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  • mktplyr517 mktplyr517 Nov 16, 2012 9:30 AM Flag

    I don't think this is 'attractive' until the yield hits 6%

    I consider 6% yields (6-7% actually) the historical norm....

    I pointed out that ETP could easily approach 11-12% yields in this cycle... and that EPD actually traded to that yield area in 09

    Its why distribution growth rate needs to be robust to maintain unit value

    They change the tax structure of MLPs and we will see a new normal of 8-10% yields.... and for the cheerleaders.... that yield is only attained by a severe reduction in unit value

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    • Mktply - Changing the tax structure of MLPs would do almost nothing. According to the OMB it would raise only about $300M a year and cost double that in other tax receipts.

      The only things that would change the yield curve for MLPs is #1 a significant increase in interest rates. An increase of 6% in the 10yr TBill rate would increase average MLP yields (now about 6%) to rise to about 8-9%. The historical correlation between TBill rates and MLP yields is about .4-.45 and a normal spread is about 200-300bps. #2 is a fundamental change in energy use whereby the World reduces use so far that basically we do not need even the existing infrastucture and do not need more production.

      Do you really think we are going to a 8% rate for TBills? Any chance of energy usage dropping worldwide by say 20%?

      As one that closely follows ETP I ask why you think it should trade at 11%? It is rated investment grade. Thus it has a yield floor determined by bond yields. That floor is somewhere in the 8.75% area. There certainly are lots of junk MLPs and those do trade at 8% or greater yields. ETP actually would trade around 8% or a bit less if the public relations department and Kelcey improved their communications grade from a F+ to merely a C.

      As your considering 6-7% a norm for MLPs yields - absolutely. That is where we are today. There are some actually under 4% and others well over 10%. What an investor looks at is getting a 10 year BBB bond and earning about 5-6% or getting EPD at around the same yield but with a track record of increasing the payout for almost 20 years.

      And yes EPD did briefly yield 11% in 2009. The entire banking system almost failed. As Liza said that was certainly not a normal time. If you tried to borrow money you certainly know that.


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