At a time when Treasury yields have been nonexistent, MLP investors have been able to get high payouts that are viewed as quasi-dividends, due to some payouts representing income and some representing return of capital. The question to ask now is whether the risk-reward is there for new investors at the current prices. The unit prices of many key MLPs have been hit hard along with stocks in the past few weeks, and we wanted to take a risk-reward look for summer 2012. This sector could get a recovery, or it could face additional pressure like we saw in 2011.

If investors have been involved in the MLP sector since before, during or right after the great panic selling of 2008 and 2009, they are up huge if they held on. In many cases they have doubled their money or more. And as far as they are concerned they have been getting 5% to 8% in payouts each year (again, some income and some return of capital). The problem is that the prices here have become choppy and the MLP structures often have had secondary offerings on top of secondary offerings. Those secondary offerings have provided growth and acquisition capital, but some investors have started to worry that these secondary offerings may be the biggest contribution to the never-ending payout increases that have been seen in this sector.

MLPs in the energy space often attract the same sort of investors who would buy utility shares and preferred shares of banks, but they also overlap with REIT investors who look for above-market yields. This sector has enjoyed large price gains in the unit (share) prices, and investors are looking for any safe investments that have high payouts, compared to the world of no-returns in CDs and Treasuries. A wave of secondary offerings from many MLPs came before and during the recent market sell-off.

24/7 Wall St. has evaluated some of the top MLP investments to see how much implied upside remains in this sector. We have taken price performance as far as the sell-off from recent highs, as well as issues like the payout ratios (implied yield-equivalent) and the consensus price targets from Thomson Reuters. We have evaluated the following MLPs: Enterprise Products Partners LP (NYSE: EPD), Kinder Morgan Energy Partners LP (NYSE: KMP), Plains All American Pipeline LP (NYSE: PAA), ONEOK Partners LP (NYSE: OKS), Energy Transfer Partners LP (NYSE: ETP) and Enbridge Energy Partners LP (NYSE: EEP). These MLPs mentioned and covered here are some of the ones we track and keep on our watch list in the sector. These have market caps above $8 billion, they have a history of increased payouts each quarter, for the most part, and generally speaking these MLPs are all believed to have good management teams.

Investors have made a bundle here in this sector. MLPs are not really all that correlated to the price of oil because these are the partnerships (general and limited) for pipelines, terminals, and other facilities involved in the oil and gas sector in America. MLPs must derive 90% of their income from real estate, natural resources and commodities. The issuing of K-1 statements can make the structure more complicated, but the payouts often make that worth it for many investors seeking higher streams of cash flow.

We also have evaluated some of the key ETFs and closed-end funds in this sector. Be advise that just the three vehicles we have tracked in funds and ETFs have a combined market value of more than $11 billion.

China’s GDP reaches a three-year low. (Reuters)

Bank of America (NYSE: BAC) will sell a large group of foreclosed homes. (Reuters)

Bank of America’s CEO, Brian Moynihan, will have to testify in a lawsuit brought by MBIA (NYSE: MBI). (Reuters)

Microsoft (NASDAQ: MSFT) makes progress in adding cloud computing customers. (Reuters)

China’s growth rate drops to 8.1%. (WSJ)

Strong oil reserves worldwide make it less likely the Iran sanctions will lift crude prices higher. (WSJ)

Former Best Buy (NYSE: BBY) CEO Brian Dunn may have had a relationship with a female employee. (WSJ)

Kinder Morgan Energy Partners (NYSE: KMP) will put $5 billion into its mountain pipeline to move oil to Canada’s west coast; the oil will be sold to Asia. (WSJ)

BrightSource Energy withdraws its IPO, another example of problems in the solar industry. (NYT)

The Consumer Financial Protection Bureau will not block deals for credit card companies to charge upfront fees. (NYT)

The European Union wants programs to limit banker bonuses. (FT)

The European Central Bank says it would prefer to buy bonds to support the region over making loans to banks. (Bloomberg)

Apple (NASDAQ: AAPL) denies the Justice Department’s accusation that it colluded with book companies to set e-book prices. (Bloomberg)

Illumina (NASDAQ: ILMN) shares fall on fear Roche will withdraw a bid to buy the firm. (Bloomberg)

The U.S. Geological Survey says some earthquakes probably are tied to fracking. (Bloomberg)

The maker of Angry Birds is in talks with Baidu (NASDAQ: BIDU) to enter China. (Bloomberg)

Douglas A. McIntyre

Kinder Morgan has agreed to sell several assets of Kinder Morgan Energy Partners LP (NYSE: KMP) including the Trailblazer Pipeline Company and the company’s 50% interest in the Rockies Express Pipeline. Kinder Morgan Inc. will part with its Kinder Morgan Interstate Gas Transmission (KMIGT) system as well as KMIGT’s Wyoming treating facilities.

