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By Jason Stipp | 09-30-2010 11:39 AM

The Most Attractively Priced MLP Today

Morningstar's Paul Larson on the runup in master limited partnerships, the one remaining value, and two alternatives to consider.

Jason Stipp: I'm Jason Stipp for Morningstar. One investment we're hearing about perhaps more than just about any other is MLPs, Master Limited Partnerships.

Here with me to talk about what all the buzz is about and if there are any attractive ideas in MLPs is Paul Larson. He is editor of Morningstar StockInvestor and an equity strategist.

Thanks for joining me, Paul.

Paul Larson: Thanks for having me.

Stipp: So, this is an investment we get e-mails about, we hear about on the Morningstar boards. What is all the buzz about? What's attracting people to this investment vehicle right now?

Larson: Well, I think it's the low interest rate environment that is driving people towards this investment class, which, all else equal, has very high yields on these investments.

It's very interesting because a couple of years ago, two, three years ago, we were recommending a large number of these MLPs and because of the tax considerations, the tax complexities around these, people looked at that and said, no, it's too much work, too complex, move on.

But it's amazing, what a low-yield environment will do to people's sentiment. Now we're saying, okay or they're saying, okay, it's 7%-8% yield. Tell me more. I will look beyond the tax complexities and actually do the homework and the extra tax work.

Stipp: So, certainly, I think any kind of income-generating investment right now is garnering some attention, since folks as you said aren't getting a lot of income elsewhere in other parts of the market. So, what exactly is behind that? What is an MLP? Why does it pay out this income, and what kind of business is underlying that?

Larson: Right. Well, MLPs are a little bit different than the regular C corporations because they are partnerships, they are pass-through entities. They don't pay corporate income taxes. That tax liability is actually flowed down to the individual owners.

The vast majority of the cases are in the energy space, typically the energy transportation space. These are infrastructure businesses--businesses that we tend to think have wide economic moats or in a worst case relatively high-quality narrow economic moat in a lot of these cases, and they are relatively attractive and steady businesses.

Stipp: So, is there a reason why that type of business, the transportation of energy, pipelines and whatnot, is good for this particular business structure? I mean, why is that, that you do see most MLPs are these types of energy transportation businesses?

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