Dividends Versus Return on Equity for High Returning MLPs

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.

Profit margins

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.

 

2 comments for “Dividends Versus Return on Equity for High Returning MLPs

  1. May 8, 2013 at 11:21 am

    Thanks for finally writing about >Dividends Versus Return on Equity for High Returning MLPs | Replacing Oil <Loved it!

  2. May 8, 2013 at 11:21 am

    Hi, just wanted to say, I loved this post. It was funny.
    Keep on posting!

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