, this superb investment is not a stock, but a Master Limited Partnership (MLP). That makes this rich uncle experience even better. I’ll tell you more about these unique investment vehicles later.

“As I write, this whip-smart company is rewarding its investors to the tune of a delightful 8.4% distribution yield—which, as you know, beats the daylights out of the measly returns these days from Treasuries, CDs and S&P corporate dividends.

“Here’s Where It Gets Even Better…

“When you own shares in this brilliant outfit…

“… you’ll instantly become a lucky ‘nephew’ of a successful general partnership that lavishes your MLP (and by extension, you) with valuable, profit-generating assets.”

Now, I wouldn’t presume you to be a “lucky nephew” — of course that’s the way to play the odds when you’re writing to the crowd of potential newsletter subscribers, in an industry that generally targets upper middle class white men who are well into their red convertible years. And I suppose you may well fall into that group as well, since I can’t see you from here, but our wild guesses about the Gumshoe readership tell us that we’ve a fair number of lucky nieces in the group as well. Still, lucky is lucky.

Who, then, is this great rich uncle of ours? Well, the basic idea is that the General Partner (the company that runs the master limited partnership) is the uncle, and the lucky nephew is the publicly traded MLP that enjoys the General Partner’s largesse — here’s how Gue puts it:

“You see, my top MLP recommendation is sponsored by one of the most experienced general partnerships in the most active wealth-building energy sectors of the entire U.S. These sectors, by the way, are redrawing the global energy map.

“This major-league sponsor owns and operates an incredibly diversified portfolio of assets involved in the gathering, transport, storing, processing, treating and selling of crude oil, natural gas and natural gas liquids (NGLs). And best of all…

“They regularly reward their MLP (my top pick) with prized “drop-down” assets—those valuable “gifts” I mentioned above.

“It works like this…

“The best general partnerships (GPs), after acquiring new companies or facilities, will often pass along—or “drop down”—some of the prime assets to their MLPs. They do this to grow the MLPs’ distributable cash flow, which makes them even more rewarding and attractive to investors.

“Typically, a GP will drop down assets to their MLP at exceedingly advantageous prices, enabling the MLP to boost its distribution payments to investors. The best GPs also help their MLPs finance acquisitions. To top it off, they provide leadership and direct financial support when business or market conditions warrant.

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“Of course, the general partnership doesn’t perform these functions out of charity. When the MLP (thanks to drop-downs) is able to boost its payout to investors, the GP also receives a larger share of the cash flow. Everybody wins.”

So that’s the idea — MLPs, given their constraints (they can’t retain earnings — not that they want to), sometimes need a bit of help growing, and that help is provided by their General Partner (GP). These General Partners also come out just fine in the bargain as they usually own a large piece of the MLP and they also get incentive distributions once they lift the MLP’s payouts above a certain level. MLPs have also been used to offload assets over the years, enabling the General Partner to sell expensive long-lived assets (like pipelines) and get those assets and their debt off the books but maintain control over them. A pipeline that generates a small amount of real income (after depreciation and taxes) for an oil company is not an exciting asset that boosts investor returns, but one that generates hu