1 Pipeline Stock Paying a 7.3% Dividend While Oil Goes Haywire
Key Points
MPLX generates very stable cash flows.
It has lots of visible growth coming down the pipeline.
The MLP should have plenty of fuel to continue increasing its high-yielding distribution.
- 10 stocks we like better than MPLX ›
The oil market has gone haywire this year. WTI, the primary U.S. oil benchmark, started the year below $60 a barrel. However, the war with Iran has sent WTI soaring. It peaked at more than $119 per barrel at one point after energy infrastructure became a target of the war. WTI was down more recently, closer to $90 a barrel, as tensions have eased a bit.
Crude prices could rise or fall sharply depending on developments in the war. However, no matter what happens with oil prices, MPLX (NYSE: MPLX) should continue paying its high-yielding distribution (7.3% current yield). That makes the pipeline stock a source of stability in these uncertain times.
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MPLX is a master limited partnership (MLP), an entity that sends a Schedule K-1 Federal tax form each year. It owns and operates midstream infrastructure crucial to supporting the energy industry. Most of its assets operate under government-regulated rate structures or long-term, fee-based contracts, minimizing its direct exposure to volatile commodity prices. As a result, it generates very stable cash flow even when oil prices are erratic.
Last year, the MLP produced nearly $5.8 billion of cash flow, enough to cover its over 7%-yielding distribution by 1.4 times. That enabled MPLX to retain cash to fund expansion projects. The midstream giant also has a strong balance sheet. Its 3.7 times leverage ratio is well below the 4.0x range its stable cash flows can support, giving it additional financial capacity for new investments.
MPLX has a long list of commercially secured organic expansion projects under construction, including several natural gas pipelines, a new LPG export terminal, and other midstream infrastructure. These projects should come online through the end of the decade, giving MPLX significantly growth visibility. It expects to grow its earnings at a mid-single-digit annual rate, which should support continued distribution increases. MPLX has raised its payment every year since its formation in 2012.
The MLP's stable cash flows and visible growth prospects enable it to withstand volatile oil prices and deliver reliable income to investors.
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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.
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