Plains All American (PAA 0.67%) initially expected that 2019 would be a transitional year. That's because the oil pipeline master limited partnership (MLP) sold a stake in a large pipeline last year to improve its financial profile. While that sale would be a drag on near-term results, it planned to use its improved financial flexibility to invest in high-return expansion projects.
This year, however, has turned out to be much better than initially anticipated, and Plains All American has boosted its growth forecast twice. Despite that increasing optimism, units of the MLP have sold off recently and are now more than 15% below their recent high. That makes the pipeline company an even more attractive income stock to buy this month.
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A bargain-basement price
Thanks to its strong results through the first half of the year, Plains All American Pipeline now expects to produce $2.035 billion, or $2.74 per unit, of distributable cash flow. That's 15% above 2018's total. It's also a significant improvement from its initial view that cash flow would rise by about 7% this year. Fueling the company's accelerated growth rate is the strong results of its supply and logistics business. That segment has taken advantage of the country's lack of pipeline infrastructure by moving oil and natural gas liquids from constrained areas to premium markets.
With Plains All American now on track to generate $2.74 per unit of cash flow, it trades at an even cheaper valuation, especially given the recent slide in its unit price. Units recently were around $21, which implies that the oil pipeline MLP sells for less than eight times cash flow. That's dirt cheap, considering most peers trade at more than 10 times cash flow.
A rock-solid yield
Plains All American's ridiculously cheap valuation isn't even its main attraction. With its unit price sliding in recent weeks, the company's dividend yield has risen to an enticing 6.9%.
That high-yield payout is on an increasingly firm foundation. For starters, Plains All American Pipeline now expects to cover its payout with cash flow by a comfortable 2.03 times even though it boosted it by 20% earlier this year. Meanwhile, thanks to a combination of asset sales and accelerated earnings growth, the company's leverage ratio ended the second quarter at 2.8 times debt-to-EBITDA. That's below its 3.0-3.5 target range. As a result of those strong metrics, the company should have no problem sustaining its payout through another downturn.
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Even better growth prospects
While Plains All American initially didn't expect much growth this year, that's not because it doesn't have expansion opportunities. The company's primary aim has been to improve its financial profile so that it has the flexibility to invest in its growing slate of expansion projects. One of the biggest in the near-term is the Cactus II pipeline, which started partial service earlier this month and should begin full service early next year.
Meanwhile, the company has been busy adding new expansions to its backlog this year. It now has five notable projects under way that should drive growth over the next few years. What's worth noting about these projects is that they're all joint ventures with industry partners. This structure will reduce the company's capital requirements while boosting project-level returns. That should enable Plains All American to grow its earnings at a faster pace in the future, meaning it can easily support its goal of boosting its high-yielding payout at a 5% annual rate over the next few years.
A great time to buy
Plains All American is an excellent option for dividend investors this month. Not only does it pay an attractive dividend, but it also trades at a dirt cheap price. Add in its visible growth prospects, and Plains All American Pipeline has the potential to produce market-beating total returns over the next few years.
