Read this article on Fool.com:
A couple of years ago I would not have noticed anything amiss with this article.. and would have probably blindly agreed with the argument because it comes from some investment-savy dude on Fool.com.
Without much ado, here is what I commented on that article:
On July 10, 2009, at 11:01 PM, Golbguru wrote:
Moreover, you need to do more homework on MLPs and stop calling distributions as “dividends”.
I will leave it to my astute readers to figure out what MLPs are … till I come back and write a little more about them.
Looking back, I cannot believe that I am actually taking the efforts to read and understand company balance sheets now-a-days. I am glad I am doing it now.
I still don’t have a good grasp of the macro-market-economics yet, but after reading views of various economists and chartists, I am not sure anyone understands that well anyways. May be someday I will understand and appreciate it, but till then I am not going to sit on a pile of cash and do nothing (and see the cash get devalued as the inflation catches up with us eventually).
Disclosure: Long on NGLS and a whole bunch of other MLPs.
Rich, it is extremely misleading to talk about MLPs like NGLS (Targa Resources) without even mentioning “distributable cash flow” and “coverage ratio”.
2009 Q1 distribution was $0.52 per common unit (share). For 47.16 million shares, that’s a total distribution of $24.5 million.
2009 Q1 distributable cash flow was $33.6 million. Gives a coverage ratio of little over 1.3. Most MLPs are in this range - and it is not bad at all.
Plus it is well within the limits set in its debt covenant (please see the balance sheet).
In summary, your statement “Seems to me that while Targa may not be able to sustain its current dividend, it could cut the divvy substantially”, is essentially baseless.