The energy sector can be a great place for income investors to find higher-yielding options. The average energy stock in the S&P 500 has a yield of around 3% at its current share price, which is more than double the 1.3% yield of the broad market index. Many energy stocks have even higher yields.
One of them is MPLX (NYSE: MPLX). The midstream energy company yields more than 7% right now. Here’s why income investors will want to take a closer look at MPLX.
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A high-quality, high-yielding payout
A yield above 7% might seem like a higher-risk income stream at first glance. However, that’s not the case with MPLX’s payout. The master limited partnership (MLP) has a rock-solid financial foundation supporting its big-time distribution.
MPLX has a diversified midstream operation that generates lots of stable cash flow backed by long-term contracts and government-regulated rate structures. It produced nearly $1.5 billion in distributable cash flow during the first quarter — enough to cover its distribution by a comfortable 1.5 times.
The MLP produced about $500 million in excess free cash flow during the period. That was enough money to cover its organic capital spending with room to spare. (Its net cash used in investing activities was about $364 million after adjusting for acquisitions.)
MPLX also has a robust balance sheet. It ended the first quarter with a leverage ratio of 3.3. That’s comfortably below the 4.0 or so ratio its stable cash flows can support.
High-octane growth
MPLX stands out among higher-yielding dividend stocks because it’s growing at a healthy clip. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose by 7% in the first quarter. Meanwhile, its distributable cash flow was up 8.5%. The company has been growing its earnings and cash flow at a nearly 7% compound annual rate since 2021. That strong growth, along with the company’s top-notch financial profile, has allowed MPLX to increase its distribution at a 10.7% compound annual rate since 2021, including by 12.5% last year.
The MLP has plenty more growth coming down the pipeline. It has secured several new investments this year. MPLX and its partners recently made a final investment decision to build the Traverse Pipeline, which should enter commercial service in 2027. It’s also building two Gulf Coast fractionators and a liquefied petroleum gas (LPG) export terminal, expanding its BANGL pipeline, building the Blackcomb and Rio Bravo pipelines, and constructing two more natural gas processing plants. These projects have in-service dates through 2029, giving the MLP lots of visibility into its earnings growth.
“We continue to anticipate mid-teen returns on these projects, which will support mid-single digit adjusted EBITDA growth,” said CEO Maryann Mannen in the first-quarter earnings press release. “This growth is expected to allow us to reinvest in the business and support annual distribution increases in the future.”
MPLX also continues to use its strong balance sheet to make acquisitions. Early this year, it agreed to buy the 55% of the BANGL pipeline it didn’t already own for $715 million, another 5% interest in the Matterhorn Express pipeline for $151 million, and a crude oil gathering system for $237 million. Given its low leverage ratio, it has ample financial flexibility to continue making bolt-on acquisitions as opportunities arise. These and future deals will further enhance its earnings growth rate, giving it more fuel to increase its distribution.
A high-quality, high-yielding income investment
MPLX is currently paying over 7%, which is much higher than the average energy stock and the S&P 500. The MLP’s big-time payout is on a very sustainable foundation. Further, it should continue growing for the next several years. That makes it a great option for income-seeking investors as long as they are comfortable receiving the Schedule K-1 federal tax form the MLP sends them each year.
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Matt 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.
