5 MLPs With Payout Ratios Under 90%

Master Limited Partnerships (“MLPs”) are well known among investors for their stellar yields, but they can come at the cost of a high payout ratio. By comparing dividends to profits, the payout ratio is commonly used to determine the sustainability of a dividend yield. MLPs often have higher payout ratios due to their flow-through status, but investors should seek out payout ratios below 90% if they are concerned about long-term sustainability [for more MLP news and analysis subscribe to our free newsletter].

That said, investors should also consider other metrics like distributable cash flow (“DCF”) per unit, distribution growth and the distribution coverage ratio when looking at the sustainability of MLP dividend yields. Companies generating higher DCF than net income or predictable DCF growth can sustain payout ratios of greater than 100% over time, while growing distributions and a distribution coverage ratio over 1.0 are further signs of yield stability.

In this article, we’ll take a look at five MLPs with payout ratios of under 90% and predictable operating cash flow as two key indicators of a sustainable dividend yield.

  1. MLPsSunoco Logistics Partners LP (SXL) – Sunoco is a crude oil and refined products logistics company with pipeline, terminal and marketing assets. With a healthy 3.13% dividend yield, the company has a trailing 12-month 46.4% payout ratio, $626 million in operating cash flow, and $300 million in free cash flow. These metrics suggest a very steady dividend yield that could increase in the near future, moving closer to the industry-average of 4.6%, since the firm is generating far more cash than its paying out at the moment [see also 10 MLPs with Impressive Dividend Yields].
  2. Oneok Partners LP (OKS) – Oneok is a transporter of natural gas that connects supply in the Mid-Continent and Rocky Mountain regions with key market centers. With its strong 4.92% dividend yield, the company has a trailing 12-month 85.2% payout ratio and $946 million in operating cash flow. However, the payout ratio is higher than its historical average, since capital spending has been on the rise, resulting in lower net income and negative $614 million in free cash flow over the same trailing 12-month period.
  3. Energy Transfer Partners LP (ETP) – Energy Transfer Partners is a natural gas operator focused on interstate transportation, storage, mid-stream and retail propane. With a robust 7.54% dividend yield, the company has a trailing 12-month 81.4% payout ratio and $1.198 billion in operating cash flow. These figures suggest a steady dividend yield, but investors should watch for higher capital spending that resulted in a $1.6 billion hit to free cash flow over the same trailing 12-month period [see also How Are MLPs Taxed?].
  4. Enterprise Products Partners LP (EPD) – Enterprise Products Partners is a liquid natural gas company with over 50,600 miles of onshore and offshore pipelines. With a 4.6% dividend yield, the company has a trailing 12-month 87.7% payout ratio and nearly $2.9 billion in operating cash flow. While capital expenditures have hit free cash flow, the company’s payout ratio has been slowly improving over time, marking a relatively secure dividend yield that’s roughly on par with the industry average.
  5. Magellan Midstream Partners LP (MMP) – Magellan Midstream Partners transports, stores and distributes refined petroleum products with 9,600 miles of pipeline and 50 terminals. With a 3.93% dividend yield, the company has a trailing 12-month payout ratio of just over 90% at 92.9%, but we’ve included it due to its history of sub-90% payout ratios, $654 million in operating cash flow and $291 million in free cash flow that provide for a very safe and predictable dividend yield over time. [4]

The Bottom Line

The companies mentioned above all have payout ratios close to or below 90%, as well as stable operating cash flows to sustain them, making them relatively safe bets for income investors concerned with a predictable dividend yield. Investors looking to assemble their own list can find dividend yield, payout ratio, and cash flow information on popular financial websites and other information–like distributable cash flow and distribution coverage ratios–in regulatory filings made by individual limited partnerships on the SEC’s website.

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Disclosure: No positions at time of writing.

This entry was posted in Actionable Ideas, Asset Allocation, Commodity Producers, Energy, MLPs and tagged , , , , . Bookmark the permalink.

Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

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