Damodaran Breaks Down The Benefits Of MLPs

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Damodaran Breaks Down The Benefits Of MLPs

After the market’s big reaction to the news that Kinder Morgan Inc (NYSE:KMI) would consolidate the master limited partnerships (MLPs) that it spun off years ago, you could be forgiven for wondering why so many people were excited to see Kinder Morgan give up tax benefits.

“If the only difference between pass-through entities and taxable entities were on taxes, the assessment that mattered for value would be whether you paid more or less in taxes with one form over the other,” explains NYU Stern School of Business professor Aswath Damodaran. “However, the laws that created the pass-through entities also created restrictions on other aspects of business behavior including where and how these businesses invest, how much they have to pay out in dividends and how they finance their operations.”

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Pass-through structure makes more sense for low-growth industries

In addition to being restricted only to certain kinds of business, both REITs and MLPs have to pay out at least 90% of their income as dividends, and they don’t get any tax benefit from taking on debt.