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Is This "Boring" Pipeline Stock a Bargain, or Is the 7.4% Yield a Warning Sign? An Honest Look.
Key Points
The "midstream" crude oil and natural gas pipeline and logistics business generates reliable cash flow.
What this industry doesn't do particularly well is generate growth without equally significant investments.
This type of holding can also create some tax-filing headaches, but this one may be worth the trouble.
Income-minded investors obviously like high yields. Dividend yields that are unusually high, however, are understandably viewed with suspicion. Frothy yields are often the result of a falling stock, and a falling stock is often an indication that trouble is brewing.
Enter MPLX (NYSE: MPLX). This oil and gas pipeline company's forward-looking dividend yield currently stands right around 7.4%, and just as shockingly, the ticker's trailing price-to-earnings ratio is just under 13. Both are at the deep-value end of the midstream sliver of the energy sector.
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What gives? Why is MPLX so bargain-priced?
A handful of factors are at work here, not the least of which is that the company is built from the ground up to generate income rather than produce net growth.
Although its dividend payment can and does grow -- it's done so for 13 consecutive years now, in fact -- the prospect of meaningful, sustained capital gains from MPLX without dilutive or debt-based fundraising is modest compared to alternatives.
The stock's valuation and dividend yield reasonably reflect this reality relative to its risk, with perhaps the biggest risk simply being an unpredictable degree of dividend growth from one year to the next.
Image source: Getty Images.
The other (and arguably bigger) reason MPLX shares are so cheap is the underlying company's legal structure. It's not a conventional corporation, as most publicly traded companies are. It's organized as a master limited partnership, which requires additional tax forms and additional steps when filing your taxes.
Although the investment income that some publicly traded partnerships generate can be more fruitful than dividend-paying stocks of seemingly similar companies, this added tax-filing burden can make limited partnerships less attractive to many investors. That's particularly true if the position in the partnership is relatively small.
Even so, with a dividend yield that's so much stronger than most other options right now, MPLX might be worth the trouble here.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.