Analysts love these MLPs with big dividends.
Master limited partnerships, or MLPs, have long been a source of reliable, high-yield income for investors. Unlike with dividend stocks, investors who buy MLPs become junior partners in the company and typically receive a large portion of the company's profits via distributions. Many MLPs operate in the midstream oil and gas segment, which has taken a big hit in 2020. However, the industry has stabilized in the second half of 2020, and high-quality MLPs provide both investment upside and some of the highest dividend yields on Wall Street. Here are nine MLPs and midstream stocks that Bank of America recommends.
Energy Transfer (ticker: ET)
Energy Transfer owns and operates one of the largest refined oil and gas transportation networks. Analyst Ujjwal Pradhan is projecting earnings per share will fall from $1.36 in 2019 to 39 cents in 2020. However, he is forecasting earnings will rebound to $1.30 per share in 2021. A court order closing the company's Dakota Access Pipeline for environmental review was reversed by an appeals judge in August. Energy Transfer has the highest yield of any MLP on this list at about 20%. Bank of America has a "buy" rating and $12 price target for ET stock.
Rattler Midstream (RTLR)
Rattler Midstream provides water-related services to Diamondback Energy (FANG). Pradhan says Rattler appears to be on track to exceed the midpoints of its full-year earnings guidance. Looking ahead to 2021, Rattler management has said it expects to continue maintenance activity at Diamondback facilities while reducing 2020 capital expenses by about 50%. Pradhan says this dynamic should support sustained free cash flow generation. He is projecting 84% EPS growth in 2020 and 87% growth in 2021. Rattler pays about a 17% dividend. Bank of America has a "buy" rating and $11 price target for RTLR stock.
MPLX is an Ohio-based crude oil and natural gas transportation and processing company. Pradhan says MPLX has been making tremendous strides in reducing operating and capital expenses and securing and developing joint venture growth projects. In addition, parent company Marathon Petroleum Corp. (MPC) recently announced a $21 billion sale of its Speedway assets to help pay down debt, a move that Pradhan says will shore up the company's balance sheet and provide a more stable sponsor for MPLX. MPLX has about a 16% dividend. Bank of America has a "buy" rating and $25 price target for MPLX stock.
Plains All American Pipeline (PAA)
Plains All American Pipeline specializes in crude oil transportation, gathering, marketing and terminaling. Plains shares are down about 63% year to date, and investors are concerned about the company's declining terminal value, the potential regulatory risk if Joe Biden wins the presidential election and lack of clear management strategy to unlock value. Pradhan says the first two issues are legitimate concerns, but they don't explain why Plains trades at a roughly 50% enterprise multiple discount to its peer group. Plains has about an 11% yield. Bank of America has a "buy" rating and $11 price target for PAA stock.
Plains GP Holdings (PAGP)
Plains GP owns a controlling general partnership interest in Plains All American Pipeline. Pradhan is bullish on Plains GP's cheap valuation and its relatively low-risk cash flow profile. Much like Plains All American, Pradhan says Plains GP's current valuation is overly pessimistic relative to peers facing similar risks. Bank of America is projecting a 2020 EPS loss of $3.06 for Plains GP, but Pradhan expects EPS to rebound to $1.56 in 2021. Plains GP pays around a 10% dividend. Bank of America has a "buy" rating and $11 price target for PAGP stock.
Magellan Midstream Partners (MMP)
Magellan Midstream Partners owns the largest U.S. refined products pipeline network, with more than 9,400 miles of pipeline and more than 50 terminals. Analyst Derek Walker says demand for refined products has returned to nearly normal levels in some rural areas, but policy restrictions are delaying demand recovery in some urban areas. Walker says demand recovery, positive excess free cash flow, an investment-grade credit profile, a healthy balance sheet and an 11% dividend are all reasons to own Magellan. Bank of America has a "buy" rating and $50 price target for MMP stock.
Enterprise Products Partners (EPD)
Enterprise Products Partners is one of the world's largest publicly traded MLPs and provides a wide range of midstream energy services. Enterprise shares are down about 38% in 2020, which Pradhan says is a sign that high-yielding midstream investments are getting little respect on Wall Street. Enterprise management has said it plans to prioritize share buybacks over increasing its payout in the near future. Pradhan says investors shouldn't overlook the potential for Enterprise to capitalize on hydrogen-related opportunities in the longer term. Enterprise pays about a 10% dividend. Bank of America has a "buy" rating and $24 price target for EPD stock.
Kinder Morgan (KMI)
Kinder Morgan is a midstream energy company that operates natural gas pipelines, liquids terminals and other pipeline services. Pradhan says Kinder Morgan isn't immune to the growth headwinds hampering the midstream group, but the company's focus on capital discipline and shareholder returns makes it a solid investment. If capital investment opportunities remain limited in the near term, management has said the company will commit to shareholder returns or paying down debt. Pradhan is projecting 2021 EPS will exceed 2019 levels. Kinder Morgan has about an 8% dividend. Bank of America has a "buy" rating and $19 price target for KMI stock.
Williams Cos. (WMB)
Williams is a pure-play U.S. natural gas infrastructure company. Walker says Williams' second-quarter numbers suggest the company has a manageable balance sheet, plenty of liquidity and an improving free cash flow profile. As of the end of last quarter, Williams had a leverage ratio of 4.3x, roughly in line with the company's 2020 target of 4.4x and longer-term target of 4.2x. The company has said it plans to sell gathering and producing assets to raise additional cash. Williams pays about an 8% dividend. Bank of America has a "buy" rating and $23 price target for WMB stock.
Bank of America recommends these MLPs and midstream stocks:
-- Energy Transfer (ET)
-- Rattler Midstream (RTLR)
-- MPLX (MPLX)
-- Plains All American Pipeline (PAA)
-- Plains GP Holdings (PAGP)
-- Magellan Midstream Partners (MMP)
-- Enterprise Products Partners (EPD)
-- Kinder Morgan (KMI)
-- Williams Cos. (WMB)