To replace the assets it plans to sell, KMI is going to make KMP an offer it can’t refuse:

KMI expects to offer (drop down) EP assets to KMP to replace the assets that KMP will divest. KMI expects the divestitures and these dropdowns to occur contemporaneously, but subsequent to the close of the KMI-EP transaction. Now that the required asset divestitures are tentatively known, EP also expects to offer EP assets to El Paso Partners, L.P. (NYSE: EPB). Such a dropdown transaction to EPB could be completed by EP before the close of the KMI-EP transaction.

KMI president and CEO Richard Kinder said that the company would have preferred to keep these assets, but the sale is necessary in order to win FTC approval. El Paso’s shareholders voted last week to approve the sale to KMI.

The sale of KMP’s stake in the Rockies Express is especially interesting because the 1,700-mile pipeline from Wyoming to Ohio was built before the huge increase of natural gas production in the Marcellus shale and the coming boom in production from the Utica shale. There have even been rumors that the flow of the Rockies Express might be reversed, to carry some of that natural gas to the Midwest.

KMI did not identify any buyers for the assets, but Richard Kinder did say that the company does “anticipate significant interest in the Kinder Morgan assets that will be sold, particularly the Rockies Express Pipeline.”

Shares of KMI are off about -1.5% at $35.55 in a 52-week range of 23.51-$37.66. Shares of KMP are down nearly -2% at $82.27 in a 52-week range of $63.42-$90.60.

Paul Ausick

The unofficial closing bells put the DJIA up about 4 points to 12,878.28 (0.03%), the NASDAQ rose less than 1 point (0.02%) to 2,931.83, and the S&P 500 fell -0.09% or just over 1 point to 1,350.5.

There were several analyst upgrades and downgrades today, including Arch Coal Inc. (NYSE: ACI) cut to ‘hold’ at Argus; Netflix Inc. (NASDAQ: NFLX) raised to ‘outperform’ and target price raised to $140 at Credit Suisse; Kinder Morgan Inc. (NYSE: KMI) raised to ‘buy’ at Deutsche Bank; Kinder Morgan Energy Partners L.P. (NYSE: KMP) raised to ‘buy’ at Deutsche Bank; and H.J. Heinz Co. (NYSE: HNZ) started as ‘underweight’ at Morgan Stanley.

Earnings reports since markets closed last night have led to some price changes as of the last half hour of trading today: Avon Products Inc. (NYSE: AVP) is up 1.2% at $17.74; Goodyear Tire & Rubber Co. (NYSE: GT) is down -5.7% at $13.18; Watson Pharmaceuticals Inc. (NYSE: WPI) is up 3.8% at $59.89; Arbitron Inc. (NYSE: ARB) is up 4.4% at $36.94; BorgWarner Inc. (NYSE: BWA) is up 0.42% at $79.18; Capella Education Co. (NASDAQ: CPLA) is down -13.3% at $39.30; Fossil Inc. (NASDAQ: FOSL) is up nearly 13% at $118.02; Hospira Inc. (NYSE: HSP) is up 6.7% at $36.50; Omnicom Group Inc. (NYSE: OMC) is down -0.23% at $47.91; and Zipcar Inc. (NASDAQ: ZIP) is down -13% at $13.99, a new 52-week low.

Other standouts from today include the following stocks:

Michael Kors Holdings Ltd. (NYSE: KORS) is up nearly 25% at $41.92 after posting a new high of $42.43 earlier today. The apparel company reported better-than-expected earnings today, and the shares have more than doubled since the company’s IPO in mid-December.

Syntroleum Corp. (NASDAQ: SYNM) is up up 20% at $1.32. The biodiesel maker’s joint venture with Tyson Foods Inc. (NYSE: TSN) has signed a deal to distribute synthetic diesel fuel.

