Plains All American Pipelines (PAA -0.43%) has a spotty dividend history. The oil pipeline master limited partnership (MLP) had steadily increased its payout each quarter for years. However, deteriorating conditions in the oil market forced the company to press pause in early 2016. It then went on to reduce its distribution twice over the following two years as market conditions worsened, which negatively affected its financial profile.

The company spent the past year and a half focused on shoring up its balance sheet by selling assets and using the cash it would have distributed to investors to pay down debt. These actions have Plains All American on track to achieve its leverage target by the early part of this year. Once it hits that level, the pipeline MLP plans to start increasing its already attractive 5%-yielding distribution to shareholders. Here's a look at how much it could boost the payout this year.

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A little bit of arithmetic

Plains All American generates relatively predictable cash flow, since fee-based contracts will provide roughly 88% of its anticipated earnings this year. Accordingly, the company believes it can haul in $2.075 billion, or $2.58 per unit, in cash flow. While that's only about 3% higher than 2018, that's due in part to the recent sale of a stake in a pipeline and the anticipation that market conditions won't be quite as strong this year.

That's still enough cash to cover the company's current distribution outlay of $960 million, or $1.20 per unit, by 2.15 times as well as the $200 million it owes holders of its preferred units. That leaves the company with about $916 million in excess cash flow. Plains All American could use that money to repay additional debt, fund expansion projects, repurchase units, or increase its distribution.

Currently, Plains All American expects to invest about $1.1 billion in expansion projects in 2019, which is down from $1.9 billion last year because it recently completed several projects. With the company on track to achieve its targeted leverage metrics, it could fund these expansions with a 50-50 blend of debt and equity, which is common practice in the pipeline sector. That would leave the company with about $366 million in excess cash assuming it sticks with its $1.1 billion capital budget.

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How much of that windfall could it send back to investors?

Plains All American could conceivably return all that money to investors via one massive distribution increase. That would work out to a roughly 38% boost from its current level and consume about 65% of its total cash flow. For perspective, that's right around the payout percentage of top-tier MLP Enterprise Products Partners (EPD 0.72%). That outcome, however, isn't likely, since the company has stated in the past that it wants to deliver sustainable multi-year distribution growth once it's in the position to boost the payout again. As a result, it will probably target a more modest increase in 2019. At the low end, a 6% raise would push its payout ratio to 50% while a 25% boost would consume roughly 60% of its cash flow. 

By providing a more moderate increase, the company would have some extra cash to allocate toward other expansion opportunities that might develop later in the year as well as initiate a unit repurchase program. A buyback would match peers Kinder Morgan (KMI 0.15%) and Enterprise Products Partners, which have both authorized $2 billion repurchase programs. The reason these midstream companies went that route rather than further boosting cash distributions is that their valuations remain well below the historical norms of about 15 times cash flow. Kinder Morgan, for example, trades at less than 10 times cash flow, while Enterprise sells for about 10.5 times that metric. Plains All American, likewise, has a low valuation as it also fetches about 10 times cash flow. That's why it wouldn't be a surprise to see it follow these midstream leaders in opting for a more modest distribution increase that it supplements with a repurchase program.

Check out the latest earnings call transcript for Plains All American Pipelines.

Expect a decent increase for 2019

With its balance sheet back on solid ground and capital spending falling after a heavy investment year, Plains All American is in the position where it could return significantly more cash to investors this year. However, the company probably won't opt for a monster increase given its relatively low valuation. Instead, MLP will probably boost its payout by a healthy rate -- likely in the double digits -- while also authorizing a meaningful repurchase program.