Showing posts with label preferred stock. Show all posts

How to Invest in a Rising Rate Environment (Morningstar)

Libor Rising to the Occasion

By Emory Zink | 02-02-17 | 06:00 AM | Email Article

This article appears in the February 2017 issue of Morningstar FundInvestor.

The three-month London Interbank Offer Rate (Libor) surpassed 1 percentage point in early January 2017, a first since May 2009 for the widely referenced interest benchmark. The rate is derived by polling roughly 20 or so global banks on a daily basis for quotes of what they would charge other banks to borrow money for three months, dropping the outliers, and calculating an average. The result is used as a base rate for trillions of dollars in financial transactions and provides insight into liquidity and lending risk in the fixed-income markets. When Libor is higher, borrowing is more expensive, and when it is lower, funding is cheaper to access.

The 1% level may look modest, particularly given that Libor touched 5.7% in 2007, but relative to the rate’s post-financial crisis fate—it sat beneath 0.6% from June 2009 until nearly the end of 2015—its more recent ascent was notable. In 2016, it inched upwards, gaining momentum in the second half of the year as money market regulatory reforms hit full stride. The latter spurred many large investors to move assets out of prime money market funds with significant credit exposure into money markets composed of mostly government securities. Redemptions among prime money market funds trimmed demand for commercial paper and certificates of deposit, which in turn raised borrowing costs, and thus Libor’s levels. In fact, many ultrashort bond funds benefited from this structural adjustment, stepping in to snap up higher-yielding instruments at attractive prices leading up to and after the formal Oct. 14, 2016, date that money market reforms kicked in. The flexible

PIMCO Short-Term (PTSHX) and more buttoned-up

Fidelity Conservative Income Bond(FCONX) are two of our favored active ultrashort bond funds that have benefited from these market dislocations.

Bank loan investors have also benefited from the rise in three-month Libor. Minimum payouts for loans—typically referred to as floors—became ubiquitous after the rate plummeted during the financial crisis, and most floors stipulated that loans would continue to pay at least 1% plus a designated spread, even if Libor were to remain below that level. When three-month Libor rises and exceeds those 1% floors, though, as it did in early 2017, and loans began hitting their 90-day resets (typically) their coupons began floating higher to levels of Libor plus that additional yield premium built into each loan. Essentially, as Libor moved higher, floating-rate loans and notes based on that rate began to look more attractive.

The real question now is whether Libor will continue its climb. The U.S. Federal Reserve has hinted that it will likely gradually hike its own federal-funds rate in the coming months and years—Libor typically tracks that level closely during normal market conditions—which implies a trend of higher borrowing costs, if not necessarily a steep one. With prime money markets shrinking, ultrashort bond funds should likely continue to benefit by answering a healthy supply of commercial paper with selective demand, but there is no guarantee that supply won’t stagnate if borrowers seek less-costly forms of financing.

Perhaps even more important, though, is the impact that a rising Libor will have across an even broader expanse of financial markets given that most derivative transaction prices are linked to that rate, as well. It may seem like an obscure financial industry tool, but Libor is ultimately one of the most important rates affecting the entire global financial system.

Emory Zink is an analyst covering fixed-income strategies on Morningstar’s manager research team.

preferred stocks (bARRONS)

September 10, 2016

With income investors hard-pressed, given the artificially low interest-rate environment, we went back to the well: that is, to preferred stocks, last mentioned here on May 14.

The stock market’s dividend yield is just 2.2%, while the 10-year Treasury yields a mere 1.67%. Both have risks, particularly Treasuries, given that the Fed is committed to raising rates, perhaps by December—and possibly sooner, as we note above. A hike would push down bond prices. What it will do to stocks is an unknown danger, too.

Corporate preferreds are an attractive way of securing a higher yield at a lower risk, though their capital gains are likely to be more restrained, too. We returned to Douglas Christopher, an analyst at D.A. Davidson, who gave us five preferred stock picks in May, most with fixed coupons. Although all of them were already above par value then, they’ve risen in price since May.

That high valuation is a problem for investors new to the preferred scene. Fixed-coupon preferred stock prices could drop and be volatile before and after the Fed hikes rates, the analyst notes.

So, this time, he likes adjustable preferreds, most of which are selling significantly below par value (see table, above). Consequently, they could fare better than fixed preferreds if a rate hike materializes, especially if the central bank moves more quickly than markets expect.

