While many companies are still trying to figure out how the largest overhaul of the U.S. tax system in decades will impact their business, Antero Midstream GP (NYSE: AMGP) quickly calculated that the newly lowered U.S. corporate tax rate would provide a substantial boost to its cash flow. So the midstream company announced a 20% increase to its target for long-term dividend growth, on top of the jaw-dropping growth the company had already anticipated. Though that announcement makes Antero Midstream GP the first pipeline company to boost its dividend growth forecast as a result of the lower tax rate, that doesn't mean we should expect a wave of tax-fueled dividend increase announcements from the sector this year.
Drilling down into Antero Midstream GP's new dividend growth plan
Antero Midstream GP went public last year, giving investors an opportunity to collect a rapidly growing income stream backed by the incentive distribution rights (IDRs) paid by Antero Midstream Partners (AM 0.05%), which is a master limited partnership (MLP). Those IDRs entitle Antero Midstream GP to an outsized share of Antero Midstream Partners' growing stream of cash flow, from the pipelines and related infrastructure it's building to support the growth of natural gas driller Antero Resources (AR 0.94%).
In fact, while Antero Midstream Partners expected to grow its payout by a compound annual rate of 28% to 30% through 2020, Antero Midstream GP anticipated that it could increase its payout by a stunning 110% to 125% this year. Furthermore, it expected to follow that up with 63% to 65% growth in 2019 and another 51% to 53% increase in 2020.
Image source: Getty Images.
However, the company now expects to pay out even more cash to investors in the coming years. That's because the changes in the tax law will reduce its corporate rate from 35% to 21%; after adjusting for a slightly higher net state and local tax rate, this will give the company 20% more cash to send back to investors each year. As a result, it's increasing its dividend growth forecast accordingly:
|
Metric |
2018 |
2019 |
2020 |
|---|---|---|---|
|
Previous year-over-year growth rate |
110% to 124% |
63% to 65% |
51% to 53% |
|
Previous anticipated cash distribution per unit |
$0.43 to $0.46 |
$0.70 to $0.76 |
$1.06 to $1.10 |
|
Updated year-over-year growth rate |
154% to 172% |
63% to 65% |
51% to 53% |
|
Updated anticipated cash distribution per share |
$0.52 to $0.55 |
$0.84 to $0.91 |
$1.28 to $1.40 |
Data source: Antero Midstream GP.
As that chart shows, investors will see an even more massive boost to their income this year as the company resets its payout to reflect the lower tax rate. Meanwhile, future increases will be by the same percentage rates as before, though that growth will come off of 2018's higher base.
Image source: Getty Images.
A sign of things to come?
Antero Midstream GP likely won't be the only midstream company to benefit from the reduction in the U.S. corporate tax rate. For example, fellow midstream general partner EnLink Midstream (ENLC +0.00%) noted in early 2017 that it expected to pay cash income taxes of about $5 million per year in 2017, 2018, and 2019. However, with the corporate tax rate coming down in 2018, the company will likely pay fewer cash taxes this year and next than initially anticipated. That could enable EnLink to send those savings back to investors. However, given that the company expected to generate between $215 million and $225 million in cash available for distribution last year, any increase from the reduction in corporate taxes would be slight.
In fact, most midstream companies won't see much, if any, benefit from the changes in the tax rate. That's because MLPs like Antero Midstream Partners don't pay corporate taxes; many other pipeline companies have recently undertaken transactions that will shelter them from having to pay cash taxes for the next few years. For example, when Targa Resources (TRGP +0.33%) acquired its MLP Targa Resources Partners in 2015, it stated that the deal would lower its cash taxes, noting that the effective cash tax rate would drop from a range of 0%-5% to 0%. Likewise, when ONEOK (OKE +0.33%) acquired its MLP last year, it stated that it wouldn't pay any cash income taxes until "at least 2021." Needless to say, since these companies aren't currently paying cash taxes, the reduction in the corporate tax rate won't benefit them in the near term.
Tax cuts aren't what will fuel dividend increases in the pipeline sector this year
Antero Midstream GP is a bit of an outlier in the midstream sector, since it was one of the few companies paying the full U.S. corporate tax rate. Since most pipeline companies don't pay much, if any, in corporate taxes, investors shouldn't expect a gusher of tax-related dividend increases this year. That said, 2018 could still be a good year for dividend increases from the sector, since many companies have expansion projects slated to start up, which will provide them with the growing stream of cash flow needed to boost their payouts.
