While MLPs have performed quite well over the past six to seven weeks, we continue to find MLP valuations quite compelling. Currently, MLPs have an average yield of 6.1% and a distribution growth forecasted at 7% over the next year. With yield plus growth or y plus g prospects in the low double digits, we think MLPs compared very favorable relative to other equity investment alternative.
Relative to other income alternatives, MLPs are trading at higher than normal yield. The 10-year U.S. Treasury is trading at a yield of 1.5% and the yield spread to MLP is 460 basis points. This compares to the historical average closer to 220 basis points.
Relative to other income producing equity securities such as REITs and utilities, MLPs traded yield spreads at 270 and 250 basis points respectively, despite having much stronger historical and projected growth rates.
MLP distribution growth remained strong during the quarter with 41 MLPs increasing distributions, compared to 35 in the prior quarter. The average distribution increase was 6.4% on an annualized basis, which was the same level as we saw in the prior quarter.Distribution announcements for the second calendar quarter have just begun but all signs point towards a continuation of the distribution growth. Based on our research, we continue to expect that midstream MLPs will increase their distributions by 7% in calendar 2012. M&A activity in the MLP space continued to accelerate during the quarter with 31 announced transactions. Like last quarter, there were several very large transactions including Energy Transfer’s acquisition of Sunoco for $5.3 billion, Williams $2.5 billion acquisition of Caiman Energy, Suburban’s purchase of Inergy’s Propane operations for $1.8 billion and Penn Virginia’s $1.0 billion purchase of Chief’s Marcellus gathering assets. Read the rest of this transcript for free on seekingalpha.com