In general, the average yield on fixed preferreds is about 5.5%, versus 4.2% for adjustables. The interest rate on adjustables can change, and that’s a risk—but rates should be rising. We’ll note that under the typical underlying terms governing adjustables, it would take a slew of hikes to raise the current coupon rates.

Nevertheless, the dollar payout levels for these five, such as a $1 per year for theGoldman Sachs Group D preferred shares (GS.D), are effectively at their minimums already. So there’s some downside protection. As in the previous batch, these preferreds come mostly from banks whose credit fundamentals and dividends are healthy.

If rates stay flat, you miss out on the better yield of the fixed-coupon preferred. Still, “if you are looking for income and a decent yield, but at a price below par, this is an attractive way to go,” Christopher observes.

Seaspan Preferred Stock (motley fool)

Was This Redemption a Smart Move for Seaspan Corporation?

www.fool.com/investing/2016/06/07/was-this-redemption-a-smart-move-for-seaspan-corpo.aspx

Matthew DiLallo

(TMFmd19)

Jun 7, 2016 at 9:45AM

Image source: Getty Images.

Seaspan Corporation (NYSE:SSW) has been busy this year. Through a series of transactions, the company raised roughly $750 million in capital, which it plans to use to fund its upcoming newbuild deliveries as well as refinance some higher cost capital. It's that latter goal that the company was recently able to complete after it redeemed the rest of its Series C Preferred Shares. It's a move that made a lot of sense given that a looming deadline would make those preferred shares much more expensive.

Seaspan Corporation's preferred method of raising cash

Seaspan Corporation's initial offering of Series C Cumulative Redeemable Perpetual Preferred Stock was completed in early 2011. At that time the company priced $250 million of the shares at an initial rate of 9.5% per year. Those funds were intended to provide the company with cash to make vessel acquisitions or investments. A few months later the company priced another $100 million shares, which further bolstered its cash position to take advantage of growth opportunities.
At a 9.5% annual yield, the price for this series of preferred stock was rather steep, but given the company's capital needs it was the price it needed to pay to fund its ambitious growth plans. Further, by going the preferred route the company wouldn't risk overextending itself with debt, nor diluting existing shareholders. It's that hybrid feature of the preferred that's appealing, which is why Seaspan Corporation isn't the only containership leasing company that uses preferred stock to finance growth. In fact, just last year rival Costamare (NYSE:CMRE) issued $100 million of Series D Preferred Stock at an initial yield of 8.75%. Costamare chose this route to raise cash for vessel acquisitions and investments so that it too could avoid additional debt and dilution.

Reading the fine print

One problem with Seaspan Corporation's preferred stock is the fact that this particular series was about to get much more expensive. That's because one of the features was a provision that would lead to a substantially higher dividend rate if Seaspan Corporation didn't redeem them by a specified date. In this case the dividend rate would increase by 1.25 times on each dividend date after January of next year up to a maximum of 30%.
This wasn't the only time Seaspan Corporation has had to include a dividend escalation feature in its preferred shares. The company's recent offering of Series F Cumulative Preferred Shares is another example. While these shares feature a lower initial yield of 6.95% for the first five years, that rate will increase by 1% every year after the fifth anniversary until it hits a maximum of 10.5%. That said, there is an acceleration feature whereby the rate jumps to 10.5% if the company doesn't complete a material transaction by the end of next year. That material transaction is either the acquisition of all the membership interests in its Greater China Intermodal (GCI) joint venture with the Carlisle Group (NASDAQ:CG) or the acquisition of all the assets owned by that joint venture. In other words, this particular series of preferred stock was issued to effectively guarantee that Seaspan Corporation has the capital it needs to facilitate Carlisle Group's exit of its investment in the joint venture.
Given these dividend escalation provisions Seaspan Corporation is often left with no choice but to redeem its preferred shares before they get more expensive. That's certainly the case with the Series C redemption and could be the case next year with the Series F Preferreds if the company doesn't take out Carlisle Group's interest in its GCI joint venture to stave off that escalation clause.

Investor takeaway

Containership companies like Seaspan Corporation and Costamare rely on preferred shares to raise capital in order to fund growth. However, this capital doesn't come cheap and it often can get more expensive due to the fine print, though it can be a better short-term option than more debt or dilution. That said, the somewhat short-term nature does force these companies to reshuffle their capital deck so to speak, which is what Seaspan Corporation is doing by making the smart move to redeem its Series C before they get too expensive.

