MLPX - MLPX: Recent Developments

2023-08-14 11:24:20 ET

Summary

• MLPX has seen weak capital gains and total returns due to changes in investor sentiment.
• MLPX's valuation has become more attractive compared to other U.S. equity valuations, potentially leading to strong capital gains.
• MLPX's dividends have grown, and are expected to continue growing assuming industry conditions remain stable.

I've covered the Global X MLP & Energy Infrastructure ETF ( MLPX ), a simple midstream energy index ETF, several times in the past . I've generally been bullish, due to the fund's comparatively safe midstream energy holdings, and a growing 5.3% dividend yield. I was neutral last year, on valuation grounds. Considering recent market movements, I thought to write a quick article looking at some recent developments for the fund.

MLPX has seen comparatively weak capital gains and total returns these past few months, due to changes in investor sentiment.

MLPX's valuation has become more attractive, while most U.S. equity valuations have risen. Wider valuation gaps means capital gains could, potentially, be quite strong moving forward.

MLPX's dividends have seen some growth as well. Growth is set to continue, assuming industry conditions do not significantly worsen.

In my opinion, MLPX's improved fundamentals, comparatively safe midstream energy holdings, and the growing 5.3% dividend yield, make the fund a buy.

MLPX - Quick Overview and Investment Thesis

A quick overview of the fund and its investment thesis, before looking at some more recent developments.

MLPX is a midstream energy industry index ETF. Midstream energy companies are those that generate most of their revenue from the transportation, distribution, and storage of energy products, including oil, natural gas, and refined products. As an example, the Williams Companies ( WMB ), MLPX's largest holding, has an extensive pipeline system delivering natural gas from Texas to sites all across the east coast, and from Wyoming and bordering states to Washington and Oregon.

Most of MLPX's underlying holdings have similar pipeline systems to the above, some targeting other regions, including western Canada and the Permian Basin.

MLPX currently invests in 26 different midstream energy companies. The largest of these are as follows:

MLPX is an incredibly concentrated fund, as it focuses on a very specific niche within an individual equity industry, and as it invests in a comparatively low number of holdings. Concentration increases risk and volatility and could result in significant under or overperformance. As such, and in my opinion, MLPX is a broadly inappropriate investment for more risk-averse investors. Large position sizes seem unwise as well.

On a more positive note, midstream energy companies have much less exposure to energy prices than the industry average, and so suffer fewer financial losses when energy prices decline. Expect midstream companies and funds, including MLPX, to outperform broader energy equity indexes when energy prices decline, as was the case in 2020:

On the flipside, expect MLPX to underperform when energy prices significantly increase, as was the case in mid-2022:

In my opinion, MLPX's lower energy price exposure is a net positive for investors, as it decreases risk and volatility. More aggressive energy bulls might prefer a fund more highly exposed to energy prices, however.

Midstream energy companies tend to distribute excess cash-flows to shareholders, which generally results in good dividends. MLPX itself yields 5.3% right now, a reasonably good yield on an absolute basis, and higher than that of broader equity and energy equity indexes:

MLPX's dividends are fully covered by underlying generation of income, as evidenced by the fund's 6.2% SEC yield.

As the fund currently generates more in income than it distributes to shareholders, dividends are likely to grow moving forward. Dividends have grown too, since inception and for most relevant time periods.

MLPX's comparatively safe midstream energy investments and the growing 5.3% dividend yield are important benefits for the fund, and form its core investment thesis.

With the above in mind, let's have a quick look at some recent developments for the fund.

MLPX - Recent Developments

Weak Capital Gains and Underperformance

MLPX and other energy equity index funds saw significant capital gains and total returns in 2022, even as broader equity indexes saw sizable losses.

Gains were partly driven by improved industry fundamentals, with energy prices increasing across the board. Improved investor sentiment also played a role, as skyrocketing inflation, interest rates, and growth valuations made investors reassess the relative merits of growth and value stocks.

Recent returns have been much more tepid, with MLPX seeing much weaker capital gains and total returns than the S&P 500 YTD. MLPX did outperform broader energy equity indexes, however.

MLPX's recent underperformance is almost entirely due to a reversal in investor sentiment, as plummeting inflation and better-than-expected economic conditions led to renewed interest in growth, tech, and other assorted investments.

Energy prices have played a small role in the fund's underperformance, as oil prices have stagnated YTD, but oscillated between $70 and $85, a reasonable range.

Considering the above, I think it is fair to say that MLPX's underperformance was mostly due to investor sentiment: industry conditions remain adequate.

Cheaper Valuation

MLPX's valuation has become quite a bit cheaper these past few months:

MLPX's cheap valuation benefits investors in several key ways.

First, cheap valuations mean stronger potential capital gains and returns. Said gains are strongly dependent on investor sentiment, which does not seem particularly bullish on the industry right now, however.

Second, cheap valuations mean cheap prices, which boosts the impact of dividends and buybacks on shareholder returns. New or prospective investors receive stronger yields the lower MLPX's price is, although existing investors do not. Lower prices allows the fund's underlying holdings to buy back more shares at cheaper prices, making them more accretive on an earnings basis.

Both of these benefits are of particular importance to MLPX, as midstream energy companies tend to deliver sizable dividends to shareholders and engage in opportunistic stock buy backs as well.

Looking at broader trends, U.S. equity valuations are mostly flat:

So, MLPX's cheaper valuation compares somewhat favorably to that of the S&P 500.

Positive Earnings Growth

MLPX's PE ratio has declined these past few months, even as the fund's share price has seen some small, but positive, increases. The combination implies strong positive earnings growth for the fund's underlying holdings, contingent on no significant portfolio changes. Morningstar also shows positive earnings growth, although I'm unclear on the time frames.

Positive earnings growth is a benefit for the fund and its shareholders, although as growth for the fund is only implied, and highly uncertain, it is unclear how important of a benefit this has been.

Moderate Dividend Growth

MLPX's dividends have seen moderate growth in the recent past. Dividends have increased 8.5% these past twelve months, 16.0% since early 2022. Longer-term growth is weaker, at 4.3% for the 5Y mark, but still positive.

MLPX's dividends could see further growth in the coming months, as the fund currently generates more in income, 6.2% as per its SEC yield, than it distributes to shareholders, 5.3% as per its TTM dividend yield. ETFs tend to distribute any and all income generated to shareholders, so the fund's dividends should increase to around 6.2% in the coming months. Much will depend on midstream energy industry performance and dividends, however.

Improved Fundamentals

MLPX's earnings and dividends have seen positive growth these past few months, even as the fund's valuation becomes cheaper. Fund fundamentals seem much improved, in my opinion at least.

Conclusion

MLPX is a simple midstream energy index ETF. In my opinion, MLPX's improved fundamentals, comparatively safe midstream energy holdings, and the growing 5.2% dividend yield, make the fund a buy.

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