Master Limited Partnerships, or MLPs, have traditionally been a good source of high-yielding securities. Many MLPs yield 5% or more, even double-digit yields in some cases. But yields aren't everything: high-yielding stocks can have poor fundamentals and end up cutting their payouts to investors. So, let's look at three top MLPs that have high yields and also strong coverage of their payouts.
Partner With Enterprise Products Partners
Enterprise Products Partners (EPD) operates as an oil and gas storage and transportation company. Enterprise Products has a tremendous asset base, which consists of nearly 50,000 miles of natural gas, natural gas liquids, crude oil, and refined products pipelines. It also has storage capacity of more than 250 million barrels. These assets collect fees based on materials transported and stored.
In its second quarter this year, EPD reported Distributable Cash Flow (DCF) of $1.7 billion, compared to $2 billion the same period last year. Distributions declared for the recent second quarter increased by 5.3% to $0.50 per common unit, with a coverage ratio of 1.6-times DCF. Adjusted cash flow provided by operating activities (adjusted CFFO) was $1.9 billion for this year's second quarter, down from $2.1 billion the same time last year.
EPD has multiple avenues for further growth, primarily growth from new projects. Exports are a key growth catalyst. Demand for liquefied petroleum gas and liquefied natural gas, or LPG and LNG respectively, is growing at a high rate across the world, particularly in Asia. Additionally, share repurchases help boost per-unit DCF growth as Enterprise repurchased 2.9 million common units for $75 million during second quarter of 2023.
Enterprise Products Partners is one of the strongest midstream MLPs, making it a safe pick. It has credit ratings of BBB+ from Standard & Poor's and Baa1 from Moody's, which are higher ratings than most MLPs. It also has a distribution coverage ratio of nearly 2-times, leaving room for distribution increases and unit repurchases. Enterprise Products' high-quality assets generate strong cash flow, even in recessions. As a result, Enterprise Products has been able to raise its distribution to unitholders for 25 years in a row.
EPD yields 7.5%.
MPLX to the Max
MPLX, LP (MPLX) was formed by Marathon Petroleum (MPC) in 2012. The business operates in two segments: Logistics and Storage - which relates to crude oil and refined petroleum products -- and Gathering and Processing -- which relates to natural gas and natural gas liquids (NGLs). MPLX generated $5 billion in distributable cash flow in 2022.
In the 2023 second quarter, MPLX's adjusted earnings before interest, taxes, depreciation, and amortization and distributable cash flow (DCF) per share grew 5% and 6%, respectively, over the prior year. Growth was primarily thanks to a 6% increase in tariff rates and 9% growth in gathered gas volumes. MPLX maintained a healthy consolidated debt to adjusted EBITDA ratio of 3.5x and a solid distribution coverage ratio of 1.7x.
Future growth is likely for MPLX. Pipelines tend to have a stronghold in terms of extracting economic rents. Building pipelines requires years of approvals and ongoing regulation. As such, the incumbent positions enjoy "toll-booth" type business models, with a good portion of their revenue fixed via fee-based and "take or pay" agreements. MPLX in particular has a strong position in the Marcellus / Utica region, with long-term contracts from Marathon.
MPLX in particular has strong operational advantages with the company self-funding on the equity side and getting rid of its Incentive Distribution Rights, or IDRs. In the last five years, MPLX has had distribution coverage ratios above 1.36-times, with total debt to adjusted EBITDA ratios under 4.0-times, which is a measure of sound leverage ratios. Overall, the distribution is safe in the absence of a prolonged recession.
MPLX has increased its distribution for 10 consecutive years. Its most recent increase was announced in 2022, and was a 10% hike at that time. MPLX currently yields 8.8%.
VIP (Very Important for Your Portfolio): BIP
Brookfield Infrastructure Partners (BIP) is one of the largest global owners and operators of infrastructure networks, which includes operations in sectors such as energy, water, freight, passengers, and data. Brookfield Infrastructure Partners is one of multiple publicly-traded listed companies under Brookfield Corporation.
BIP reported solid second-quarter results. Funds from operations (FFO) rose 8% year over year (YOY) to $552 million, supported by the contribution of around $2.1 billion of capital deployed in new acquisitions over the past year, partially offset by the impact of asset sales and borrowing costs related to financing new investments. Organic growth was near the high-end of its 6-9% target range, benefiting from elevated levels of inflation on tariff increases and the commissioning of around $1 billion in new capital projects over the last 12 months.
FFO per unit climbed 8% to $0.72. During Q2, BIP accelerated its global data center growth strategy through the acquisition of two marquee development platforms in Europe and North America, respectively. These investments fill gaps for its core portfolio, which was regionally focused in South America, Australia, and India. Year-to-date, FFO per unit rose 10% to $1.44.
BIP has a strong track record of selling mature assets and redeploying capital for attractive long-term returns. From 2013-2022, the company grew its FFO-per-share by 8% per year. From 2021-2022, BIP invested $5 billion in new investments.
BIP said after the second quarter it expects its equity share of the deployment to be nearly $2 billion across three transactions (two data centers and Triton). The utility expects to generate proceeds of about $2 billion per year from its capital recycling program. Overall, BIP targets an FFO-per-share growth rate of 5%-9% per year.
According to this formula, its year-to-date payout ratio is 68%, within management's FFO payout ratio target of 60% to 70%. BIP's FFOPS remains stable, even through recessions, because of the essential services provided by its diversified infrastructure portfolio.
BIP stock currently yields 4.7%.