Preferred Stocks Frequently Asked Questions (from Incapital.com)

Preferred Security FAQs

HOW DO I PURCHASE PREFERRED SECURITIES?

After syndication, most public preferred securities are traded on an exchange. The most widely used is the New York Stock Exchange. They also trade over-the-counter through broker-dealers who make markets in various preferreds. Privately-placed preferreds trade through a broker-dealer or directly between investors.

WHAT ARE CUMULATIVE AND NON-CUMULATIVE DIVIDENDS?

Preferred stock dividends are either cumulative or non-cumulative. Cumulative dividends are due to shareholders irrespective of an issuer’s profitability. If an issuer has trouble meeting its financial obligations and does not pay a cumulative dividend, dividends accrue and the company is obligated to pay all past and currently due preferred dividends before paying common dividends. If a company does not pay a non-cumulative dividend, it is not obligated to do so in the future. Non-cumulative dividends do not accrue beyond one year and the issuer is still permitted to pay common dividends the year following an omission if preferred payments recommence. In either case, a company is not automatically considered in default if it misses a payment as it would be by missing a bond payment.

ARE PREFERRED SECURITIES CALLABLE?

Preferred securities may be callable, in which case the issuer has the right to purchase the securities from the investor at a predetermined date and price.

IS THE INCOME FROM PREFERRED SECURITIES TAXABLE?

Income from preferreds with the exception of Trust Preferreds is taxable as ordinary income unless it is Qualified Dividend Income (QDI) and/or Dividend Received Deduction (DRD) eligible. QDI and DRD eligibility depends on factors relating to the structure, issuer and investor.

Income from Trust Preferreds and Baby Bonds is considered interest and taxable as ordinary income.

The tax treatment of preferred securities varies. However, investors should not rely on these taxation provisions, as they may change. Incapital does not provide tax or financial advice. Please read the tax section of the prospectus and prospectus supplement and consult a qualified tax professional before investing.

WHERE DO PREFERRED SECURITIES STAND IN THE PRIORITY OF CLAIMS?

The priority of claims refers to the order in which investors receive their share of a firm’s net worth upon liquidation. Preferred securities rank junior to bonds and senior to common stock in the priority of claims against a company’s assets in the event of bankruptcy or reorganization. The diagram below illustrates the capital structure priority. A preferred’s place may vary depending on its specific characteristics outlined in the prospectus and prospectus supplement.

This Priority of Claims diagram is for illustrative purposes only. Each security’s offering documents will govern the issue’s priority.

WHERE CAN I GET A PROSPECTUS OR PROSPECTUS SUPPLEMENT?

The prospectus and prospectus supplement for public offerings are available on the SEC’s website.

Investing for income in 2016 - Barrons Magazine Predictions

January 2, 2016

There are still plenty of places to find decent income in stock and bond markets, even with many key interest rates at or near historically low levels. Investors can get yields of 4% to 9% on a range of investments, including junk bonds, utility stocks, telecom shares, and real estate investment trusts. These look appealing in an environment of sub-2% inflation, 1%-to-3% Treasury yields, and minuscule yields on bank deposits and money-market funds.

• Yield-oriented sectors of the stock market didn’t generate outsize returns in 2015 despite generally favorable earnings, as investors favored dividend-free or low-yielding growth stocks like Facebook, Amazon.com, and Alphabet. The result is that price/earnings ratios are lower now than they were 12 months ago in utilities, REITs, and telecoms. • A big issue is whether bonds and yield-oriented sectors of the stock market can do well in 2016, with the Federal Reserve likely to continue lifting short rates. The Fed may prove to be a head wind, but the central bank is expected to raise short rates to only about 1% by year-end 2016, and such an increase may be already partly discounted in the market.

This is the fourth straight year that Barron’s has sized up income-producing investments in both stock and bond markets. What looks best for 2016?

Topping our list are junk bonds, now yielding almost 9% on average after a weak year dominated by a crash in the energy and commodities sectors. Other areas that look good include dividend-paying stocks, with yields at 3% or more in a range of industries, as well as utilities and REITs. Municipal bonds, which are coming off a solid year in which they bested Treasuries, look good, not great, for the year ahead.

Pipeline master limited partnerships are on the minds of many individual investors following a 40% sector crash in 2015. Despite the losses, the sector doesn’t look like a bargain, given tougher business and financial conditions in an environment of low energy prices. What follows is our view of 10 income sectors in order of their appeal.

