Bill Gross has made a lot of money in his career. Dubbed the "bond king," Gross helped build Pimco into a leading investment management firm focused on fixed income. He's amassed an estimated $1.7 billion fortune, according to Forbes.
These days, Gross has been putting a portion of his net worth into master limited partnerships (MLPs). However, in a recent post on X, Gross wrote, "Pipeline MLPs have peaked for now." That drove him to sell some of his MLP holdings, including Enterprise Products Partners(NYSE: EPD). However, while he exited that position, he's still holding Western Midstream (NYSE: WES), Energy Transfer(NYSE: ET), and MPLX(NYSE: MPLX). Here's a look at why he thinks those MLPs are more attractive for income-seekers right now.
Not high enough
Bill Gross has been pounding the table for MLPs. However, he has noted that some MLPs are more attractive than others because of their higher relative dividend yields. Now he's selling two of his MLP holdings: Enterprise Products Partners and NuStar.
The NuStar sale is largely due to the run-up in its unit price after a fellow MLP agreed to buy it earlier this year. The sale of Enterprise Products Partners is more of a surprise. It's one of the largest MLPs with very diversified operations. It also has a magnificent record of increasing its distribution. It recently passed the quarter-century mark of consecutive annual distribution increases. That steady growth should continue. The MLP has a rock-solid financial profile and a growing backlog of capital projects.
However, its 7.4% current distribution yield is on the lower end in the MLP space. That's due in part to its higher valuation. Because of that, Bill Gross is selling his stake in Enterprise Products Partners to focus on his favorite MLPs.
Bigger income streams
Bill Gross' favorite MLP is Western Midstream, which he called the "best of the bunch." He highlighted on X that it "yields 10.25% tax deferred." The billionaire investor also wrote that Energy Transfer and MPLX are "still attractive holds." They also offer higher relative yields than Enterprise Products Partners (8.1% for Energy Transfer and 8.3% for MPLX). That's largely because they have lower valuations than Enterprise Products Partners. With higher yields and lower valuations, they could generate higher total returns for investors relative to Enterprise Products Partners.
For the most part, these pipeline MLPs have very similar business models and financial profiles. All four companies operate gathering and processing (G&P) assets. However, they have varying degrees of diversification beyond that line of business. Western Midstream's main business is operating G&P assets after it sold $790 million of non-core assets this year, $400 million of which Enterprise acquired. MPLX has a roughly even split between G&P and logistics and storage. Meanwhile, Energy Transfer is a very diversified MLP, like Enterprise. Given their greater diversification, Energy Transfer and Enterprise Products Partners produce less volatile cash flow than Western Midstream and MPLX.
The MLPs also have similarly strong financial profiles. Western Midstream, Enterprise Products Partners, and MPLX expect their leverage ratios to be in the low 3.0 range this year. Meanwhile, Energy Transfer expects leverage to be at the low end of its 4.0 to 4.5 target range. Enterprise has the lowest leverage level of the group at 3.0, which backs its A-rated credit (the highest in the midstream sector).
In addition, these MLPs all generate significant excess free cash flow after paying their hefty distributions. That enables them to retain cash to fund expansion projects, opportunistically repurchase units, make acquisitions, and maintain their strong balance sheets.
These features put all of their high-yielding distributions on rock-solid footings.
All are great options
Bill Gross is selling his stake in Enterprise Products Partners because he believes Western Midstream, Energy Transfer, and MLPX offer more attractive yields and upside potential. However, that doesn't mean you should follow him and sell your stake in the MLP. For starters, there are tax implications to selling an MLP. As Gross has highlighted, they offer tax-deferred income, which means selling would trigger a tax liability on the income you have received in the past. Further, it has a strong track record of increasing its distribution, which should continue.
Holding Enterprise, or one of Gross' favored MLPs, can be a great way to generate passive income as long as you're comfortable with the additional tax complications that can come with owning an MLP (such as they send a Schedule K-1 at tax time instead of a 1099-DIV Form). So, while yield-seeking investors might want to consider buying Western Midstream, Energy Transfer, or MPLX ahead of Enterprise Products Partners right now, they're all solid options in the MLP space.
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Matt DiLallo has positions in Energy Transfer and Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
