Is Kinder Morgan Dividend Cut the Bottom? 4 Cash Flow Rich MLPs to Buy Now

Well, it finally happened. In an effort to retain its investment grade rating, and with an inability to go to the capital markets for a cash raise, energy and industry giant Kinder Morgan Inc. (NYSE: KMI) cut its dividend a whopping 75%. Not only does this end months of rampant speculation over what the iconic company would do, but it may very well mark a bottom in the long and painful energy sector decline.

In a new report, Jefferies keeps Kinder Morgan at a Neutral rating, and while conceding that the stock has solid upside potential, the analysts suggest that investors take advantage of huge price discounts and focus on high-quality, cash flow companies. Four companies meet that requirement at Jefferies and are the top picks for investors now.

Remember that master limited partnership (MLP) distributions can contain return of capital.

AmeriGas Partners

This stock is a solid play on the propane industry. AmeriGas Partners LP (NYSE: APU) has the advantage of having a very large propane footprint. Propane usually trades at almost twice the price of spot natural gas. The consumer is often in a rural or, in some cases, outlying area, and there is no major competition to speak of. AmeriGas operates as a retail and wholesale distributor of propane gas, and related equipment and supplies in the United States. It serves approximately 2 million residential, commercial, industrial, agricultural, wholesale and motor fuel customers in 50 states through approximately 2,500 propane distribution locations.
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The stock has sold off pretty hard, and Jefferies still views this a very solid buying opportunity. The firm also points out that unlike other MLPs, this company is not constantly going to the equity markets to raise capital, and that is a big plus for unitholders with those markets currently all but shut.

AmeriGas investors receive a very rich 10.15% distribution. The Jefferies price objective is $52, and the Thomson/First Call consensus price target is $50. AmeriGas closed Wednesday at $36.26.

Enterprise Products Partners

This is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, just raised the distribution 1%. The company maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.

One reason why many analysts may have a liking for the stock might be its distribution coverage ratio. That ratio is well above one times, making it relatively less risky among MLPs. The company’s distributions have grown for several quarters and are expected to continue in 2016. Plus the Standard & Poor’s current rating is BBB+, which is investment grade, and the outlook is stable

Enterprise investors are paid very solid 6.36% distribution. The Jefferies price target is $36. The consensus target is higher at $38.70. Shares closed Wednesday at $24.21.
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Sunoco

This company recently paid big money to purchase wholesale fuel and retail marketing assets it didn’t own. Sunoco L.P. (NYSE: SUN) operates more than 850 convenience stores and retail fuel sites and distributes motor fuel to convenience stores, independent dealers, commercial customers and distributors located in 30 states at approximately 6,800 sites, both directly as well as through its 31.58% interest in Sunoco LLC, in partnership with an affiliate of Energy Transfer Partners.

In November, Energy Transfer Partners and Sunoco announced the dropdown to Sunoco of the remaining 68.42% interest in Sunoco LLC and 100% interest in the legacy Sunoco retail business for approximately $2.226 billion. Sunoco is expected to pay to Energy Transfer Partners approximately $2.2 billion in cash (including the expected value of working capital) and also will issue approximately 5.7 million common units valued at approximately $194 million. This now completes the $5.7 billion total retail business dropdown in just over a year.

Sunoco investors receive a very solid 8.27% distribution. The $51 Jefferies price objective is higher than the consensus target of $48.43. The shares closed Wednesday at $36.07.

Williams Partners

This is yet another top company that shines with an investment grade rating and solid cash-flow. Williams Partners L.P. (NYSE: WPZ) is an industry-leading, large-cap MLP with operations across the natural gas value chain from gathering, processing and interstate transportation of natural gas and natural gas liquids to petchem production of ethylene, propylene and other olefins.

With major positions in top U.S. supply basins and also in Canada, Williams Partners owns and operates more than 33,000 miles of pipelines systemwide, including the nation’s largest volume and fastest growing pipeline, providing natural gas for clean-power generation, heating and industrial use. Its operations touch approximately 30% of U.S. natural gas. The company is rated BBB and stable.

Williams shareholders are paid a large 14.07% distribution. The Jefferies price target is $45, and the consensus price target is a whopping $55. The stock closed on Wednesday at $24.17.
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The Kinder Morgan dividend cut is a huge event and may very well mark what could be the bottoming process in the MLP and energy arena. Despite howls from bearish analysts that oil could go to $20, the Saudis and other OPEC nations can’t take the hit financially, and will either have to decouple their currency from the dollar or cut production.