1Q24 Midstream/MLP Dividends: Growth Story Intact

• On a year-over-year basis, nearly 95% of the broad Alerian Midstream Energy Index (AMNA) by weighting has grown their dividends. No AMNA constituent has cut its dividend since July 2021.
• Dividend growth enhances compelling yields for midstream/MLPs, which have consistently exceeded those of comparable income investments in recent years.
• The outlook for continued dividend growth is constructive, with several names providing long-term dividend growth guidance supported by expected free cash flow and EBITDA growth.

The first quarter of 2024 showcased continued financial strength for energy infrastructure companies and their commitment to returning excess cash flow to investors. Midstream/MLPs extended their dividend growth trend, and the long-term outlook for the midstream space remains constructive for income investors. Today’s note discusses 1Q24 dividends across Alerian midstream and MLP benchmark indexes, current yields compared to other income investments, and the outlook for continued growth.

Dividend growth trends remain intact for midstream companies so far in 2024, with a handful of names increasing their payouts for 1Q24. Leading the group, Western Midstream Partners (WES) and Targa Resources (TRGP) raised their quarterly dividends sequentially by 52% to $0.8750 per unit and 50% to $0.75 per share, respectively. These sizeable increases build upon solid growth in 2023, particularly for TRGP (read more). Albeit, these large percentage increases are feasible because both companies cut their payouts in 2020.

Other names raised payouts sequentially by low-to-mid single-digit percentages. Examples include Energy Transfer (ET), Kinder Morgan (KMI), TC Energy (TRP), DT Midstream (DTM), and Hess Midstream (HESM). Sunoco LP (SUN) raised its distribution by 4% following the closing of the NuStar Energy acquisition. Importantly, no constituent of the broad Alerian Midstream Energy Index (AMNA) has cut its dividend since July 2021. That said, Cheniere Energy Partners (CQP) lowered the variable component of its distribution to preserve capital for the Sabine Pass expansion project as discussed on Cheniere’s earnings call.

The pie charts below show quarter-over-quarter changes to dividends for AMNA, the Alerian MLP Index (AMZ), and the Alerian MLP Infrastructure Index (AMZI) by comparing 1Q24 payouts to those made for 4Q23. To be clear, 1Q24 dividends refer to dividends paid in 2Q24 based on operational performance in 1Q24.

On a year-over-year basis, the majority of index constituents in AMNA, AMZ, and AMZI have grown their payouts. The bias towards growth is especially clear when looking at dividend growers by weighting. Nearly 95% of the broad benchmark AMNA by weighting have increased their dividends since 1Q23. For the MLP indexes AMZ and AMZI, 83.0% and 88.2% of the indexes by weighting have grown payouts over the past year, respectively. Larger companies tend to more commonly grow dividends and have higher weightings in these indexes. However, across all three indexes, more constituents have grown payouts year-over-year than maintained.

Midstream/MLPs typically offer generous yields compared to other income investments, with dividend growth adding to the appeal of midstream/MLPs. Even with strong equity performance in recent years, midstream yields remain well above equity income investments such as REITs and Utilities. Even as interest rates rose beginning in 2022, MLPs consistently offered more compelling income (read more). As shown in the chart below, only high-yield bonds provide yields greater than midstream/MLPs.

Several companies have announced multi-year dividend growth targets, providing visibility that supports a constructive outlook (read more). Canadian midstream corporation TRP has a long-term annual growth target of 3%-5%, while Williams Companies (WMB) plans to grow its dividend in line with core business adjusted EBITDA growth. HESM is targeting at least 5% distribution growth through 2026, while ET has an annual growth target for its distribution of 3-5%. Energy infrastructure companies can provide long-term dividend guidance given the predictability of cash flows as they invest in projects that generate stable fees. Companies are also expected to continue generating free cash flow. Stated targets can provide investors with greater confidence in continued dividend increases for midstream/MLPs.

Compelling yields offered by midstream/MLPs in recent years have been complemented by solid dividend growth. Long-term free cash flow generation for the space underpinned by fee-based business models contributes to an overall constructive outlook for continued income growth for investors.

AMZ is the underlying index for the JP Morgan Alerian MLP Index ETN (AMJ), which matures in May 2024, and the JPMCFC Alerian MLP Index ETN (AMJB), which matures in 2044. AMZ is also the underlying index for the ETRACS Quarterly Pay 1.5x Leveraged Alerian MLP Index ETN (MLPR). AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMNA is the underlying index for the ETRACS Alerian Midstream Energy Index ETN (AMNA).

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Midstream Sees Strong Free Cash Flow Generation in 2023

2024 EBITDA Guidance: Midstream/MLPs See Growth

4Q23 Midstream/MLP Dividend Recap: The Growth Continues

Is Your Income Stream Too Dependent on the Fed?

Beyond 2024: Examining Multi-Year Guidance for Midstream

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