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A Closer Look at MLPs and IPOs

Wednesday - 6/19/2013, 2:45pm  ET

Frequent visitors to know that we subscribe to long-term outlooks. Buy and hold is best: Find a great company at a great price, and hold it forever. This sort of thinking also leads us to give a company time to properly prove itself after an IPO before we buy in. After all, in a great deal of these cases, there tends to be a pop and drop after an IPO, which can sting you if you buy too soon but also provide a great opportunity to buy in if you wait.

But there's one type of investment you can make that doesn't experience the IPO pop and drop that most other stocks do: master limited partnerships. There have been a lot of announcements recently about companies in the oil and gas industry that have spun off their midstream assets into master limited partnerships, and now that there's talk that renewable energy companies could gain MLP status, it's more important than ever to take a closer look.

IPO performance
Let's start by looking at the initial six months of share performance for four relatively new publicly traded entities. We'll begin with Facebook , a company that IPO'd in May of last year and is currently trading below its offering price of $42.05.

FB Chart

FB data by YCharts

Ouch. Facebook's IPO is one of the worst in history, and this example certainly qualifies as low-hanging fruit. But that doesn't make the point about investing at IPOs any less true.

Now let's look at Dunkin' Brands, a company that doesn't come with anywhere near the media attention of Facebook. Dunkin' IPO'd on July 27, 2011, at $25 a share.

DNKN Chart

DNKN data by YCharts

Dunkin' was all over the place during the first few months of trading, including a run-up on Day One that it was trading below six months later.

Now let's have a look at two recent energy MLP IPOs. First up is Summit Midstream Partners , which entered the market on Sept. 28 of last year at $21 per unit.

SMLP Chart

SMLP data by YCharts

Summit did fall a bit in the beginning, but six months later it has easily outperformed the market, returning more than 31%.

Finally, let's check out MPLX , Marathon Petroleum's midstream spinoff that IPO'd on Oct. 26 of last year at $25.50 per unit.

MPLX Chart

MPLX data by YCharts

There's virtually no initial pop and drop -- just a brisk rise to 42.28% six months later.

Much of the appeal of investing in master limited partnerships comes from the distribution yields. Summit Midstream is currently yielding 5% with an annualized payout of $1.68 per unit, while MPLX yields 2.9% with an annualized distribution of $1.09. Facebook is currently yielding nothing, and Dunkin' Brands is sporting a 1.8% yield and an annualized payout of $0.76 per share.

If the share price of an MLP plummets after the IPO, investors are still getting that guaranteed dividend. The return is there immediately for MLP investors; it's not there for Facebook investors. All this means, really, is that there's no rush to get into, or out of, these specific offerings. Investors want to buy MLPs because of the consistent returns. Volatility is often -- though not always -- a stranger to these equities.

The other side of this coin is that, especially with MLP spinoffs from established businesses, as is the case with MPLX, there is no guesswork. Marathon simply made public another level of its proven business, compared with Facebook, a company that's continuing to figure out exactly how it can monetize data collected from its user base.

Coming soon
Many established companies are considering MLP spinoffs of its existing assets, which could provide enticing opportunities for investors in the near future. Exploration and production company Devon Energy has announced that the midstream MLP it was considering is officially going to happen. The company plans to IPO its spinoff sometime during the third quarter if the regulatory process goes according to plan.

A pair of refiners will probably join Devon, as Phillips 66 and PBF Energy have announced their desire to spin off midstream assets as well. Phillips 66 is further along in the process than PBF Energy, and we could see that company's MLP IPO by the end of the year. PBF has mentioned the plan only offhandedly, and it probably won't come to fruition in 2014, if it does happen.

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