Enterprise Products Partners L.P. Message Board

Preferred stock and common stock are treated the same for purposes of the REIT tax rules. For corporate and other purposes, they have the obvious differences that are well-known and with good reasons for each to exist..
Preferred is not debt, but is equity just like common. Even though it has a preferred dividend over the common, the Board still has to declare that dividend. It is not guaranteed.
I have mentioned before that a corporation's reported GAAP earnings are calculated differently from its taxable earnings which are used to determine its REIT dividend requirements.
The benefits of owning preferred are that you get your dividend and any liquidation proceeds before the common holders, but you don't get to vote for the board (except if the dividend is in arrears) and you don't get the upside in the common stock price, should that occur.
As to the language in the Prospectus,there are plenty of risk factors about the company's ability to pay its preferred dividends. While they didn't specifically say that an NOL would allow them not to pay the preferred dividend, they clearly linked the payment of the preferred dividend with the requirements under the REIT tax rules. It is not their job to educate the investing public about the various contours of the tax code.

stagg, I think refineries actually make money when gas prices drop. Usually that's because the price drop encourages more driving and the drop in gas prices only occurs after their input (oil) has dropped. But the perception may be that falling gas prices equates to falling refinery margins. It all depends on the crack spread. Anyway, this is where I am letting the charts decide what is the best thing to do and I think they are saying to take a profit.

I suggest you might want to read the tax code and learn the REIT dividend requirements or just admit, that there could be some people who may have worked in this industry before and know a little about the taxation of REITs. It is a difficult area, but you are mixing apples and oranges and bananas and don't seem to understand the differences between cashflow, GAAP earnings and taxable earnings. Each is different.
As to the disclosure in the prospectus, I just re-read it and did not see anything that said the preferred dividend must be paid because it is part of the SG&A. You could post what you think it says and we could discuss.
Sorry to be so blunt.

I don't think that is correct. They don't have to pay any dividends as long as they can utilize the NOLs. The dividend requirement is driven by their taxable earnings, not cash flows or GAAP earnings. From an optics standpoint, mutual funds want to see the stock paying a common dividend and have a share price over $5, but that is coming in time. Right now, they want to be able to show that they can invest the capital and earn a better return.

We will see. These trusts have a history of selling off after the ex-dates as it did back in Feb. PER has a little more room to run into the next resistance level around $15.25, especially if it clears its 50 dma. But be careful after that.

Huff, can't believe MWE has not done an spo. We are passed the ex-date so the risk is high. They may have gotten a boost from the NRGM/CMLP merger announcement.

bob, I don't know what to think. I totally discount the opinion of the Hedgeye firm which seems to issue these "hit" pieces. But there's the old adage about where there's smoke there's fire. I don't like when a company's accounting policy becomes a lightening rod. Who's to really know what the "correct" answer is? The point is not that there is a right and wrong answer. I don't know enough about accounting policy to know that answer, but when accounting becomes a distraction, then it is difficult to focus on the business plan.
I'm not a buyer or a seller. I have had better luck with the pipeline and midstream MLPs.

liza, you are probably right, but there are still some questions to be answered. The presentation materials did not give an estimate of the projected distribution going forward. One could try to back into it since they gave the number of units and the projected EBITDA, but you would need to know what % of EBITDA makes it to DCF and what coverage ratio they projected. Second, CMLP holders are getting $1 in cash in addition to the NRGM units. One could think of that $1 as being spread over several quarters to make up the difference in the distributions, except you get it upfront. That "equalizes" the distribution for 12 quarters if my math is right. The theory of the transaction seems to be that bigger is better. CMLP seemed always to be priced at a higher yield than its competitors so could this be a case where a bigger entity gets priced at a lower yield and then some growth in the new NRGM distribution. Or will the main beneficiaries of any distribution growth be the GP?

