When looking for high-yielding dividend stocks, one of the best places to look is in the midstream energy space. Many of these companies are structured as Master Limited Partnerships (MLPs); which pass through their profits to their shareholders and as such do not pay corporate taxes.
As a result, most pay very generous distributions, which are similar to dividends, but most payments are considered a return of capital. This portion is tax-deferred until the stock is sold. that come at tax time.
The midstream industry as a whole has gone through many changes over the past decade.In the past, firms often had a general partner (GP) and limited partner (LP) structure, which ultimately was more beneficial to the GP GPs would have what are called incentive distribution rights (IDRs), while the LP would pay the GP a percentage of its distributions when they hit certain points.
This became very beneficial to GP because when the MLPs reached a higher 50/50 split, GP would receive half of the increased distribution fee.For example, if the company increases its distribution by $0.02 per unit, and that equals $10 million (500 million units outstanding at $0.02), then he must also send GP an additional $10 million under the IDR agreement.This structure was also an incentive LPs to fund growth by issuing more shares because the more units the LP owned, the higher the dollar payouts.
By and large, this structure has been eliminated, and MLPs are generally in better financial shape as a result, carrying less leverage and being able to grow their businesses through free cash flow with where they traded in an old, out-of-whack model.From 2011 to 2016, MLPs traded at an average multiple of 13.7. enterprise valueto-EBITDA (earnings before interest, taxes, depreciation and amortization), the most common way to value these stocks.
Today, companies in the sector are trading at much lower valuations, although the industry as a whole is in a much better place. This, along with demand for artificial intelligence (AI) hardware in data centers, creates a great buying opportunity. which you should buy right now.
Despite having some of the best assets in the midstream space with its large integrated system, Energy transfer(NYSE: ET) One of the cheapest MLPs in the space, trading at an EV/EBITDA multiple of 8.5, it currently has a forward yield of 6.4% and expects to grow its distribution by 3% to 5% annually.
Its distribution is also well covered, with a last quarter coverage ratio of 1.8x based on its distributable cash flow (operating cash flow minus maintenance capital expenditures), and it generated more than $165 million in free cash flow after paying distributions.
Energy Transfer also has some of the best growth opportunities in the midstream space, partly due to its strong presence in the Permian Basin, which gives it access to the nation’s cheapest natural gas to move adjacent natural gas out of the basin.This results in a very cheap regional price and makes Texas an ideal area to build data centers.
Energy Transfer also has pipeline infrastructure to transport natural gas from the Waha Junction in West Texas to various other locations. 40 featured data centers in 10 states.
The company also announced a new $2.7 billion Permian gas pipeline project that it says will help support data center growth in Texas.
Overall, Energy Transfer combines cheap stocks with solid, well-covered distribution trades at a historically attractive price.
Image source: Getty Images
Even in the days of the old MLP model, Enterprise Products Partners:(NYSE: EPD ) has always been one of the most shareholder-friendly companies in the MLP space.It eliminated its 50% IDRs back in 2002 in favor of a 25% high split, then completely collapsed its structure in 2011. The company has also always taken a more conservative approach with leverage and maintain a solid balance.
This has allowed the company to raise its distribution through various economic and energy cycles for 26 years. The stock currently yields 6.4% and trades at an attractive EV/EBITDA multiple of 10.
The company is currently starting to accelerate growth given the opportunities it sees. After reducing its growth capital expenditures (capex) to $1.6 billion in 2022 at the peak of the pandemic, it will spend about $3.5 billion to $4 billion in 2024. billion dollars.A means of strong EBITDA growth in the coming years.
Enterprise Products Partners is also well-positioned to benefit from growing AI and data center energy needs, with a strong presence in Texas, particularly in Dallas and San Antonio, both of which are pushing to become data center hubs, the company said , that AI-driven energy demand is one of the most promising signals it has seen in natural gas in a long time, and that it has some of the best assets to take advantage of this. from the trend.
Overall, Enterprise Products Partners has proven to be a model of consistency and has plenty of upside while trading at an attractive valuation.
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Jeffrey Siler has positions at Energy Transfer and Enterprise Products Partners.The Motley Fool recommends Enterprise Products Partners a disclosure policy.
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