Well, it finally happened. In an effort to retain its investment grade rating, and with an inability to go to the capital markets for a cash raise, energy and industry giant Kinder Morgan Inc. (NYSE: KMI) cut its dividend a whopping 75%. Not only does this end months of rampant speculation over what the iconic company would do, but it may very well mark a bottom in the long and painful energy sector decline.
In a new report, Jefferies keeps Kinder Morgan at a Neutral rating, and while conceding that the stock has solid upside potential, the analysts suggest that investors take advantage of huge price discounts and focus on high-quality, cash flow companies. Four companies meet that requirement at Jefferies and are the top picks for investors now.
Remember that master limited partnership (MLP) distributions can contain return of capital.
This stock is a solid play on the propane industry. AmeriGas Partners LP (NYSE: APU) has the advantage of having a very large propane footprint. Propane usually trades at almost twice the price of spot natural gas. The consumer is often in a rural or, in some cases, outlying area, and there is no major competition to speak of. AmeriGas operates as a retail and wholesale distributor of propane gas, and related equipment and supplies in the United States. It serves approximately 2 million residential, commercial, industrial, agricultural, wholesale and motor fuel customers in 50 states through approximately 2,500 propane distribution locations.
The stock has sold off pretty hard, and Jefferies still views this a very solid buying opportunity. The firm also points out that unlike other MLPs, this company is not constantly going to the equity markets to raise capital, and that is a big plus for unitholders with those markets currently all but shut.
AmeriGas investors receive a very rich 10.15% distribution. The Jefferies price objective is $52, and the Thomson/First Call consensus price target is $50. AmeriGas closed Wednesday at $36.26.
Enterprise Products Partners
This is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, just raised the distribution 1%. The company maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.
One reason why many analysts may have a liking for the stock might be its distribution coverage ratio. That ratio is well above one times, making it relatively less risky among MLPs. The company’s distributions have grown for several quarters and are expected to continue in 2016. Plus the Standard & Poor’s current rating is BBB+, which is investment grade, and the outlook is stable
Enterprise investors are paid very solid 6.36% distribution. The Jefferies price target is $36. The consensus target is higher at $38.70. Shares closed Wednesday at $24.21.