Junk Bonds
With yields averaging close to 9%, junk bonds look better than they have in several years. “A confluence of events suggests that you should be buying high-yield bonds now,” says Andrew Susser, manager of the MainStay High-Yield Corporate Bond fund (ticker: MHCAX). He argues that the junk market was an outlier in a year when U.S. stocks and interest rates were little changed and the U.S. economy advanced at a slow 2% pace.

Susser maintains that vulnerability of the $1.5 trillion junk market is overstated because buy-and-hold investors such as pension funds and insurance companies account for more than half of the investor base. Pension funds and endowments could see junk debt as an increasingly attractive asset class, as they seek to hit targeted annual returns of 7% or more.

One of the longtime knocks against junk debt is asymmetric risk—little upside and a lot of downside. The selloff has changed that equation, with most bonds trading at discounts to their face value, allowing for sizable capital gains. All of this suggests the possibility of double-digit returns in 2016.

The wild card is defaults, which probably will rise. Many energy and commodity bonds already discount bankruptcy and could be big winners if commodity prices rally in 2016. At a minimum, they offer a nice alternative to common shares.

Higher-quality junk from T-Mobile US yields about 6.5% and Charter Communications, 5.75%. Energy debt has been crushed, with that sector now trading for an average of about 50 cents on the dollar.

A good junk manager should be able to add value relative to an unmanaged ETF like theiShares iBoxx $ High Yield Corporate Bond (HYG). Investors need to look carefully at mutual funds, given the troubles at the Third Avenue Focused Credit fund (TFCVX), which was too heavily invested in risky, illiquid debt. Most junk funds are more prudent with risk. There are plenty of closed-end junk funds trading at roughly 10% discounts to net asset value, like the BlackRock Corporate High Yield (HYT). Another closed-end at a 12% discount, the AllianceBernstein Global High Income (AWF), holds junk and emerging market debt, which also is out of favor.

High-Dividend Stocks
There are plenty of stocks yielding 3% or more outside of traditional yield sectors like telecoms and utilities. Investors generally have to venture into out-of-favor industries like autos, retailing, and manufacturing to get those dividends.

General Motors (GM) and Ford Motor (F) both yield over 4% and are covering their dividends comfortably out of earnings. In technology, Qualcomm (QCOM) yields almost 4% and Seagate Technology (STX), almost 7%. Qualcomm has a large slug of cash on its balance sheet, while Seagate raised its payout in October in a sign of confidence.

Many traditional retailers facing competitive threats carry high yields, including Macy’s(M), at 4%; Gap (GPS), 3.6%; GameStop (GME), 5%; and Barnes & Noble (BKS), 7%. All are covering their payouts from earnings. Other notable high-yielders include Procter & Gamble (PG), the subject of a bullish Barron’s story last fall (“It’s Time for P&G to Split,”Nov. 23). P&G yields 3.3%; Merck (MRK), 3.4%; and Cummins (CMI), 4.3%.

With income-oriented funds, it pays to focus on expenses since high fees can eat up a good chunk of the dividends. Low-fee ETFs like the Vanguard High Dividend Yield (VYM) and Schwab U.S. Dividend Equity (SCHD) have annual expenses of about 0.10 percentage point and yields of about 3%.
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Electric Utilities
The sector retreated after a strong 2014, as the Utilities Select Sector SPDR ETF (XLU) fell about 8% in 2015 and finished with a negative return of 4% after dividends. The ETF now yields 3.6%.

Many utilities, including American Electric Power (AEP), Southern Co. (SO), andDuke Energy (DUK), carry yields in the high-3%-to-mid-4% range. Valuations aren’t bad, as the group trades for an average of about 16 times projected 2016 earnings, in line with the Standard & Poor’s 500. The industry is expected to produce modest earnings and dividend growth in the low-to- mid-single-digit annual range over the next few years.

Edison International (EIX), the big Southern California utility, is favored by Bernstein analyst Hugh Wynne because he sees above-average profit and dividend growth in the coming years. Edison, at $60, yields 3.2% and trades for about 16 times projected 2016 earnings. One potential negative for the sector is the growth of rooftop-generated solar power, which cuts into demand.

Municipal Bonds
Tax-exempt debt starred in an otherwise lackluster U.S. bond market in 2015, generating 2%-to-4% returns depending on maturity, while Treasury returns were about flat. “Munis are likely to outperform again because demand remains strong and credit issues have receded,” says Alan Schankel, municipal analyst at Janney Montgomery Scott. He notes that muni mutual fund flows have been positive in recent months, in contrast with taxable bonds.

