MLPA - MLPA: 2 Out Of 3 Ain't Bad (Rating Upgrade)

2023-12-29 12:05:45 ET

Summary

• Global X MLP ETF is a dividend hero with a track record of regularly paying dividends over the last 10 years.
• The trend in dividend payouts for the MLPA ETF is moving higher, indicating a good time to invest.
• MLPA provides exposure to the Midstream sector without the hassle of dealing with MLPs and their associated tax forms.
• We rate MLPA a buy at current levels.

Introduction

I think Global X MLP ETF ( MLPA ) is in a buy zone, and yield-hungry investors should take note. We have covered this little-sung dividend hero once previously , with an article in November of 2022. Then, I rated it a hold at $42. It's been a decent call as the exchange-traded fund, or ETF, has continued to trade in a fairly tight range, and bouncing off resistance in the mid-$40's a couple of times. I hold a small position - 100 shares - in my taxable account and am ready to up my stake. Every quarter it spits out a tidy $87.00 dividend, which I have set up to plow back into new shares - a couple a quarter at current prices.

We all have our reasons for investing. In the E&P's, I discuss most of the time I am after growth, a situation that's been elusive over the past year and half in this sector. My other reason for investing is income. I am hoping to build a portfolio of dividend payers that yields 8% - which is challenging as that is well into the danger zone for a cut, so stock picking is imperative. 8% average is my target as with a taxable portfolio size of around $200K - including high yielders that I will begin transitioning out of my IRA in 2024, these equities should throw off $16K per year, or about half my Social Security benefit that my wife would lose if I were to pass along. With risk comes reward. The key is managing the risk to avoid capital losses, and I think MLPA is a good bet at or near current pricing in the market I see developing in 2024, with little downside risk at current prices.

Dividend history

MLPA has an unblemished track record for regularly paying their dividend over the last 10 years. That's good enough for me. Ten years covers a lot of ground. As noted, folks who have been long for an extended period reaching back to the mid-teens may be underwater on a capital basis - almost certainly if they were caught in the 1:6 reverse split. That said, they have been collecting that dividend all the while, which should lessen the sting at least a little. If you're in an ETF like MLPA for anything but modest growth and steady income, you need to hire a new financial advisor.

Now, if you take out 2020 where they did a 1:6 reverse split, the dividend payment track record of MLPA is stellar. That doesn't count against MLPA in my book, as the underlying industry was collapsing at the time. For those who have been long since 2015, dividend rates have declined, closely matching the fortunes of the Midstream companies that make up the fund. Timing is everything in investing, and the uptick in payouts suggests to me the time is right for MLPA.

The key thing for me as a relatively new entrant to the stock, and as someone who is considering increasing his position at current levels, is that the trend in dividend payouts is moving higher. For the first time in nearly eight years, the pot is getting bigger.

Holdings

The holdings of MLPA read like a who's who list in the Midstream space, with the two largest holdings being Energy Transfer ( ET ) and Enterprise Products Partners ( EPD ). Both of those companies have been featured in our service as standalone investment ideas in the past year, along with our current favorite and proud portfolio member, Enbridge ( ENB ). Curiously, ENB is absent from this fund, perhaps because it is not an MLP, but a C-Corp.

The thesis for MLPA

Time and again we hear about the difficulty in building new infrastructure to meet rising demand from E&P operators. This has been a fact for the last decade probably, but certainly come more into prominence over the last several years. Regulatory and legal hurdles dog every project and expansion as the agencies have been staffed with climate zealots. That fact along with:

• The huge capital outlays required to build or buy existing infrastructure,
• The rise in interest rates over the past year and a half contributing to both financing costs, and providing competition for stock with high rates on Treasuries.
• Concerns about a recession affecting demand.

Have put downward pressure on this sector.

There is some good news on the horizon. Help may be coming on the economic front, with interest rates peaking and the likelihood that we will avoid a deep recession next year. Two outta three ain't bad . As for the regulatory environment, that's expected to continue, but the shift in sentiment as regards these companies appears to now be overcoming it.

The Global X MLP ETF fund invests in stocks of companies and MLPs operating in energy, oil, gas and consumable fuels, oil and gas storage and transportation, storage, and processing of natural resources sectors. It invests in growth and value stocks of companies across diversified market capitalization. The fund seeks to track the performance of the Solactive MLP Infrastructure Index , by using a full replication technique.

Risks

ETF's are creatures of the stocks they hold in the fund. There is certainly the issue of sector concentration, but exposure to this sector is the reason you are considering investing in MLPA, so that's a plus-minus attribute that comes with it. As I noted before, I don't hold the 1:6 equity contraction in 2020 as being related to the quality of the fund. The world was ending, the ETF did what it had to survive. I don't think that risk is on the table absent the world ending again. And, as we all know, after the world ends people are going to want to drive their cars, take a shower, and hop a jet plane to someplace warm. Energy will be required for all of that.

Your takeaway

The Midstream space is perking up. The companies we follow in this sector are seeing increases in their stock prices, and have rising cash flow to cover their distributions. I think this will accelerate as investors looking for yield create demand for the shares of this sector tracking ETF. Both of these things are bullish for the shares of MLPA and could continue pushing the stock higher.

Currently, MLPA is sitting just above support at $43.80 and its 200-day SMA at $40.80. It made a double bottom at $44ish this quarter, and if crude and gas fundamentals maintain or even improve as we move into 2024, MLPA could rally back toward the $50.00 level, a point not seen since 2019. Like I said, modest growth and steady income.

As a final point, MLPA is a way to spread risk in this sector without incurring the IRS K-1. I avoid MLPs for that reason, and like the exposure that the MLPA ETF brings broadly to that sector without the hassle of the K-1.

I think MLPA belongs in a risk-tolerant income seeker's portfolio, with an entry point at or near current prices. It's in mine, and I intend to add at current levels.

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