Income Opportunities: The Reliability Of Midstream/MLP Dividends

Sep. 09, 2022 8:00 AM ETAMLP, AMNA, MLPB, AMZA, KYN, CEN, FEN, AMJ, FEI, TYG, MLPX, JMF, NTG, FPL, KMF, CEM, EMO, GER, SRV, NML, JMLP, EMLP, DSE, GMZ, CTR, CBA, TTP, SMM, ENFR, SRF, AMU, MLPS, ATMP, MLPA, MLPC, MLPE, MLPG, MLPI, BMLP, AMUB, IMLP, MLPO, AMTR, AMND, EINC, PYPE, USAI, UMI, TPYP3 Comments

Summary

  • Following the hawkish comments from Jackson Hole, it seems like the dynamic seen for much of 2022 is set to continue.
  • Less sensitivity to interest rates may also work in energy’s favor.
  • Positive changes in recent years to the financial positioning of midstream corporations and MLPs add confidence to the reliability of their dividends going forward.

Oil pipeline in industrial district with factories at dusk

spooh

By Stacey Morris, CFA


Following the hawkish comments from Jackson Hole, it seems like the dynamic seen for much of 2022 is set to continue (i.e., rising interest rates to combat high inflation). If so, energy may provide ongoing relative outperformance, as strong free cash flow generation and returning capital to investors through dividends and buybacks helps offset some of the macro volatility. Less sensitivity to interest rates may also work in energy’s favor. For energy exposure with generous income, midstream/MLPs are an obvious choice, but some investors may be reluctant to consider this space given painful dividend cuts in the past. Today’s note explains why income investors can have greater confidence and comfort around midstream/MLP payouts.

Dividend track record is rebuilding with bias to growth.

For four straight quarters, the Alerian energy infrastructure index suite has not had a single constituent cut its dividend. Looking back at data to 2014, there has not been a longer stretch without a dividend cut. Importantly, companies are not just maintaining their payouts, but they are growing them. On a year-over-year basis, 83.2% of the Alerian Midstream Energy Index (AMNA) and 87.8% of the Alerian MLP Infrastructure Index (AMZI) by weighting had grown their payouts based on 2Q22 dividend announcements and index weightings at the end of July (read more). Relative to years past, companies are more focused on sustainably growing their dividends and taking a more conservative approach with their financial positioning.

Balance sheet improvements and enhanced financial flexibility reduce likelihood of cuts.

For some names, stretched balance sheets from the massive infrastructure buildout of the 2010s and the difficulty in tapping equity markets as oil prices fell from 2014 to early 2016 left companies with little choice but to cut their dividends in the back half of the decade, particularly in 2015, 2016, and 2018. The onset of the pandemic, crashing energy markets, and significant uncertainty led to another round of dividend cuts for 1Q20. In the early days of the pandemic, 21 of 48 dividend-paying midstream companies cut their payouts, with most of the cuts coming from smaller names in the space.

While there were painful cuts in the past, several positive changes over recent years will likely lead to fewer cuts going forward. A capital-intensive growth focus has been replaced with a capital-light, efficient approach. Capital spending has declined, and many companies are generating significant free cash flow, providing greater financial flexibility. Balance sheets have improved, and leverage ratios have come down (read more). Midstream names are largely self-funding equity needs, and instead of issuing equity, many names are active with repurchase programs (read more). The midstream business model of providing services for a fee has not changed, but the way these companies are managed financially has changed noticeably for the better.

Strong free cash flow generation has supported dividend increases.

A huge differentiator between today and prior years is that midstream companies are generating significant free cash flow as they reap fees from completed projects and spend a lot less on new projects. Growth capital spending has come down significantly. For large names, capital spending in 2021 relative to 2019 was lower by billions of dollars (read more). Excess cash flow provides enhanced financial flexibility and the potential to return cash to investors through dividend increases and buybacks.

Bottom Line:

Positive changes in recent years to the financial positioning of midstream corporations and MLPs add confidence to the reliability of their dividends going forward.

AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMNA is the underlying index for the ETRACS Alerian Midstream Energy Index ETN (AMNA).

Picture1-Sep-08-2022-02-48-56-96-PM

Current Yields vs. History

Midstream/MLP yields are currently below their five-year averages but remain attractive relative to other income investments. YTD total return remains strong as energy continues to be a bright spot in a challenging tape.

Table1-Sep-08-2022-02-48-57-48-PM

Yields for the Dividend Dogs index suite are generally in line or above their five-year averages. SDOGX has seen the best performance YTD, down only -3.2% compared to a 16.1% loss for the S&P 500, which is the starting universe for the index.

Table2-2

Stay informed

Receive the latest news and insights from our team.

Multiple screens for dividend durability, including evaluating cash flows, EBITDA, and debt-to-equity ratios, help ensure reliable income from the durable dividend indexes.

Table3

Closed-end funds have been pressured by the rising interest rate environment, and the current yields for the three CEF indexes are above their historical averages.

Table4


Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.


This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit <a href="https://www.alerian.com/disclaimers">alerian.com/disclaimers</a>.

© Alerian 2022. All rights reserved.

This article was written by

Alerian is now VettaFi! VettaFi, a data, analytics, and thought leadership company, is transforming financial services from an industry to a community—one relationship at a time. In addition to providing interactive online tools and research, VettaFi offers asset managers an array of indexing and digital distribution solutions to innovate and scale their businesses. With $14 billion in assets benchmarked to its indexes – and more than 200 customers globally – asset managers look to VettaFi for benchmarks and best-in-class index solutions at competitive prices.

Recommended For You

Comments (3)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.