Munis, however, don’t yield much, with triple-A-rated 10-year debt now about 2% and 30-year bonds at about 3%. There are some pluses. Top-quality muni yields are comparable to Treasuries and offer clear tax advantages, especially for those in top brackets.

High-quality long-term revenue bonds from the likes of the Los Angeles Department of Water and Power and the Port Authority of New York and New Jersey yield about 3.25%. Investors should be aware that most long-term muni debt trades at a sizable premium to face value, meaning yields should be calculated to the shorter expected call date, not maturity.

The efforts to restructure Puerto Rico debt probably will dominate the headlines in 2016, as its government, Congress, and investors grapple with how to reduce the commonwealth’s debt burden while implementing fiscal and economic reforms to help revitalize a moribund economy. So far, there has been plenty of posturing and gamesmanship, but little progress outside of negotiations involving the island’s electric company, Puerto Rico Electric Power Authority. Puerto Rico’s benchmark long-term debt issue, the 8% bond due in 2035, was trading last week around 73 cents on the dollar, indicating that investors are banking on some restructuring that will result in less-than-full recovery.

Vanguard’s muni funds, including the big Vanguard Intermediate-Term Tax-Exempt(VWIUX), continue to outshine most rivals, thanks in part to low fees. Veteran muni manager Joe Deane and his partner David Hammer are generating nice returns with thePimco Municipal Bond (PMLAX) and Pimco High-Yield Municipal Bond (PYMAX). Muni closed-end funds aren’t the bargains they were a year ago, but many still trade at close to double-digit discounts to net asset values. These include the BlackRock Municipal Target Term Trust (BTT), yielding 4.5%. Unlike nearly all closed-end muni funds, the BlackRock fund has an appealing built-in mechanism to close its discount to NAV with a scheduled maturity date in 2030.

Real Estate Investment Trust
The overall sector moved little in 2015, as measured by the big Vanguard REIT ETF (VNQ). Its 2015 return of 3.7% through the middle of last week was entirely due to dividends. Its current yield is 3.9%.

Michael Bilerman, the REIT analyst at Citigroup, projects a 5% to 10% total return for REITs in 2016, writing in his outlook report that “REITs are benefiting from solid operating fundamentals, healthy free-cash-flow growth, good dividend yields and coverage, and a meaningful amount of private capital still chasing real estate.” REITs are expected to generate mid-single-digit growth in operating profits in 2016.

It probably pays to stick with quality franchises like Boston Properties (BXP), Vornado Realty Trust (VNO)—both in the office sector—or AvalonBay Communities (AVB), in apartments.

There have been plenty of stories during the Christmas season about the “death of malls,” due to the growth of Amazon.com and online retailing. That isn’t apparent yet, however, in the share prices of two of the top mall REITs, Simon Property Group (SPG) and Taubman Centers (TCO). Shoppers at high-end malls often want to see clothing or luxury goods in person before buying. That may insulate them from the online threat.

Convertible Bonds
An often overlooked sector, convertibles have experienced similar selling pressure to the junk market in late 2015, as hedge funds and other investors dumped securities to meet expected investor redemptions or reduce risk.

David King, who co-manages the Columbia Convertible Securities fund (PACIX), says convertibles look statistically attractive. He points to Allergan ’s 5.5% preferred stock (AGN.PA) as a good way to play the shares of the drug maker, which has a merger deal with Pfizer. The Allergan preferred trades around $1,030, above its face value of $1,000.

The largest convertible ETF is the SPDR Barclays Convertible Securities (CWB), and there are several convertible closed-end funds that trade at double-digit discounts to their net asset values, including the Advent Claymore Convertible Securities & Income (AVK), which was changing hands last week at a 17% discount.

Telecoms
Amid little enthusiasm for the U.S. telecom sector, AT&T (T) and Verizon Communications(VZ) have long traded in narrow ranges, and both are valued at a modest 12 times projected 2016 earnings. Verizon, at about $47, yields 4.8%, and AT&T, at $35, 5.5%. Both are committed to their dividends.

The competitive pressures in the U.S. wireless market are well known, as are the high expense to improve cellular network quality and the erosion of wire-line operations. Dubious investors view AT&T’s purchase of DirecTV as a deal for a declining satellite-TV business.

