Andrew Bary

Former bond king Bill Gross remains a fan of master limited partnerships like Energy Transfer and Enterprise Products Partners, saying they have trailed behind pipeline operators structured as corporations in the stock market and have unappreciated tax attributes.

In his latest investment missive, Gross, a co-founder of the big bond manager Pimco and now a private investor, notes that the pipeline partnerships have high yields. Energy Transfer and Enterprise Products are at around 7%, while Kinder Morgan and Williams Cos, two pipelines that are corporations, yield 4%.

Enterprise Products and Energy Transfer have both gained ground this year, with Energy Transfer up about 20%, but Kinder Morgan and Williams are up 40% and 50%, respectively.

In addition to Energy Transfer and Enterprise Products, Gross is a fan of Western Midstream Partners (ticker: WES), Plains All-American Pipeline $(PAA)$, MPLX, and Hess Midstream $(HESM)$.

Gross, 80, said that MLPs benefit from a tax-deferral feature on distributions (the MLP equivalent of dividends) that can allow investors to defer taxes on a chunk of their distributions until they sell their units. "The compounding deferral could add as much as 1% or so over a 5-10-year average holding period, turning the 8% average to a 9-10% dividend return on your portfolio," Gross wrote.

Many individuals holding MLPs never sell their units and get a permanent tax deferral. When the investments end up in their estates, heirs benefit from the so-called step-up feature, which can mean certain taxes on distributions are never paid.

"One structural key is the fact that MLPs are masquerading as stocks on the NYSE but have tax advantages as partnerships given to them by Congress in the mid-1980s," Gross wrote. "In my opinion, Wall Street research firms, while providing fundamental research, fail to even mention these tax advantages for fear of being sued if not legally explained," he wrote.

Many investors don't like getting K-1 tax returns on MLPs because they can complicate and add to the expense of tax preparation. And mutual funds tend not to own MLPs in part because of concern that their holders would be forced to file K-1 forms, Gross noted.

Gross acknowledges that the C-Corp pipelines have some advantages, notably some that primarily transport natural gas, like Williams and Kinder Morgan. U.S. gas supply and demand are growing in part due to the need for gas as a fuel for power plants to supply data centers for the artificial-intelligence boom. Investors favor the gas-pipeline operators over those that transport oil and oil products like gasoline, which have a more muted demand outlook.

"Some MLP stocks have a small gas component (ET, WES) but there is a current bias for C corp pipelines (like WMB, OKE, KMI) and they are up 20% on average In the past 2 months whereas MLP pipelines are up 3-4%," Gross wrote. "There's less Al sex appeal for MLPs. But as a long-term investment? MLPs vs. C corps are an obvious choice. PE's at 12 versus 20, yields at 8% versus 4," Gross wrote.

Write to Andrew Bary at andrew.bary@barrons.com

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October 24, 2024 11:00 ET (15:00 GMT)

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