Answer: Thank you for your question. It is a good one.
The Valuentum process considers both value and momentum in considering ideas. Just because a firm is undervalued does not guarantee that it will be added or remain in the newsletter portfolios. We use the Valuentum Buying Index rating system as a guide for idea consideration (addition and removal), which considers both the attractiveness of the entity from a valuation standpoint and market conviction via its share-price activity.
As of late, our fundamental view on MLPs has deteriorated, and we have grown more cautious on the space, a view that has been reinforced through the broad-based sell-off and weakness in shares. We think this has warranted a removal in ETP shares from the Dividend Growth Newsletter portfolio, despite the appearance of undervaluation. An in-depth valuation assessment is only one part of our process.
Regarding ETP’s distribution assessment, for MLPs and REITs, specifically, we publish adjusted Dividend Cushion ratios and unadjusted Dividend Cushion ratios. This link walks through the difference and illustrates the capital-market dependency of such instruments: /20150803_1.
Hope this helps clarify our view. A general rule of thumb for corporates is that capex is typically funded through cash flow from operations. Not all companies use the debt market to fund growth. This is more of an exception than a rule, though it is a way of life for most MLPs.
Our continued best wishes.
Question: I’m confused about your reasoning on ETP. You evaluate it as having good dividend safety, good dividend growth prospects, a good Dividend Cushion ratio and selling well below your estimation of fair value. But it’s a sell because Capex and dividend combined far exceed FCF? Isn’t Capex often funded by debt? How is it that your standard way of evaluating dividend stocks is so at odds with your current view?