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August 31, 2012 – Comments (6) | RELATED TICKERS: MMP

Today, Magellan Midstream (MMP) made an announcement that adds absolutely no value to unit holders.  Partnership units are being split two-for-one. 

YAY!, I'll have twice as many units.  BOO!, each post-split unit will be worth half as much as today's units.  Eh, I'll be right back where I am.

I think splits can make sense when share prices climb to the point that even a couple of shares for a typical individual investor get out of reach.   For example, AAPL and GOOG are getting near or past the point where a split makes sense.  Berkshire addressed the issue several years ago by creating a two-tier structure with BRK-A retaining the stratospheric share price and BRK-B shares targeted to be within the reach of mere mortal portfolios.  But, MMP is trading in the low $80s, hardly pricey enough to close investors out of the market.

The press release explains the split, "This unit split, the second in Magellan’s history, reflects our confidence in the future growth of Magellan and enhances our liquidity by making our equity more accessible and affordable to a larger group of new investors.”  OK, maybe trading volume demands more units, but I'd rather the parnership have saved the admin costs of the split and put the money towards capital investment projects.

Enough grumbling over nothing significant.  I still like and plan to hang on to my MMP units, it's been one of my best investments this year.  Units are up about 20% since the 2011 close and have kicked out three nice distributions (one more to go for 2012). I would welcome a lower unit price to pick up more on sale - this gets the lower unit price, but doesn't do anything about putting them on sale.

Hope everyone enjoys the holiday weekend.

Fool on!, Russ

As mentioned, I own units in MMP.  No postion in any other companies mentioned.



6 Comments – Post Your Own

#1) On September 01, 2012 at 12:07 AM, awallejr (35.81) wrote:

I dunno Russ I would be happy with the decision. Stock splits tend to be a good thing.  The stock only has 113 million shares oustanding so a double from there is still ok.  I love mlps and this one is a solid one.  Keep it.

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#2) On September 01, 2012 at 10:09 AM, HarryCaraysGhost (85.49) wrote:

Hey Russ,

I wrote about the same topic here-

Wish I would've used your title since mine somewhat sucked:)

I think Kirk had the best response- if the quality of the Company is there it will do well regardless of splits.

An aside about a year or so ago my Mother gave me 2 Grand to invest for her, managed to double it and have been looking for a solid MLP to park her gains and this looks like a candidate.


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#3) On September 01, 2012 at 11:04 AM, rd80 (95.80) wrote:

@awallejr - I'm in the camp that believes the positive bias stocks tend to get from a split is mostly because it's generally strong companies that split their stock.  I just think there wasn't much reason for this one.  Not a big deal either way and I'm certainly not going to sell and have to wade through the K-1s to come up the the cost basis - I plan on leaving that drill for my kids many, many, many years from now - after the distributions from MMP help pay for my retirement and maybe grandkids' (none yet) educations.

@HarryCarysGhost - Your KO split blog was a good one.  MMP has done well for me.  I bought it after making it a CAPS pick and following for awhile, not sure it was the best choice, but it was a good one.  Distribution yield is less than some of the others, but the latest quarterly had good stuff to say about prospects for raises.  If it pulls back, I'll probably add but the cheapskate in me hates buying this close to 52-week highs.  Maybe awallejr can add some good MLP names to consider, I think he holds a couple of them.

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#4) On September 01, 2012 at 3:22 PM, somrh (86.44) wrote:

I concur with you that the reason they provide seems dubious. Apart from a psychological effect I think there are two valid considerations for splitting to lower share price.

1) Options.

Since contracts are specified by 100 shares, if I wanted to do a covered call strategy with, say, AAPL, I would have to buy 100 shares which means I would have to lay out over $60K. If AAPL's shares were selling for $20, I'd only have to lay out $2000. Lowering the share price would make option strategies (including protective puts) more accessible to the small investor. 

2) DRIPs

Some such programs may not allow the purchase of fractional shares. Having a lower share price might make the difference between whether or not I can purchase a share or not. For example, if I own $2000 worth of stock that pays 1% per quarter, I'll receive $20. If the share price is higher than that, the program may not allow me to purchase the additional share. 

Beyond that, unless the share price is in excess of, say, $500 I don't know what the issue with this is. For someone with less than $500, the transaction fees would probably be the biggest barrier to entry.

Having said that, if shares are electronic, why can't they be divisible? Why can't I buy 11.3481 shares? 

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#5) On September 01, 2012 at 3:27 PM, awallejr (35.81) wrote:


Sure, put the pressure on me there Russ;p  Here are a few good links to at least get you started Harry.**

There are plenty quality mlps out there.  All I can do is tell you what I own personally and a short reasoning for it.

1) PVR I bought in summer of 2008 for around $20 and it was paying $1.88 at the time.  Of course then came the crash and you could have bought it for $8 a share.  It currently pays $2.12 a share, not counting any further future gains.  It used to be more of a coal play but it has been making a nice transformation into a larger pipeline play.

2) BBEP I bought end of 2009 and even blogged about it here:  This is considered an "upstream" mlp in that it engages in the exploration and production aspect.

3) MMLP is a pretty interesting mlp.   Here is a nice SA writeup about that company:*

4) BWP I recently started a position in.  What caught my eye was its expansion into LNG storage which is the wave of the future.

I have others and closed others but the above 4 are my largest holds in the space.  I would throw in SDRL too since it plans on converting into a mlp but it's beta might be too nerve wracking for your mom.  

One thing about mlps in general is the fact that they are low beta.  That can be good or bad depending upon your point of view.  Personally I like it because it keeps my portfolio stable with steady income into it.

Oh and once in awhile you will check your mlp stock and see it down a dollar or two on the day.  Before you curse my name just be aware that mlps do issue stock for reinvestment purposes.  They tend to be quickly accretive and the drop does offer a chance to add.  That happens a lot with BDCs and REITs too.

Hope this helped.

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#6) On September 09, 2012 at 12:37 AM, awallejr (35.81) wrote:

Oh and once in awhile you will check your mlp stock and see it down a dollar or two on the day. 

Well it did happen to BBEP on thursday heheh.

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