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This Recently Created High-Yield Stock Is Worth Putting on Your Watchlist

By Matthew DiLallo - Dec 2, 2018 at 2:07PM

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The midstream company anticipates it can deliver a high yield that it can grow at a healthy rate.

In mid-November, natural gas giant EQT Corporation ( EQT 4.16% ) spun off its midstream franchise into the newly created Equitrans Midstream Corporation ( ETRN 1.02% ). Those assets should supply that company with the cash flow to start paying a high-yielding dividend in 2019, which it plans to increase at a fast pace in the coming years. That makes it an intriguing option for income-seeking investors. 

However, I think investors would be wise to put Equitrans on their watchlist until there's more confidence in its go-forward plan, which it recently adjusted by announcing transactions to streamline its midstream franchise.

$100 bills with the word "dividends" on top.

Image source: Getty Images.

Equitrans Midstream 101

EQT's midstream assets consisted of its stake in two publicly traded master limited partnerships (MLPs), which are now held by Equitrans Midstream. The company has a 91.3% interest in midstream general partner EQGP Holdings (NYSE: EQGP), which collects management fees from EQM Midstream Partners ( EQM ) as well as distribution income from its 17.9% interest in that company. In addition to that, Equitrans holds a direct 12.7% stake in EQM Midstream Partners.

EQM Midstream owns all the franchise's operating assets. These include the third-largest natural-gas gathering system in the country, which runs through parts of Ohio, West Virginia, and Pennsylvania, as well as a 950-mile pipeline that moves gas out of the region to the nation's interstate pipeline system. Those assets produce very predictable cash flow backed by long-term contracts with natural gas producers such as EQT, which is its top customer. 

EQM Midstream is also investing nearly $3.3 billion to expand its midstream system by building out additional gathering and long-haul pipelines. Those expansion projects should boost that company's earnings by 32% in the coming years, which should support dividend growth across the franchise.

A twist of pipelines with a bright sun shining behind them.

Image source: Getty Images.

Simplifying the situation

One of the first things Equitrans Midstream did after gaining its freedom from EQT was to take steps that will streamline its structure. At the end of November, the company agreed to acquire all the units of EQGP Holdings that it didn't already own in exchange for cash. In addition to that, the company has offered to eliminate the costly management fees EQM Midstream pays to EQGP in exchange for a larger stake in that MLP. If both deals close, Equitrans will hold a 61% interest in EQM Midstream, which would continue to own and operate the midstream assets.

The simplification transaction would enable EQM Midstream not only to maintain its current 8.8%-yielding distribution but grow that payout at a 6% to 8% annual rate going forward. Further, the company's distribution coverage ratio would expand from a tight 1.0 times after the deal closes to a more comfortable level of greater than 1.2 times starting in 2020. Meanwhile, leverage would be within its long-term target of 3.5 to 4.0 times debt-to-EBITDA beginning in 2020, which is well within the comfort zone of most MLPs.

These transactions would also support Equitrans Midstream's dividend growth plan. The company currently expects to pay a dividend of between $1.70 and $1.90 per share in 2019, which implies a more-than-7% yield at the recent stock price. Meanwhile, Equitrans Midstream expects to grow its dividend at an 8% to 10% annual rate, fueled by EQM Midstream's rising distribution.

An interesting income growth stock to watch

Equitrans Midstream controls one of the largest and fastest-growing natural gas midstream MLPs in the Appalachian Basin. That sets the company up to expand its high-yielding dividend at a high rate for the next few years, provided it completes its simplification transaction early next year. That upside potential is why investors should put this pipeline stock on their watchlists and reevaluate things after its simplification transactions close early next year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Equitrans Midstream Corporation Stock Quote
Equitrans Midstream Corporation
$9.93 (1.02%) $0.10
EQT Corporation Stock Quote
EQT Corporation
$20.55 (4.16%) $0.82
EQM Midstream Partners, LP Stock Quote
EQM Midstream Partners, LP

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