The stock market sold off on Wednesday on the mere mention that the governors at the Federal Reserve are starting to discuss the ending or at least tapering off of the long running quantitative easing programs. Income and yield investors who have hidden in overpriced Treasury and investment-grade corporates should start looking at master limited partnerships (MLPs) for solid income. Now BofA is making its stand in the MLP sector.
When the MLP team at Credit Suisse Group (NYSE: CS) recently pounded the table on MLPs for the coming year, we covered their very convincing reasons why. They are still firm believers in their “catch-up” rally slogan. MLPs underperformed the S&P 500 in 2012 for the first time since 1999, with the Alerian MLP Index (AMZX) gaining 4.8%, compared to 16.1% for the broader market. MLPs have made up some ground thus far in 2013 as the S&P 500 gained 5.03% in January, versus 12.5% for the AMZX and 9.8% for the Cushing MLP Index. With comprehensive tax reform likely off the table, Credit Suisse believes that tax fears will weigh less on MLPs, and while they are still positive on the oil infrastructure MLP stocks, they also think that one-off newer issues as well as double-digit growers could extend the rally we have seen in January and February.
Now the MLP analysts at Bank of America Corp. (NYSE: BAC) join the growing chorus of Wall St. firms suggesting MLP stocks for their customers seeking solid, dependable income streams. In a research piece out today, they point out once again that MLPs are attractive from an income and growth perspective, providing investors yield and return potential. They consider the yield component of the MLP sector’s total return attractive, given the current low interest rate environment. However, they point out that a greater portion of total MLP return potential could result from capital appreciation driven by production growth and associated robust cash distribution growth. Given the advantages of MLPs as tax deferred yield instruments, the analysts also believe that exploration and production MLPs with strong metrics can help narrow the value gap between the intrinsic value (NAV) and the share price of the E&P assets.
Today’s report highlighted three top names for investors:
Memorial Production Partners L.P. (NASDAQ: MEMP) is a Houston-based MLP with one of the highest distributions currently available. Paying $2.03 per unit translates to a 11.10% yield. The Thomson/First call price target is $21.50.
Based in west Texas with properties in the Permian Basin, mid-continent and the Rocky Mountain regions, Legacy Reserves L.P. (NASDAQ: LGCY) is another top pick. With a solid 8.70% distribution to unitholders, the Wall St. consensus price target is $31.
Breitburn Energy Partners L.P. (NASDAQ: BBEP) is also a top pick at Bank of America. Another high yielding name, this West Coast-based MLP pays unitholders $1.88 per year, which equals a 9.60% yield. The consensus price target is $22.
As we have pointed out before, the advantage to owning MLPs in an investor portfolio is that they often present one of the best total return opportunities. Fitch Ratings even gave a very positive multi-year outlook on the MLP segment in recent days. These three high-yielding individual names could offer just that. Investors seeking diversification in the space may also want to look at the Kayne Anderson MLP Investment Co. (NYSE: KYN) or the more aggressive Cushing MLP Total Return Fund (NYSE: SRV). Both are exchange traded funds (ETFs) that offer a basket of MLP names.