Examining Midstream/MLP Dividend Growth By Company

A hallmark for the energy infrastructure space in recent years has been generous yields complemented by strong dividend growth. Each quarter, VettaFi recaps dividend announcements and examines dividend growth trends at the index level. However, today's note takes a closer look at the growth in payouts for individual companies. How significant is dividend growth for certain MLPs or corporations? How does it compare to inflation? The commentary below addresses these questions and discusses the outlook for future dividend growth.

Midstream/MLPs growing payouts amid high inflation

Significant free cash flow generation across midstream has helped support dividend growth (read more).

On a year-over-year basis, 95.3% of the Alerian Midstream Energy Index (AMNA) and 79.5% of the Alerian MLP Infrastructure (AMZI) by weighting as of October 5 have grown their payouts (read more). But how significant has growth been from individual companies?

The charts below show YOY dividend growth for constituents in AMNA and AMZI. They compare the dividend paid in 3Q23 with the dividend paid in 3Q22. Dividend growth has been quite healthy, but for names that cut their payouts in 2020, growth is coming off of a lowered base. Four out of the top five growers in both AMNA and AMZI cut their dividends in 2020, as denoted. This enabled some of the large double-digit percentage increases seen YOY. Cheniere Energy (LNG) also stands out for significant growth, having initiated dividend payments at the end of 2021.

Most of the companies shown have increased their payouts ahead of inflation. Through August 2023, the 12-month average change in the Consumer Price Index (CPI) was 3.7% compared to the 8.0% average seen in 2022. Midstream tends to perform well in periods of elevated inflation given real asset exposure and contracts with annual inflation escalators (read more). Healthy dividend growth can be another offset to inflation.

Some of the larger U.S. and Canadian corporations in AMNA have seen more modest dividend growth this year but did not cut during the pandemic. For additional context, there are five names in AMZI and eight names in AMNA that have maintained payouts over the last year. However, those constituents tend to represent a smaller portion of each index by weighting.

Outlook: future dividend growth is likely more moderate

Going forward, companies are expected to continue providing dividend growth but the percentages will likely vary. Names that increased by ~20% or more may see more moderate growth. For example, Plains All American (PAA/PAGP) is targeting ~$0.15 annual distribution growth until a certain coverage ratio is achieved, which would imply ~14% growth next year. On the other hand, Energy Transfer (ET) grew its distribution steadily through 2022 with the goal of restoring its payout to where it was before the 2020 cut. With that level now surpassed, ET is targeting 3-5% annual growth.

Companies that did not cut their payouts in 2020 will likely provide single-digit percentage growth in general, with some exceptions. For example, Cheniere (LNG) is targeting ~10% dividend growth through the construction of Corpus Christi Stage 3. Investors will also be closely watching the next distribution announcement from MPLX (MPLX), which is focused on distributions as the primary way to return capital to investors in 2023. In recent years, MPLX has increased its distribution with the November payout, and management has indicated that the company would be considering its distribution in 2H23.

While dividend growth will vary by company, midstream corporations and MLPs are focused on sustainably growing their payouts. Dividend growth enhances already generous yields. As of October 5, AMZI and AMNA were yielding 7.9% and 6.5%, respectively.

Bottom Line:

Midstream/MLP dividend growth has been healthy over the last year and has significantly outpaced inflation for most names. Companies are expected to continue to sustainably grow their payouts going forward.

Disclosure: © VettaFi LLC 2023. All rights reserved. This material has been prepared and/or issued by VettaFi LLC ("VettaFi") and/or one of its consultants or affiliates. It is provided as general information only and should not be taken as investment advice. Employees of VettaFi are prohibited from owning individual MLPs. For more information on VettaFi, visit VettaFi.

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Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.