Thursday, July 04, 2013 1:12:17 PM
By the BullMarket.com Staff
A common question we get about master limited partnerships (MLPs) is how can they pay out higher dividends than their earnings?
The answer to this question has to do with the way that depreciation and, in the case of natural resource producers, depletion expenses are treated. Depreciation and depletion expenses are a means of assigning the cost of a long-term asset, such as a pipeline or natural resource, over its useful life. These items are called "non-cash" expenses because cash is not actually being paid out for the depreciation or depletion of the long-term asset.
A corporation typically reinvests much of its cash flow to upgrade its equipment, keep pace with technological advancements, and/or expand its business. After these payments are made, the remaining cash flow can then be paid out as dividends. MLP assets, such as pipelines, however, are generally long-lived; require very little maintenance; and are not subject to major technological changes.
It is for these reasons that an MLP can pay out a very high level of its cash flow to unitholders without hurting the long-term basic earnings power of the business. This is also why investors should value MLPs based off metrics related to distributable cash flow (DCF) and not earnings.
DCF is the cash flow available to the partnership to pay distributions to LP unitholders and the GP. Since DCF strips out all non-cash items, it is a truer measure of how much cash an MLP is generating and whether it can continue to pay out or increase its dividend.
Recent HEP News
- Form 15-12G - Securities registration termination [Section 12(g)] • Edgar (US Regulatory) • 12/11/2023 11:03:56 AM
- Form EFFECT - Notice of Effectiveness • Edgar (US Regulatory) • 12/08/2023 05:15:10 AM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 12/04/2023 11:30:29 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 12/04/2023 11:27:03 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 12/04/2023 11:10:12 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 12/04/2023 11:08:54 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 12/04/2023 11:08:26 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 12/04/2023 11:07:30 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 12/04/2023 10:07:22 PM
- Form SC 13D/A - General statement of acquisition of beneficial ownership: [Amend] • Edgar (US Regulatory) • 12/04/2023 09:28:27 PM
- Form POS AM - Post-Effective amendments for registration statement • Edgar (US Regulatory) • 12/04/2023 09:20:56 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 12/04/2023 09:10:59 PM
- Form S-8 POS - Securities to be offered to employees in employee benefit plans, post-effective amendments • Edgar (US Regulatory) • 12/04/2023 09:07:55 PM
- Form SC 13D/A - General statement of acquisition of beneficial ownership: [Amend] • Edgar (US Regulatory) • 12/04/2023 09:05:56 PM
- Form SC 13E3/A - Going private transaction by certain issuers: [Amend] • Edgar (US Regulatory) • 12/01/2023 09:41:04 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 12/01/2023 09:12:02 PM
- HF Sinclair Corporation and Holly Energy Partners, L.P. Announce Expiration and Final Results of Exchange Offers and Consent Solicitations for Outstanding Notes of the HEP Issuers • Business Wire • 11/30/2023 12:44:00 AM
- Form 8-K - Current report • Edgar (US Regulatory) • 11/28/2023 10:09:06 PM
- HF Sinclair Corporation and Holly Energy Partners, L.P. Announce Results of Early Participation in Exchange Offers and Consent Solicitations for Outstanding Notes of the HEP Issuers and Extension of the Early Participation Exchange Consideration • Business Wire • 11/14/2023 12:14:00 AM
- Form 425 - Prospectuses and communications, business combinations • Edgar (US Regulatory) • 11/03/2023 10:06:26 AM
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