MLP Q4'18 Distribution Coverage... Now Featuring Payout Ratios!

Mar. 06, 2019 8:00 AM ETEPD, MPLX, AM, EQM, PSX, SHLX, HEP, DCP, CEQP, NGL, PAA12 Comments
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  • Today, we look at MLP distribution coverage and payout ratios to help a broader investor base analyze and compare MLPs with other investment options.
  • Improving distribution coverage metrics should give investors comfort around the ability of MLPs to afford their distributions.
  • Payout ratios should be viewed in the context of the MLP sector’s generous yields and the fact that MLPs do not pay federal taxes.

By Stacey Morris

Last week's piece recapped 4Q18 distribution trends for midstream MLPs, and this week we look at the ability of MLPs to afford those distributions. Historically, when exploring this topic, we have only focused on distribution coverage, which compares distributable cash flow (DCF) generated in a period to distributions paid. Today, we are incorporating payout ratios in addition to distribution coverage metrics. Why? Distribution coverage is an example of MLP jargon that is admittedly less than user-friendly. As we discussed in our 2019 outlook video, we see generalists or new investors entering this space as a potential catalyst for MLPs. The least we can do is start providing data in a format that is more familiar to generalists and widely used across investments. To analyze distribution coverage trends and payout ratios, we focus on the constituents of the Alerian MLP Infrastructure Index (AMZI).

Higher distribution coverage sometimes comes at a cost

Distribution coverage for the constituents1 of the AMZI Index has generally improved over the last two years. The 4Q18 average coverage ratio of 1.4x is a noticeable step up from the 1.2x average from the same quarter in 2016. Notably, of the 22 names with coverage ratios below, 17 MLPs have coverage ratios of 1.2x or better in 4Q18, compared to only 11 names in 4Q16.

Why has coverage improved? For some MLPs, improved coverage has resulted from distribution cuts. While some names cut prior to 4Q16 (read more), we have denoted in the chart those MLPs that cut between the two periods presented. Other companies have not cut their distributions but have higher coverage due to their focus on self-funding equity, including Enterprise Products Partners (EPD) and MPLX (MPLX), for example. Still others have seen coverage decrease as distributions to unitholders have

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