Chelsea Therapeutics International Inc. (NASDAQ: CHTP) is up nearly 19% at $3.69. The company’s shares fell almost -40% yesterday, but bargain hunters can’t resist. We mentioned this possibility yesterday.

Energy Conversion Devices Inc. (NASDAQ: ENER) is down more than -80% to $0.29. The solar maker filed for bankruptcy this morning. We have more coverage here.

JinkoSolar Holding Co. Ltd. (NYSE: JKS) is down nearly -12% at $7.95. The solar panel maker is just one more victim among solar stocks today of a proposed cutback in Germany’s solar subsidies and the bankruptcy of ECD. More coverage here.

Stay tuned for Wednesday. Dallas Fed President Richard Fisher is giving a speech. We have noted the following events on the schedule (all times Eastern):

• 7:00 a.m. – Mortgage Bankers Association purchase applications
• 8:30 a.m. – Empire State manufacturing survey
• 9:15 a.m. – Industrial production
• 10:00 a.m. – Housing market index
• 10:30 a.m. – EIA weekly petroleum status report
• 2:00 p.m. – FOMC minutes released

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Paul Ausick

Arch Coal Inc. (NYSE: ACI) Cut to Hold at Argus.
Banco Santander (NYSE: STD) Raised to Hold at Societe Generale.
Bank of America Corporation (NYSE: BAC) Cut to Neutral at Citigroup.
Bed Bath & Beyond (NASDAQ: BBBY) Cut to Neutral at Citigroup.
Biogen Idec Inc. (NASDAQ: BIIB) Reiterated Buy but raised target to $140 at Argus; Started as Market Perform at Wells Fargo.
BioMarin Pharmaceutical Inc. (NASDAQ: BRMN) Cut to Underperform as Bear of the Day at Zacks. Campbell Soup Co. (NYSE: CPB) Started as Underweight at Morgan Stanley.
CBOE Holdings, Inc. (NASDAQ: CBOE) Cut to Neutral at Credit Suisse.
El Paso Corporation (NYSE: EP) Started as Hold at Deutsche Bank.
Gap Inc. (NYSE: GPS) Raised to Buy at Citigroup.
Gardner Denver, Inc. (NYSE: GDI) named as Value Stock of the Day at Zacks.
General Mills (NYSE: GIS) Started as Overweight at Morgan Stanley.
H.J. Heinz Company (NYSE: HNZ) Started as Underweight at Morgan Stanley.
Kinder Morgan, Inc. (NYSE: KMI) Raised to Buy at Deutsche Bank.
Kinder Morgan Energy Partners, L.P. (NYSE: KMP) Raised to Buy at Deutsche Bank.
Kraft Foods Inc. (NYSE: KFT) Started as Overweight at Morgan Stanley.
Netflix, Inc. (NASDAQ: NFLX) Reiterated Outperform and raised target to $140 at Credit Suisse.
ProAssurance Corporation (NYSE: PRA) Raised to Outperform as Bull of the Day at Zacks.
Sprint Nextel Corporation (NYSE: S) Reiterated Hold but widened out loss estimates by Argus.

If you enjoyed the top analyst upgrades and downgrades, you can sign up in the box below to join our morning email list to receive news directly in your inbox each morning. We include major analyst upgrades and downgrades, IPO and M&A news, special situation developments, observations on Warren Buffett and key market gurus, as well as special exclusive feature stories.

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It turns out that many stocks with high dividend yields are now more attractive than sovereign debt in the U.S. and abroad. Part of the allure, besides income or reinvestment, is that dividend stocks often hold up better than other investments during jittery markets. It is hard to imagine, but the high-yield utility sector was one of the top performers of the S&P in 2011. In some cases, half of an investor’s total return through time may come from dividends. Warren Buffett generally picks dividend-paying companies for Berkshire Hathaway Inc. (NYSE: BRK-A) after following some of the principles of Benjamin Graham.

The 24/7 Wall St. 2012 Model Dividend Portfolio includes the following stocks: American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

While exchange-traded products have been avoided in the past, recent trends merit a look at the open-end or closed-end mutual funds and ETF products as follows: SPDR Barclays Capital High Yield Bond (NYSE: JNK); JPMorgan Alerian MLP Index ETN (NYSE: AMJ); ALPS Alerian MLP ETF (NYSE: AMLP); and PowerShares Financial Preferred (NYSE: PGF).

