The Mighty Middle of the Market
June 13, 2018
Oh, the trials and tribulations of being in the middle. Think of the poor middle child of the family. The elder sibling gets all sorts of attention as parents fret over getting everything right with their first kid. Then the next child comes along and the parents figure that they have this parenting thing down, so they don’t worry as much.
But if a third child comes along, then the parents — tending to now be being older and more affluent — shower all sorts of indulgences on the youngest in the family.
The middle child is just there. And they often feel disadvantaged compared to their older and younger family members.
Mid-cap stocks are often treated the same way by traders and investors. The big stocks get all the headlines and they plug into all sorts of indexes and funds that further boosts their importance in the stock markets and at trading desks.
And the smaller stocks, often from recent start-ups, get the attention as the shiny new things in the market. Roadshows by underwriters are rolled out to tout them. Their CEOs also get plenty of airtime as they pitch their companies and all the potential of their new, smaller stocks to eager audiences.
So, much like the middle child, the mid-cap stocks can be sort of left in the shadows of their larger and smaller peers.
But perhaps that’s at the peril of the savvy investors. If you track the mid-cap stocks in the U.S. market over the past ten years, it’s the middle of market that’s outpaced the bigger stocks of the S&P 500. For the S&P Mid-Cap 400 Index has generated a return of 170% against the general S&P 500’s return of 154%.
And this outperformance of the mid-caps continues this year. For the year to date return of the Mid-Cap 400 is 6% against the S&P 500’s 5%.
There are many great mid-cap stocks offering great opportunities for growth and dividend income. But perhaps one of the better bargains can be found in the middle of another market — petroleum.
The petroleum market has been gaining with a rise in demand for energy supporting higher prices for both upstream producers and downstream refiners.
But both the producers and the refiners are more at risk for price volatility in crude and refined products. The mid-stream pipeline companies continue to remain more insulated against the general ups and downs in petrol prices.
And as the toll-takers of the petrol market, pipelines are a great source of dividend income as they merely transport oil and gas, collecting fees from clients day in and day out.
Plains GP Holdings (PAGP)
The first mid-cap midstream dividend payer is Plains GP Holdings LP (NYSE:PAGP). Plains is set up as a general partner of passthrough assets comprised of pipelines operated by Plains All American Pipeline. As a general partner, Plains GP collects fee income from the pipelines that run throughout North America including the U.S. and Canada.
That fee income continues to be on the rise, with annual gains of 29.9%. Margins on the fee income for the General Partner are relatively ample at 4.4%.
And the shares remain heavily discounted to the General Partnership’s revenues by nearly 90% of trailing sales.
The dividend is nice at 4.7% making for a good stream of income for individual investors who also benefit from reduced current income tax liabilities, as this mid-cap midstream pays no corporate income taxes and the dividends paid are partially shielded from income tax liability as a partnership.
Genesis Energy (GEL)
A second mid-cap, midstream opportunity is Genesis Energy, L.P. (NYSE:GEL). This is another U.S.-based pipeline company with its assets primarily in the southern and south-central U.S. states including Texas, Louisiana and Mississippi as well as additional capacities in Kansas, Oklahoma and New Mexico.
Revenues are on the ascent with demand for pipelines on the rise, with trailing 12-month sales up some 18.4%.
Operating margins for Genesis are even fatter than for Plains at 10.9%. And while the shares are a bit more expensive than for Plains, they are still cheap, as they are valued at a mere 1.2 times trailing revenues.
The dividend is even more ample as well, with the current yield sitting at 9% which is also partially shielded from income taxes as it is a passthrough partnership.
Buckeye Partners, L.P. (BPL)
And the third mid-cap, mid-stream dividend payer is Buckeye Partners, L.P. (NYSE:BPL). Buckeye is also a passthrough security set up as a partnership. This, like for the other mid-cap, midstream companies mentioned above, means that they do not pay corporate income taxes and pass through tax deductions to individual investors that provide for reduced current income tax liabilities.
Buckeye is a bit different than the other two noted above in that it has a focus on refined products and that it is set up to transport the refined products from refiners to shipping companies via its collection of marine terminals.
This a great segment of the U.S. pipeline market as exports of petroleum, both crude and refined products continues to hit new historic highs.
Revenues are up year over year by 12.3%. And operating margins for Buckeye are fat at 18.7%.
And the dividend is a whopping 13.6%.
And despite the great assets and the great dividend flows, the sharers are still a bargain as they are trading at a mere 1.5 times the company’s trailing sales.
Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.