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Dave Sather's Money Matters: The numbers tell a story

By By Dave Sather
Feb. 18, 2014 at 5 p.m.
Updated Feb. 17, 2014 at 8:18 p.m.


During much of the 2000s, we routinely used what had been a rather obscure asset class called a Master Limited Partnership (MLP) to provide growth and significant income for our clients. At the time, the entire industry was comprised of just 18 companies, which collectively were valued at less than $15 billion. The industry owned relatively straight-forward assets like pipelines.

As interest rates fell and investors became disenchanted with tech stocks, demand for investments with hard assets and high payouts increased. The collective valuation of the MLP industry grew by more than 30-fold, making it very popular with investors.

With interest rates at record lows, and no relief in sight, income-starved investors continued to pile into the expanding asset class. However, we have not shared the enthusiasm for all MLPs for quite some time.

Our concerns became more apparent this past week when Boardwalk Pipeline Partners made big news by falling 46 percent for the week. The Houston-based company, which transports, stores, gathers and processes natural gas, revealed that earnings were well below what Wall Street had expected.

The earnings led to a massive 80 percent reduction in its dividend. All of the sudden, the income distribution champion had investors running for the door.

The question most investors have is whether or not there were obvious warning signs.

I used this as a case study with my students at Texas Lutheran University, asking them to assess Boardwalk's financial statements. I did not let the students know what company they were looking at - all they had in front of them were financials. Although often dry reading, there is a wealth of information in them for the disciplined investor.

The students' observations were quick and to the point.

Ernie observed that revenues had only grown 3.6 percent per year over the past five years, and between 2005 and 2013, revenues had actually dropped by 10 percent. This did not appear to be a high-growth company.

Kelli chimed in that over the past eight years, earnings per share were volatile but essentially flat. Definitely not the type of growth or consistency one would hope for.

As Kelli finished her sentence, Arthur quickly added quizzically that over the same time period, the dividend had increased by 60 percent. He added that in 2009, the dividend distribution was more than double the earnings - a policy that is clearly unsustainable.

Jacob then offered that shares outstanding had increased from 115 million to 243 million, which in the process diluted the effective ownership of existing shareholders by 50 percent. Jacob added that it appeared that Boardwalk was using their stock as a form of currency. Again, not a good sign.

Eli made the most concerning assessment. Long-term debt had increased from $1.3 billion to $3.5 billion over the last eight years. He was rather skeptical as to how efficiently management was using this debt as earnings were not increasing.

Tasha stated that Boardwalk appeared to be using a combination of both debt and stock sales to fuel their ever-increasing dividends. It was hard to disagree with her.

The student assessment was quite accurate and applies to virtually all companies. With Boardwalk, the warning signs were there long before this week.

In general, strong companies increase revenues and earnings with great consistency over time.

Strong companies don't pay out more in dividends than they earn. As such, income-starved investors should not chase after high dividends as they are often unsustainable.

Furthermore, truly robust companies don't continuously issue stock, and they make so much money they have little need for debt.

Knowing this, smart investors understand that the numbers will tell you a story, if you are disciplined enough to study them.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

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