A double-digit dividend yield usually is an ominous sign for income investors since it often signals that a reduction is on the way. However, that's not always the case. Sometimes market sentiment is so bad that it weighs heavily on a company's value, pushing up its yield.
That seems to be the case with MPLX (MPLX 0.26%). Units of the master limited partnership have tumbled more than 30% over the past year -- pushing the yield up near 12% -- even though its financials have remained solid. Because its numbers are sound and expected to get even better in the coming years, the company doesn't need to reduce its payout, which was a clear takeaway from its fourth-quarter conference call.
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No red flags whatsoever
MPLX CEO Mike Hennigan led off the call by stating, "I'm pleased to report that MPLX delivered excellent results with fourth-quarter adjusted EBITDA of $1.3 billion and distributable cash flow of $1 billion, which provided continued strong distribution coverage of 1.4 times and leverage of 4.1 times." Those are solid metrics for an MLP, since most have historically aimed for coverage above 1.2 times and leverage around 4.0 times debt-to-EBITDA, which puts it firmly within investment-grade territory.
Meanwhile, Hennigan noted that the company produced $5.1 billion of adjusted EBITDA and more than $4 billion of operating cash flow for the full year, which supported its ability to return $3 billion in cash to its investors. That left it with roughly $1 billion in excess cash to invest in expansion projects. While the company spent about $2.5 billion on capital projects, it was easily able to cover the balance with new debt while maintaining its investment-grade leverage metrics.
Given those numbers, the company doesn't need to reduce its high-yielding distribution. That's because the numbers show it can easily fund the payout as well as its expansion program, through a combination of internally generated cash and its top-notch balance sheet.
Taking things up another notch
Meanwhile, funding growth will get even easier in the coming years. MPLX initially anticipated that it would invest about $2.6 billion to continue expanding this year. However, it has worked hard to high-grade its backlog by focusing on its highest-return investment opportunities. That led it to reduce its capital budget to $1.5 billion for the coming year. With its cash flow continuing to rise thanks to its prior expansions, it will be even easier to fund this growth-focused investment while maintaining its hefty payout this year.
By 2021, the company expects capital spending to decline even further, as it currently anticipates investing roughly $1 billion on expansion projects. With its cash flow on track to keep growing as prior expansions come online, "we expect to achieve positive free cash flow net of both capital investments and distributions in 2021," according to Hennigan. As a result, the company will have the financial flexibility to "pursue incremental capital allocation opportunities including leverage reduction or unit repurchases, broadening our value creation options, and enhancing long-term flexibility."
This forecast suggests MPLX doesn't need to reduce its distribution. Instead, the company has the financial flexibility to continue increasing its payout, which is something it's done for the past 28 consecutive quarters. Or it could press pause on distribution growth in the near term so it can more quickly reach its free cash flow inflection point and potentially start repurchasing some of its dirt-cheap units.
A very high yield without the high risk
Thanks to its strong balance sheet and healthy cash flow, MPLX has the financial fortitude to cover both its high-yielding payout and expansion program. Achieving both tasks will become even easier over the coming years, since its growth-focused spending is on track to decline as it focuses on investing in its highest-return opportunities. It doesn't need to reduce its payout, which makes it one of the more compelling opportunities available to dividend investors these days.
