Usually, when a dividend yield approaches double digits, it’s a sign of potential trouble. It often suggests the market doesn’t believe the payout is sustainable and that a cut could be forthcoming.
However, a dividend cut isn’t in the cards for MPLX (MPLX 0.92%). That’s evident in the master limited partner’s (MLP) financial results. The company’s robust cash flows, strong financial profile, and visible growth recently gave it the confidence to boost its payout by 9.7%, pushing its yield to an eye-popping 9.5%. That likely won’t be the last raise it provides investors, making it a great option for those seeking a big-time income stream.
A cash flow-generating machine
MPLX’s diversified midstream operations generate lots of steady cash flow backed by fee-based contracts and government-regulated rate structures. The pipeline company produced nearly $1.4 billion in distributable cash flow during the third quarter, up almost 9% year-over-year. That brought its year-to-date total to almost $4 billion, up 6% compared to the year-ago period.
The midstream company benefited from the strength of its logistics and storage (L&S) business during the third quarter. Earnings were up roughly 13% compared to the year-ago period, fueled by higher rates and volumes. Meanwhile, earnings from the company’s gathering & processing (G&P) segment rose slightly, thanks to higher volumes and fees.
The MLP has generated enough cash to cover its high-yielding distribution by a comfy 1.6 times this year. That includes the third quarter, which factors in its recent raise. That high coverage ratio enabled MLPX to retain a meaningful amount of cash flow. It has produced enough cash to cover its capital spending ($727 million through the first nine months of the year) with $752 million left over.
It used that excess free cash flow to strengthen its already fortress-like balance sheet. MPLX ended the third quarter with $960 million in cash and a 3.4 leverage ratio. That’s down from 3.5 in the year-ago period and well below its target of around 4.0.
More growth ahead
MPLX has spent $727 million on capital projects to maintain and expand its midstream systems this year. Those investments will help sustain and grow its cash flows. That will give it more money to pay distributions in the future.
The company has several expansion projects underway. Its L&S segment is expanding its natural gas and natural gas liquids (NGL) long-haul and crude oil gathering pipelines to support production growth in the Permian and Bakken basins. The company and its partners completed the expansion of their Whistler pipeline in the third quarter, increasing natural gas takeaway capacity in the Permian. It’s also building the associated Agua Dulce Corpus Christi Pipeline lateral, which it expects to finish in the third quarter of next year. Finally, it’s expanding its BANGL NGL pipeline joint venture, which it anticipates completing in the first half of 2025.
Meanwhile, its G&P segment continues expanding in the Permian and Marcellus regions to support natural gas production growth. In the Permian, it’s building its sixth (Preakness II) and seventh (Secretariat) processing plants, which should come online in the first half of 2024 and the second half of 2025, respectively. It’s also building the Harmon Creek II plant in the Marcellus, which it expects to complete in the first half of next year.
These projects provide the company with visible growth through the next two years. Meanwhile, it has the financial flexibility to pursue additional expansion projects and make accretive acquisitions as opportunities arise. The rising cash flow from these investments, along with its strong financial profile, should enable it to continue increasing its distribution. MPLX has raised its payout every year since its formation in 2012.
Ideal for income
MPLX offers a monster yield. Unlike many big-time payouts, this one is on a very firm foundation. That’s evident in the company’s strong financial profile and the recent decision to boost its distribution by almost 10%. More growth seems likely, given the expansion projects it has under construction. That makes it an excellent option for those seeking a sizable passive income stream.
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.