Perhaps the best way to view the pair is as bond surrogates, with upside potential if wireless competition eases and investors accord them higher valuations.

Preferred Stock
Bank issuers dominate the market, and their improving profits and balance sheets since the financial crisis have made preferred stock a more secure investment. The bank preferred market has been strong lately, with many issues at or near 52-week highs. Yields, however, generally don’t look attractive, given the interest-rate risk.

Most bank preferred trades above face value—usually $25 a share—and the result is that those issues probably will be redeemed early, typically five or 10 years after the initial sale. This means investors should focus on the lower “yield to call,” based on the shorter expected maturity date rather than higher current yields.

Callable bank preferred from big issuers such as JPMorgan Chase (JPM), Citigroup(C), and Wells Fargo (WFC), have current yields of about 6%, but the yields to the shorter call dates are closer to 5%.

Preferreds are vulnerable if rates rise, since they have no maturity dates. “Preferreds are usually issued at $25 and callable in five years. The risk/reward isn’t skewed in favor of the investor,” says King, who also co-manages the Columbia Flexible Incomefund (CFIAX).

He favors two unusual preferred issues from Bank of America (BAC) and Wells Fargo that technically are convertibles, but amount to regular or “straight” preferreds, because the conversion prices are far above the current common equity prices.

The Bank of America Series L issue has a 7.25% dividend rate, $1,000 par value, and recent price of $1,100 for a current yield of 6.64%. Bank of America can redeem the issue only if its share price, now $17, hits $65. In that scenario, investors would be paid a premium above the current share price. The Wells Fargo 7.5% issue has a similar structure, with a $1,000 par value, price of $1,155, and yield of 6.5%. Wells Fargo can call the issue if its stock, now about $55, hits $203. “If you’re going to play bank preferred, this is the way to do it,” King says. “They’re misunderstood.” The Wells Fargo 7.5% issue yields a percentage point more than the bank’s regular preferred.

There are several preferred-focused closed-end funds trading at discounts to net asset value, including Nuveen Preferred Income Opportunities (JPC).

Treasuries
It’s hard to get excited about government bonds, with yields ranging from 1% on two-year notes to 3% on 30-year bonds. Probably the best thing that can be said for Treasuries is that they could be a good hedge for stocks in a bear market.

Low-fee ETFs may be the best way for individuals to buy Treasuries. Large ETFs include the iShares 20+Year Treasury Bond (TLT), now yielding 2.5%, and the iShares 7-10 Year Treasury Bond (IEF), yielding 1.9%. Treasury inflation-protected securities, or TIPS, offer a good alternative to regular Treasuries. TIPS trailed Treasuries in 2015 as inflation expectations declined. The so-called break-even inflation rate at which 10-year TIPS return more than ordinary Treasuries is now 1.5%, down from more than 2% in late 2014.

Kenneth Taubes, U.S. chief investment officer at Pioneer Investments, likes TIPS. “They are imputing very low inflation rates for a long time,” he says. Once energy prices stabilize, U.S. inflation readings, now about zero, should rise. TIPS, moreover, offer a hedge against what many bond investors fear: inflation. The most liquid ETF is the iShares TIPS Bond (TIP).

Master Limited Partnerships
Bulls argue that pipeline MLPs, down an average of 40% last year based on the Alerian MLP index, are bargains. On a recent investor conference call, Kevin McCarthy, co-founder and managing partner at MLP specialist Kayne Anderson Fund Advisors, said that the “MLP sector is oversold, and commodity prices will recover.” Fans say the sector was depressed by late-year tax-loss selling and could rally in early 2016.

While MLP prices are down and the average yield on the Alerian index is almost 9%, the sector doesn’t look cheap based on traditional financial measures, and most companies still need to finance much of their capital spending in the now-unfriendly capital markets if they plan to continue their generous distributions.

Kinder Morgan (KMI) rattled the sector with a 75% reduction in its dividend last month, and its shares, at about $15, were off 65% in 2015. The Street is betting that big MLPs won’t follow Kinder’s lead. That could reassure investors, but the industry’s business model, which relies on outside funding, is under threat and may have to change.

Based on traditional valuation measures, MLPs aren’t cheap, with major companies trading for 10 to 12 times projected 2016 cash flow, or earnings before interest, taxes, depreciation, and amortization. That’s slightly higher than electric-utility valuations, and above those of the major telecoms and cable companies. Given financial and business pressures, MLPs don’t look like bargains now.

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