This commentary was originally sent to Dividend Stock Advisor subscribers at 10:55 on Dec. 09.
This week is turning out to be D-Day for the energy master limited partnership (MLP) space. Industry bellwether Kinder Morgan (KMI) slashed its dividend 75% overnight, in order to maintain the investment grade rating on its debt.
Does this mean the floodgates could open and we'll see a rush of more distribution cuts in the coming months? Kinder wasn't the first company in the space to cut its dividend and won't be the last -- but we'll address the payouts that appear to be most at risk in a separate piece later today.
In the meantime, we want to highlight another double-digit percentage yielder in this space, for which we believe the payout is sound.
Plains All American (PAA) is an oil pipeline operator that also has gathering and marketing assets. Even though the stock has rebounded today along with the rest of the MLP group, the company still sports a 12.7% yield. The stock was recently changing hands around $22.16.
Plains pays a quarterly distribution of $0.70 a share, which management has raised for 25 consecutive quarters. We expect the next dividend to be announced in early 2016. In the meantime, the company has a very strong balance sheet, with its bonds rated three levels above junk status.
Plains announced better-than-expected quarterly results last month. And while the company is facing increased competition for take-or-pay contracts, which could slow down the pace of distribution growth, management still expects earnings before interest, taxes, depreciation and amortization (EBITDA) to grow in 2016, with profitability expected to incrementally increase throughout the year.
The company is targeting more material EBITDA growth in 2017, which could in turn lead to a resumption of dividend growth. In the meantime, we believe the current payout is secure for readers who are looking for potential value in this beaten-up sector of the dividend universe.