Summary
- MLPs historically reported distributable cash flow (DCF) — a non-GAAP measure intended to reflect the amount of cash available to be paid to investors or used to fund growth. DCF was compared to distribution payments to calculate distribution coverage.
- For large MLPs and corporations, 2024 distribution coverage was generally between 1.5 and 2.0x, with some corporations above 2.0×.
- Payout ratios, free cash flow after dividends, and strong dividend track records can provide helpful color about the safety of midstream payouts and prospects for continued growth.
When oil prices fall or equity markets become volatile, longtime MLP investors will typically ask about distribution coverage in the space. For years, distribution coverage was used to gauge how well midstream MLPs and corporations could afford their dividends. Over time, some companies have shifted to using more common metrics like free cash flow after dividends or payout ratios. Today’s note explains distribution coverage, examines metrics for 2024, and discusses some of the other measures companies have implemented around dividends.
What is distribution coverage?
Historically, MLPs reported distributable cash flow (DCF) and distribution coverage (DCF/distributions paid). DCF is a non-GAAP measure intended to reflect the amount of cash available to be paid out to investors or to fund growth. Because it is not standardized, companies can calculate DCF in different ways. While methods vary, DCF is typically calculated as shown below.
Higher DCF will result in higher coverage, assuming steady dividends. Higher coverage implies that a company is better able to afford (and potentially grow) its payout. Prepandemic, it was not uncommon for MLPs to have distribution coverage around 1×. Equity self-funding was relatively rare, and this was a period where distribution cuts were more common. To be clear, there has not been a cut to regular dividend for a constituent of the Alerian MLP Infrastructure Index (AMZI) or Alerian Midstream Energy Select Index (AMEI) since July 2021.
How did distribution coverage look in 2024?
A handful of midstream MLPs and corporations report distribution coverage or DCF, which can then be used to calculate coverage. The table below shows 2024 distribution or dividend coverage for relevant names that provide these metrics. For most, distribution coverage falls between 1.5x and 2.0x, with the average for the MLPs shown at ~1.7×.
Keep in mind that several companies are pursuing robust project backlogs related to infrastructure for natural gas or natural gas liquids. Equity self-funding (i.e., not having to issue equity to finance growth projects) goes hand in hand with higher coverage ratios, as companies use retained cash flows (and debt) to fund growth projects.
Cheniere Energy (LNG) stands out for its high coverage. It bears mentioning that the company spent $2.3 billion on equity buybacks last year (read more) and has guided to 10% annual dividend growth through the end of this decade.
Alternatives to DCF and distribution coverage.
DCF is admittedly midstream jargon. As midstream MLPs and corporations have sought to attract generalist investors, some companies have moved away from DCF. In recent months, Kinder Morgan (KMI) has stopped discussing DCF in its press releases, noting declining investor interest in DCF as a performance measure.
Other companies have put greater emphasis on free cash flow after dividends (FCFAD). Hess Midstream (HESM) has guided to 2025 FCFAD of ~$135 million. Antero Midstream (AM) highlighted 11 straight quarters of positive FCFAD on its earnings call last week. This provides a helpful indication of the cushion companies have when it comes to affording their payouts and capital budgets.
Some midstream companies include target payout ratios or dividend coverage in their capital allocation plans. For example, ONEOK (OKE) targets 3%-4% annual dividend growth and a dividend payout ratio of 85% or less. Enbridge (ENB CN) plans to maintain a payout range of 60%-70% of DCF. Meanwhile, DT Midstream (DTM) targets dividend coverage above 2.0×.
When talking about confidence in dividends, it also bears mentioning that some midstream names have very impressive track records for growth. EPD boasts 26 consecutive years of distribution growth. ENB recently marked 30 years of consecutive dividend increases, and TC Energy (TRP CN) has grown its dividend for 25 straight years.
Why does distribution coverage matter?
Distribution coverage and related metrics provide helpful context to midstream dividends, particularly when yields are elevated. With recent performance weakness, AMZI was yielding 7.6% as of April 30, which is above its three-year average of 7.4%.
We expect most midstream names to continue to grow their payouts. Historically, dividend growth has been a key performance driver for this space, particularly for MLPs (read more). In short, when distributions are growing, MLP equities tend to perform well. Distribution coverage and related metrics can help investors feel more confident in continued dividend growth or at least stable payouts.
Stay tuned for our upcoming note recapping 1Q25 dividend announcements. Once again, there was a strong bias toward dividend growth. For more on midstream, please join our upcoming 30-minute webcast on May 20 at 12:30 p.m. ET, “The State of Midstream/MLPs in Volatile Markets.” Register here.
AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR) and the Alerian Energy Infrastructure Portfolio (ALEFX).
Related research:
Examining Improved MLP Distribution Coverage (April 2023)
Charting Annual MLP Distribution Changes & Performance
Midstream/MLP 4Q Buybacks Add to Robust 2024
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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