This Ultra-High-Yield Stock Sees More Growth Ahead

Western Midstream (WES 1.43%) pays its investors an eye-popping dividend that currently yields more than 11%. Two factors have driven the master limited partnership's yield up that high. First, it has shed more than 25% of its value this year, in part because of some issues that emerged during the second quarter. Despite those problems, Western Midstream's earnings continue to grow, which has enabled it to keep increasing its distribution.

Western Midstream sees more growth ahead, which was one of the key takeaways from its recent third-quarter earnings report. Here's a look at those numbers, as well as what's ahead for this high-yielding energy company.

Drilling down into Western Midstream's third-quarter results

Data source: Western Midstream.

Western Midstream's earnings rose about 6% year over year because of record volumes on several of its assets. Its West Texas Complex, for example, moved 1.27 billion cubic feet of natural gas per day during the third quarter, which was up 8% from the second quarter. Water volumes in the Delaware Basin, meanwhile, surged 13% sequentially while oil volumes in both the DJ Basin and West Texas rose 9% sequentially. Those positives more than offset the fact that total gas volumes declined 2% sequentially because of some infrastructure issues affecting its assets in the Rockies.

Cash flow, on the other hand, slipped about 1% year over year. That's mainly due to an increase in expenses. What's worth pointing out is that Western Midstream still produced enough cash to cover its high-yielding payout by 1.08 times during the quarter and by 1.17 times so far this year. While that's below the company's initial target that it would cover it by at least 1.2 times, it's still on track to cover it by at least 1.15 times this year, even as it increases the payout by 5% to 6% from last year's level.

Image source: Getty Images.

A look at what's ahead for Western Midstream

In addition to reporting its third-quarter results, Western Midstream put out its initial view for 2020. The MLP expects its adjusted EBITDA to grow by about 10% year over year. Assuming the company achieves the midpoint of its 2019 guidance range of $1.7 billion, that would put 2020's earnings at about $1.87 billion. On one hand, this forecast is only slightly better than what the company initially expected to produce this year before it ran into issues during the second quarter. However, with how challenging the oil and gas markets have been, a 10% increase on top of this year's projected growth is a positive sign.

Meanwhile, Western Midstream expects that its capital spending will decline by 20%-30% from the midpoint of this year's budget range of $1.3 billion-$1.4 billion. By delivering healthy earnings growth while spending less money, Western Midstream will have a bit more financial flexibility next year. That "should enable sustained distribution increases," according to comments by CEO Michael Ure in the third-quarter earnings release.

That's good news for income-seeking investors, since it suggests that the company intends not only to maintain its high-yielding payout but also to continue growing it. That would continue its current streak, which is now up to 27 consecutive quarters.

Striking a confident tone

Units of Western Midstream have tumbled over the past year because of a rather tight distribution coverage. Investors are worried that if market conditions continue to weaken, the company might need to cut its big-time payout. Western Midstream, however, remains optimistic that it can keep growing both its earnings and its payout. If it's correct, then it could produce big-time total returns for investors who believe that management can deliver.