The dividend yield is misleading. That high yield is not fixed and is susceptible to being cut over time. The prospectus gave targets and subordination levels, but one trust issued before this (ECT) got clobbered when the distribution was not supported once the subs converted. Those distribution projections were based on higher assumptions. I could be wrong, but I think these trusts have become trading vehicles to buy when they become oversold and their RSI levels are under 20 and to sell into the dividend run that seems to occur each quarter.

I have been trying to decipher the technicals on these trusts over the last several quarters. They appear to undergo a dividend run some 4-6 weeks prior to the announcement, but then start selling off even prior to the ex-div date. So far SDT has cleared the 50 dma and there appears to be some resistance right at the current level where it filled the gap down in March. I don't know where the rally will stop -- is there a Fibonnacci retracement level at 16 which marks a retracement of the downturn from 19 to 12.5? One thing is that the fundamentals have seemed to deteriorate and those that bought at the low of $12.5 surely will not wait around to see how production or pricing goes over the next quarter. I would expect the hedge funds to start shorting again right after the ex-date if not sooner. That seems to have been the pattern over the last few months.

Ed, I think I am going to add some MTGE. They always seem to bounce after these selloffs so why not try.

Have you seen WGP? Why I insist on waiting to buy these GPs to see if they perform is beyond me.

There is support from back in late 2010 under $35. I wouldn't touch it until then. Wonder what the puts are trading at?

Sarge, I still own IVR, not because I like it, but because I am still stuck with it from several years ago. I recently sold MITT and AMTG. I had a nice gain on MITT (about 4 points and several dividends) but thought it's chart was going sideways. Not much of a gain on AMTG, but I did collect some divies. My theory was that at the beginning of the year, money would shift out of the agency mREITs and into the nonagency mREITs, but I didn't see the share gains in the nonagencies and didn't want to risk losing my gain as we went into May. It's all about risk and reward and I thought there was more risk of losing a couple of points then the reward of picking up 80 or 90 cents of dividend which wasn't payable until July.
As for the Fed, it is true that the risk of rising borrowing rates is very small, but mREITs make money from the spread, and the top part is collapsing. With collapsing spreads, the only way to maintain divies is to increase leverage and we all know what can happen when companies use high leverage and things go the wrong way -- we saw it happen once before with IVR and recently with ARR -- they get a margin call and have to do an spo below book.
Cramer must have some long term relationship with Mike Farrell at NLY because he never really gets into how mREITs work -- he just keeps saying that NLY is the best because they have been in business the longest. There's some truth to longevity being a good metric, but it ignores other opportunities.

Well, I don't know what report you are reading, but they only had 78 cents in cashflow and burned through half of their undistributed earnings. I would think a cut to $1 is coming for the June announcement. The last time the divy got cut though the stock rebounded well.

Sarge, I have been warning about this for awhile. People wanted to just ignore that spreads were tightening and prepayments increasing. When AGNC, which is known as the best run mREIT, finally misses, that should tell you something. The long ride for mREITs may be entering the final innings. But AGNC has a loyal following and I would expect those to be buying tomorrow when it drops down to book value (around $28). The real risk is what happens to the next divy payment, due to be announced in June. They only earned 78 cents of spread in the first quarter from income, so they had to deplete their cookie-jar of undistributed earnings by half. I would think a cut to at least $1 is coming, and pricing the stock at a yield of 15% would give you $26.

BTW, I noticed that ARR cut their divy again to 7 cents per month. They are using over 9 times leverage to pay that amount. If mortgages go the wrong way, they'll get another margin call. Extreme risk there.

Bob, you may be right, but I don't know. We always knew this day would finally come when the spread would be squeezed so much and the book value would take a hit. AGNC held up well the last time they cut the divy, but who's to say that will continue when you get the double-barrel action of a decine in book and a possible cut in the divy. They still have some savings in the cookie-jar, but buying before the next dividend announcement, which should be in June, could be risking. If they cut to $1, the stock would trade at a 15% yield at $26.