Lastly, there have been some exits due to upside price performance: Altria Group Inc. (NYSE: MO); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD); and Kinder Morgan Energy Partners LP (NYSE: KMP).

We have described the features and outlook for each component of our Model Dividend Portfolio.

We overlaid some of the recent Fitch Ratings analysis after the individual MLPs.  The aim is to show how the MLPs are valued at today as well as how they compare to their Thomson Reuters consensus price target objective and 52-week trading ranges.  The individual MLPs we are including on our own are as follows: Enterprise Products Partners L.P. (NYSE: EPD); Kinder Morgan Energy Partners LP (NYSE: KMP); MarkWest Energy Partners, L.P. (NYSE: MWE); Plains All American Pipeline, L.P. (NYSE: PAA); Williams Partners L.P. (NYSE: WPZ); Magellan Midstream Partners, L.P. (NYSE: MMP); Buckeye Partners, L.P. (NYSE: BPL); and El Paso Pipeline Partners, L.P. (NYSE: EPB).

As the end of 2012 approaches rapidly, we wanted to take a year-end look into the sector to see where there is opportunity versus risk.  We have shown the basic fundamentals of some of our top go-to names in the MLP sector and have shown a chart of the key ETF in this sector.  A report from Fitch Ratings earlier this month called MLPs fairly well positioned against economic regulatory risks and has noted that the sector should generate stable operating performance and financial credit measures for 2012.  The belief was that these should remain consistent with recent past performance and the outlook includes natural gas pipelines as well as crude oil and refined products pipelines. 

Income and dividend investors have become more aggressively interested in MLPs after a couple of years of Treasury rates and CD rates not paying anything of substance any more for income.  Retirees need cash flow from their investments in order to live.  Even though these distributions paid to investors act as dividends, there is usually a mixed combination of income and a return of capital.  In short, not all of the distributions paid out are treated the same by the tax-man.

Our individual valuation analysis on some of the key individual MLPs is as follows:

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $39.2 billion now and trades at $45.00, under its consensus target of $49.11 and it has a 52-week range of $36.00 to $46.70.  The implied distribution per year based on the last payout was about 5.5%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.9 billion and trades at $81.00, above its consensus target of $76.11 and against a prior 52-week range of $63.42 to $80.52.  The implied distribution per year based on the last payout was 5.8%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.6 billion.  This unit trades at $54.20, and is under the consensus target of $61.88 and it has a 52-week range of $39.00 to $56.82.  The implied distribution per year based on the last payout was 5.4%.

We have overlaid some of the Fitch Ratings analysis after the individual MLPs because we wanted to show you what the MLPs are valued at today as well as how they compare to their Thomson Reuters consensus price target objective and 52-week trading ranges.  The individual MLPs we are including on our own are as follows: Enterprise Products Partners L.P. (NYSE: EPD); Kinder Morgan Energy Partners LP (NYSE: KMP); MarkWest Energy Partners, L.P. (NYSE: MWE); Plains All American Pipeline, L.P. (NYSE: PAA); Williams Partners L.P. (NYSE: WPZ); Magellan Midstream Partners, L.P. (NYSE: MMP); Buckeye Partners, L.P. (NYSE: BPL); and El Paso Pipeline Partners, L.P. (NYSE: EPB). 

Our individual valuation analysis on some of the key individual MLPs is as follows:

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $40 billion now and trades at $46.10, under its consensus target of $49.11 and it has a 52-week range of $36.00 to $46.70.  The implied distribution per year based on the last payout was about 5.3%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.1 billion and trades at $78.50, above its consensus target of $76.11 and against a 52-week range of $63.42 to $79.34.  The implied distribution per year based on the last payout was 5.9%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.7 billion.  This unit trades at $55.80, and is under the consensus target of $58.38 and it has a 52-week range of $39.00 to $56.40.  The implied distribution per year based on the last payout was 5.3%.

Plains All American Pipeline, L.P. (NYSE: PAA) is valued at $10 billion, and its $67.30 price compares against a price target of $71.96 and its 52-week trading range is $54.90 to $67.74.  The implied distribution per year based on the last payout was 5.9%.

