06/22/12: Growth versus Yield

Far too many investors ignore Western Gas Partners LP (NYSE: WES) because the units yield 4.3 percent–well below the 6.3 percent distribution yield offered by the Alerian MLP Index.

Although the stock’s current yield is at the low end of the range for its peer group, Western Gas Partners has grown its payout at an average annual rate of more than 17 percent over the past three years. We expect the MLP’s distribution to increase at an average annual rate of 15 percent to 20 percent over the next two years. This rapid growth makes up for the stock’s subpar yield.

The stock has pulled back after the MLP on June 19 announced a secondary offering of 5 million common units at a price of $43.88. Assuming the underwriters choose to exercise their 750,000 unit over-allotment option, the MLP would raise almost $250 million.

Investors’ knee-jerk reaction to an offering of new units is to sell the stock because this move ostensibly dilutes the stake of existing unitholders. However, these secondary offerings rarely prove dilutive; MLPs usually plow the proceeds into acquisitions or organic growth projects that increase the amount of distributable cash flow. We’ve found that the temporary selloff that accompanies a secondary offering often presents savvy investors with an opportunity to pick up the units at a discount. Western Gas Partners LP joins the Conservative Portfolio and my Best Buys List as a buy up to 48.

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