These days all anyone seems interested in is dividend yields. I understand the reasons, but recently in Seeking Alpha I published a post comparing three Master Limited Partnerships with high levels of Return on Equity. The point is, if a company can either distribute cash to you in the form of a dividend or use it to fund highly profitable operations, which is a better strategy for investors?
This is an excerpt from a post I recently published on Seeking Alpha regarting MLPs with a high return on equity.
Tesoro and Magellan have some of the most impressive profit margins in the pipeline industry. Sunoco Logistics is well behind, but they operate in a slightly different arena. Sunoco’s acquisition and marketing activities carry far higher operating costs than simply managing pipelines. It has maintained a slim, but steady, profit margin over the past several years.
June 30, 2011 Sept. 30, 2011 Dec. 31, 2011 March 31, 2012 June 30, 2012 Tesoro Logistics 39.15 55.76 40.72 42.67 68.68 Magellan Midstream Partners 26.87 25.31 22.64 18.95 30.66 Sunoco Logistics Partners 3.29 2.84 1.83 2.34 4.01
Tesoro’s profit margin of 68% is as high as a software company. I just can’t expect it to continue with those incredible numbers. I’ll be looking out for its third quarter earnings call. If they can maintain a 68% profit margin, I think I’ll be doubling down on that investment.
It goes on to show that Magellan and Tesoro are getting such a high return on assets and in turn equity, that they might be better off lowering dividend distributions and reinvesting that capital into operations.