High Dividend Doesn't Have to Mean High Risk

High-dividend stocks can turn off some investors. They worry the dividend could be at risk of getting cut in a recession. MPLX LP is a notable exception. This Master Limited Partnership has a 10% distribution yield, and even better, the payout is covered by sufficient cash flows, with a wide margin of safety. For that reason, income investors could add this stock to their portfolios as a quality stock with high yields. On a Marathon MPLX is a diversified, large-cap MLP formed by Marathon Petroleum , which owns and operates midstream energy infrastructure and logistics assets, and provides fuels distribution services. It was formed in 2012 and operates in two segments: Logistics and Storage, which involves the transportation and storage of crude oil and refined products, and Gathering & Processing, which is related to natural gas and natural gas liquids (NGLs). Logistics and Storage generates approximately 65% of the total earnings before interest, taxes, depreciation, and amortization of MPLX. The oil and gas industry is characterized by high cyclicality, which is caused by the dramatic cycles of the prices of oil and gas. This is the primary reason why most income-oriented investors avoid energy stocks. However, MPLX is superior in this aspect, as it has one of the most resilient business models in its sector. MPLX charges a fee to its customers every time they transport or store oil, refined products or natural gas through its network. MPLX signs long-term contracts, which have minimum-volume requirements. So, it receives a minimum amount of fees, even if its customers transport and store lower volumes than expected. Thanks to its toll-like, fee-based model, MPLX has proved much more resilient to downturns than the vast majority of energy companies. In 2020, the energy sector was severely hurt by the coronavirus crisis, which caused a massive recession. Due to the social distancing measures taken in response to the pandemic, the demand for refined products incurred a major collapse and the price of oil dived into negative territory for the first time in history. As a result, all the oil majors, such as Exxon Mobil and Chevron , incurred losses or saw their earnings collapse and all the refiners posted material losses last year. On the contrary, MPLX saw its distributable cash flow per unit decrease only 9%, from $4.52 to $4.12. It incurred an 8% decrease in its pipeline volumes and a 21% decline in its terminalling through-puts, but it also reduced its operating expenses as well as its capital expenses and enjoyed the aforementioned benefit from its minimum-volume contracts. Notably the MLP grew its distributable cash flow 5% over the prior year, from $4.1 billion to $4.3 billion, but it issued new units due to the acquisition of Andeavor Logistics and thus its distributable cash flow per unit slightly decreased. Overall, MPLX proved one of the most resilient energy companies in the fierce recession caused by the pandemic. High Energy After Marathon Petroleum acquired Andeavor, MPLX acquired Andeavor Logistics. The combination of these two MLPs resulted in a large-scale, diversified midstream company, with a robust fee-based model. The large asset footprint serves as a strong competitive advantage, as it poses high barriers to potential competitors. Moreover, thanks to its fee-based business model and the long-term contracts with its customers, primarily its parent Marathon Petroleum, MPLX is hardly affected by the cycles of commodity prices. As a result, it is one of the most defensive energy stocks during recessions. Growth Ahead MPLX greatly benefits from the evolution of the U.S. as the largest oil producer in the world. The U.S. has grown its oil production every single year for more than a decade, with the exception of last year due to the pandemic. As a result, it has surpassed the production level of Saudi Arabia, thus becoming the largest oil producer in the world. This is a strong tailwind for MPLX, which benefits from the higher volumes transported and stored through its network. MPLX also benefits from the secular growth in the production and consumption of natural gas. This fuel is much more environmentally friendly than oil and refined products and hence the environmental policies aim to enhance the use of natural gas. MPLX has facilities in all the major basins of production of natural gas and thus it benefits from its rising volumes. The above tailwinds are evident in the growth trajectory of MPLX. Since its formation in 2012, the MLP has grown its distributable cash flow per unit at a 7.6% average annual rate. This growth rate is certainly outstanding in the highly cyclical energy sector, particularly given the impact of the pandemic last year. Even better, MPLX does not rest on its laurels. It invested $2.5 billion on growth projects in 2019, another $878 million in 2020 and has announced an additional $800 million of growth projects this year. MPLX recently reiterated its commitment to continue to expand its network from the Permian Basin to the Gulf of Mexico. Its Wink to Webster crude oil pipeline continues to progress, with segments and assets expected to come online later this year. This project will originate in the Permian Basin and have destination points in the Houston market, including Marathon Petroleum's Galveston Bay refinery. It has its entire capacity contracted with minimum-volume requirements. MPLX has other ongoing growth projects in the Permian Basin, as well. Moreover, it recently completed its Agua Blanca project, which is connected to nearly 20 gas processing sites in the Delaware Basin. Thanks to all these growth projects, MPLX is likely to grow its distributable cash flow over the next several years. Distribution Distinction MPLX raised its distribution for 28 consecutive quarters until last year. Due to the pandemic, the MLP has paid the same distribution in the last five quarters. However, the distribution freeze should not disappoint investors, as most energy companies cut their dividends last year amid one of the fiercest downturns in history. MPLX is currently offering a 10% distribution yield. When a stock offers such a high yield, the distribution is usually at the risk of being cut. This is especially true in periods of low interest rates and all-time high levels of the broad stock market. However, MPLX is a bright exception. It has a strong distribution coverage ratio of 1.58 and a solid balance sheet, with a debt-to-adjusted EBITDA ratio of 3.9. It is also important to note the resilience of the distribution of MPLX amid the pandemic. In the full year 2020, MPLX posted an average distribution coverage ratio of 1.46. Not only did the MLP cover its $3 billion of annual distributions and its $878 million of investments in growth projects, but it also generated excess cash flows of $266 million. When a company generates excess cash flows amid one of the most severe downturns in history, investors can rest assured that its distribution has a wide margin of safety.

High Dividend Doesn't Have to Mean High Risk

With its exceptional 10% distribution yield, MPLX is an ideal stock for income-oriented investors who want to get into energy.

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