Williams Partners L.P. (NYSE: WPZ) is worth some $17.3 billion and its $59.65 price compares to a target of $60.81 and a 52-week range of $44.81 to $61.22.  The implied distribution per year based on the last payout was about 5%.

Magellan Midstream Partners, L.P. (NYSE: MMP) is worth $7.35 billion and its $6.30 price is just under the $66.64 consensus price target.  Its 52-week range is $51.00 to $65.92. The implied distribution per year based on the last payout was only about 4.9%.

Buckeye Partners, L.P. (NYSE: BPL) is valued at $5.95 billion and its $63.98 price is pretty far under the consensus price target of $70.25.  It has a 52-week range of $54.51 to $68.92. The implied distribution per year based on the last payout was 6.5%.

El Paso Pipeline Partners, L.P. (NYSE: EPB) is valued at $6.7 billion with a $32.60 share price.  That is one of the largest discounts to the consensus price targets of peers as its target is $39.00.  Its 52-week range is $31.34 to $38.36. The implied distribution per year based on the last payout was 6.1% based on today’s price.

Because many of the largest MLPs are so close to or above the consensus price targets, we recently gave the 24/7 Wall St. Model Dividend Portfolio some changes to focus more on the funds and ETFs (with payout rates based upon the average of the last two payouts): Kayne Anderson MLP Investment Company (NYSE: KYN) with a distribution of about 6.9%; JPMorgan Alerian MLP Index ETN (NYSE: AMJ) with a distribution of about 5.2%; and ALPS Alerian MLP ETF (NYSE: AMLP) with a distribution of about 6.3%.

The deal, which has been approved by the boards of both players, is expected to close in the second quarter of 2012. When it does, Kinder Morgan will have nearly twice the enterprise value of Enterprise, about the same spread as  that between Exxon Mobil Corp. (NYSE: XOM) and its nearest US competitor Chevron Corp. (NYSE: CVX).

The combination gives Kinder Morgan greater pipeline capacity to the US east coast market and additional capacity into southern Arizona and California. Kinder Morgan plans to proceed with plans that El Paso announced last year to sell off El Paso’s exploration and production assets. The sale of those assets will go to reduce the approximately $17 billion of debt Kinder Morgan is assuming from El Paso.

Kinder Morgan shares are up more than 5.5% in the first half hour of trading this morning, at $28.84, in a 52-week range of $23.51-$32.14, and Kinder Morgan Energy Partner shares are up nearly 3.5%, at $73.97, in a 52-week range of $63.42-$78.00. El Paso shares are up more than 23%, at $24.12, after posting a new 52-week high of $24.61 earlier. El Paso Pipeline Partners have seen a share-price drop of more than -10%, to $34.06, in a 52-week range of $31.34-$38.36. Both FBR Capital and Oppenheimer downgraded the shares this morning, from what were essentially ‘buy’ ratings to ‘hold’ ratings.

Paul Ausick

Baker Hughes Inc. (NYSE: BHI) Cut to Market Perform at BMO.
Beam Inc. (NYSE: BEAM) Started as Hold at Argus.
Boeing Co. (NYSE: BA) Cut to Perform at Oppenheimer.
Cisco Systems Inc. (NASDAQ: CSCO) Started as Buy at IS Group.
Ecolab Inc. (NYSE: ECL) Cut to Neutral at Citigroup.
FXCM Inc. (NYSE: FXCM) Cut to Sell at Citigroup.
Gap Inc. (NYSE: GPS) Cut to Market Perform at Wells Fargo.
General Electric Co. (NYSE: GE) Started as Overweight at Barclays.
Hewlett-Packard Co. (NYSE: HPQ) Started as Buy at ISI Group.
International Business Machines Corporation (NYSE: IBM) Started as Outperform at Macquarie.
Interactive Brokers Group (NASDAQ: IBKR) Raised to Outperform as Bull of the Day at Zacks.
ITT Corporation (NYSE: ITT) Started as Equal-Weight at Barclays.
Kinder Morgan Energy Partners (NYSE: KMP) Started as Neutral at JPMorgan.
Plains All American Pipeline (NYSE: PAA) Started as Overweight at JPMorgan.
TAL International Group, Inc. (NYSE: TAL) named Value stock of the day at Zacks.
Teradyne, Inc. (NYSE: TER) lowered target to $12 as Bear of the Day at Zacks.

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JON C. OGG