Frequent visitors to Fool.com know that we subscribe to long-term outlooks. Buy and hold is best: Find a great company at a great price, and hold it forever. This sort of thinking also leads us to give a company time to properly prove itself after an IPO before we buy in. After all, in a great deal of these cases, there tends to be a pop and drop after an IPO, which can sting you if you buy too soon but also provide a great opportunity to buy in if you wait.
But there’s one type of investment you can make that doesn’t experience the IPO pop and drop that most other stocks do: master limited partnerships. There have been a lot of announcements recently about companies in the oil and gas industry that have spun off their midstream assets into master limited partnerships, and now that there’s talk that renewable energy companies could gain MLP status, it’s more important than ever to take a closer look.
IPO performance
Let’s start by looking at the initial six months of share performance for four relatively new publicly traded entities. We’ll begin with Facebook Inc (NASDAQ:FB), a company that IPO’d in May of last year and is currently trading below its offering price of $42.05.
Ouch. Facebook’s IPO is one of the worst in history, and this example certainly qualifies as low-hanging fruit. But that doesn’t make the point about investing at IPOs any less true.
Now let’s look at Dunkin Brands Group Inc (NASDAQ:DNKN), a company that doesn’t come with anywhere near the media attention of Facebook Inc (NASDAQ:FB). Dunkin’ IPO’d on July 27, 2011, at $25 a share.
Dunkin Brands Group Inc (NASDAQ:DNKN) was all over the place during the first few months of trading, including a run-up on Day One that it was trading below six months later.
Now let’s have a look at two recent energy MLP IPOs. First up is Summit Midstream Partners LP (NYSE:SMLP), which entered the market on Sept. 28 of last year at $21 per unit.
Summit did fall a bit in the beginning, but six months later it has easily outperformed the market, returning more than 31%.
Finally, let’s check out MPLX LP (NYSE:MPLX), Marathon Petroleum Corp (NYSE:MPC)‘s midstream spinoff that IPO’d on Oct. 26 of last year at $25.50 per unit.
There’s virtually no initial pop and drop — just a brisk rise to 42.28% six months later.
Reasoning
Much of the appeal of investing in master limited partnerships comes from the distribution yields. Summit Midstream Partners LP (NYSE:SMLP) is currently yielding 5% with an annualized payout of $1.68 per unit, while MPLX LP (NYSE:MPLX) yields 2.9% with an annualized distribution of $1.09. Facebook Inc (NASDAQ:FB) is currently yielding nothing, and Dunkin Brands Group Inc (NASDAQ:DNKN) is sporting a 1.8% yield and an annualized payout of $0.76 per share.
