The Alerian MLP Index was up 1.7% in April (price change only, not including distributions), compared with -0.7% for the S&P 500. A significant percentage of that 1.7% price change came with yesterday’s 0.6% change. April’s 1.7% was actually the worst April price change since 2006’s +0.97%. MLP Index has been range bound since its big rally in the 4th quarter 2011, oscillating between 390 and 400, with a brief spike up to all time high 411.7. The record amount of 1st quarter MLP equity issuance and lower NGL and natural gas prices have helped keep MLPs below 400 lately.
May has historically and consistently been one the weakest months for MLPs, 8 of the last 16 Mays (50%) have been negative, compared with just 38% for the Index overall since 1995. May 2010 (-6.2%) and May 2011 (-5.7%) were particularly bad. Natural gas has found some support and MLP equity issuance has slowed, so MLP Index is closing in on 400 again. Expect distribution ex-dates and more equity offerings to hold MLPs down further, until a catalyst like commodity prices or positive economic data changes the current environment.
So, where do we go from here? One way to look at it is a matrix of that highlights what distribution growth rates and exit yields will do for Index return in the next 12 and 24 months. With this matrix, you can see what your view of MLP yield and growth will produce in returns. It’s just math. If you think MLPs will exit next year at 6.5% and grow distributions 4%, MLP Index will produce just a 3.8% total return from here. If you think MLPs will exit at its current yield plus 6% distribution growth in the next 12 months, that will result in 12.3% total return in next 12 months. You can see that the impact of exit yield changes has a more pronounced effect on total returns than distribution growth. In other words, its not enough to just buy a high growth MLP, your return is largely dependent on buying that growth MLP at a reasonable price.