Energy infrastructure companies Targa Resources (NYSE:TRGP) and CorEnergy Infrastructure Trust (NYSE:CORR) both have something that would catch the eye of income-focused investors: a yield north of 8%. One reason both stocks have such elevated payouts is that they trade at relatively cheap prices. CoreEnergy, for example, sells for less than 10 times cash flow, while Targa goes for around 13 times, both below the mid-teens multiple of their peer group.
However, the reason both sell for such low prices is that neither appears to be in the position to increase their payouts anytime soon. For evidence, we need only look at their rather lackluster third-quarter results.
Still waiting for it to pull the trigger on a deal
CorEnergy Infrastructure Trust's third-quarter results were more of the same. The energy infrastructure-focused REIT said its adjusted funds from operations (AFFO), which measures cash flow available to pay dividends, came in at $11.9 million, or $0.90 per share, for the quarter. While that was more than enough to cover its $0.75-per-share dividend, AFFO was down from the $13 million, or $0.98 per share, the company pulled in during last year's third quarter, which pushed its year-to-date AFFO down 3.6% to $37.7 million. It's tough to justify increasing the payout when cash flow is in decline.
CorEnergy is working to reverse that trend by seeking out acquisitions that would grow its cash flow. The company noted in its earnings release that it's currently evaluating a broad set of opportunities and hopes to make one or two transactions per year, targeting $50 million to $250 million per deal. Furthermore, CorEnergy noted that it ended the quarter with more than $145 million in liquidity to make a deal.
CorEnergy, for its part, has been on the lookout for a deal for quite some, which suggests it hasn't found anything worth buying. This inability to find the right fit makes it less likely that the company will be in a position to boost its payout anytime soon.
Way too tight right now
Targa Resources, on the other hand, is at least growing cash flow. The pipeline company reported that distributable cash flow in the third quarter rose 10.9% to $186.6 million, fueled by recently completed growth projects and higher commodity prices. However, that was short of the $196.2 million the company paid out in dividends during the quarter. Targa has therefore had to access the capital market to bridge the gap, as well as finance the $1.32 billion of capital spending it has planned for this year.
Targa anticipates that its growth investments will boost EBITDA from about $1.13 billion this year to more than $1.5 billion in 2019. The company also thinks earnings could top $2 billion by 2021, which is a conservative estimate, since it doesn't include what it could make by using its excess liquefied petroleum gas-exporting capacity or from the growth projects it has in development. One of those projects is the Gulf Coast Express joint venture with Kinder Morgan (NYSE:KMI) and DCP Midstream (NYSE:DCP). The companies have proposed building a large pipeline to move natural gas from the fast-growing Permian Basin in western Texas to markets along the Gulf Coast. Targa would own a 25% stake in the Kinder Morgan-operated project, which could enter service -- and start generating cash flow -- in the second half of 2019.
Initially, the rising earnings from these projects will help Targa improve its balance sheet and dividend coverage. Only after that point, which might not come until 2019 or 2020, would the company be generating enough excess cash even to consider increasing its dividend.
Bond-like for now
On one hand, the third-quarter reports for CorEnergy and Targa Resources show that both companies can maintain their lucrative dividends for the time being, which would give investors a bond-like income stream. However, stock investors typically want more upside when they take on the additional risk associated with equity. While both companies look as if they could eventually be in the position to reward investors by growing their payouts, the timing of those increases didn't become any clearer after a glance at their third-quarter reports.