If your head is spinning from these numbers, you are not alone. You see, the biggest reason investors have against selling Enterprise Product is because of taxes. With a basis of about $40 something per unit, and gain of about $20 capital and $6 to $7 return of capital, I am doing the smart thing of cutting my “stake” early, and moving into other entities that can provide me with slightly better growth, yield and total returns, minus the tax nightmares. It is just intriguing to me that some investors are preaching against selling because the taxes were onerous, yet they did not register the flaw in their thinking.
It therefore seems smarter to sell Enterprise Product when I have a $6 to $7 ordinary gain and buy a security with slightly better characteristics (KMI and KMR) and pay the least amount of taxes, than do this in 10 – 15 years, when my basis will be zero. After your basis is exhausted, and you don’t add any more funds, you will have to pay ordinary income taxes on the amount you receive as distributions.
I am still holding onto approximately 33-34% of original position in Enterprise Product Partners (EPD). The partnership could easily end up yielding less than 4%, which could be a sell signal. If the partnership yields less than 4% however, I might consider dropping my stake altogether. I also am going to keep my options open, and could decide to sell by end of 2013 and replace it with Kinder Morgan Management LLC for example.
Astute readers would notice that for my original position of Enterprise Product I am left with about 50-55% in MLP entities for this position (EPD and OKS). They are subject to these onerous MLP K-1 filings that so many other investors are losing sleepless nights over. Of course, as I mentioned before, the decision to sell was based on valuation, although taxes did come out second in the decision.
I found the Enterprise Product partnership to be richly valued, and I liked the fact that there are alternatives that can provide me with better values. In addition, because of adding to Kinder Morgan Inc and Kinder Morgan Management LLC I am going to have less of a hassle with MLP filings. Kinder Morgan Inc is going to deliver higher dividend growth, and possibly high total returns – at 4% yield growing 10% is much better than a 4.30% yield growing 6%. Kinder Morgan Inc is a corporation, and therefore I am dealing with 1099 at tax time, versus K-1s.
Kinder Morgan Management LLC is a better choice than Enterprise Product because it pays distributions in extra stock, which is not a taxable event. It also yields moreand would likely have slightly higher distributions growth. In addition KMR trades at a discount to Kinder Morgan Energy Partners which is closely tracks ( although not as high as a few years ago). So no K-1 forms here either.
ONEOK Partners is more of a value play here, as it is not loved by investors at present times. However, if the partnership growth plans materialize, you could be very positively surprised in 4-5 years. Sure, there are K-1s there, but I believe it will do much better than EPD over time.