Examining MLP/Midstream Dividend and Buyback Yields

• Buybacks have become common among energy infrastructure companies given significant free cash flow generation.
• Buybacks complement dividends and enhance overall shareholder yield.
• Shareholder yields for the Alerian MLP Infrastructure Index (AMZI) and Alerian Midstream Energy Select Index (AMEI) have been around 8% and 7%, respectively, in recent years based on dividend and buyback yields.

Dividend yields have long been in focus for energy infrastructure companies as stable cash flows from fee-based businesses have supported generous payouts. In recent years, buybacks have become another important avenue for shareholder returns as companies generate significant free cash flow. Today’s note looks at total shareholder yield at the index level, incorporating dividend and buyback yields.

Buyback authorizations became more prominent for midstream MLPs and corporations starting in 2H20 and 2021. This was when companies began to generate meaningful free cash flow as growth capital moderated from peak levels in 2019. Lower spending also reflected a greater emphasis on capital discipline and more manageable production growth in the US (read more).

Buybacks have become an important component of total shareholder yield for MLPs/midstream in recent years. The chart below shows trailing 12-month dividend yields and buyback yields for the Alerian MLP Infrastructure Index (AMZI) and the Alerian Midstream Energy Select Index (AMEI), which is 75% US and Canadian corporations and 25% MLPs. Total shareholder yields for AMZI and AMEI have been around 8% and 7%, respectively, in recent years. Note that buyback yields were not adjusted for equity issuances for acquisitions or other purposes. Companies with buyback authorizations account for 70.6% of AMZI and 73.3% of AMEI by weighting as of May 8, 2024.

Digging into underlying trends, MLPs were more active with buybacks initially. Former MLP Magellan Midstream Partners, MPLX (MPLX), Enterprise Products Partners (EPD), and Western Midstream (WES) combined for almost $1.6 billion in buybacks in 2021 and $1.7 billion in 2022. Corporations saw large repurchases in 2022 and 2023 driven mostly by Cheniere Energy’s (LNG) ~$1.5 billion in repurchases each year. Aggregate buybacks for MLPs and corporations were the greatest in 2022 at approximately $4.5 billion (read more).

While buybacks help enhance total shareholder returns, dividends continue to be the primary means for midstream companies to return cash to shareholders. AMZI and AMEI had indicative dividend yields of 7.3% and 5.9%, respectively, as of May 8. Companies typically have strong commitments to maintaining and growing their dividends. In contrast, buybacks tend to be more opportunistic and can vary with stock performance and valuations.

Fueled by excess cash flows, dividend growth has been a key priority for midstream companies, with some names providing multi-year targets (read more). As we will discuss next week, most of AMZI and AMEI by weighting have grown their payouts over the last year. Growth from select names has been particularly healthy, with Targa Resources’ (TRGP) 50% dividend hike and Western Midstream’s (WES) 52% increase providing eye-catching recent examples. (For context, both TRGP and WES had cut their payouts in 2020 and are growing off a lowered base. Both have also been active with buybacks in recent years.)

Buybacks have complemented dividends to drive attractive total shareholder yields for MLPs/midstream. Dividend growth is expected to remain a priority for most energy infrastructure companies, while buybacks will continue to be more opportunistic for most names.

Midstream Sees Strong Free Cash Flow Generation in 2023

4Q23 Midstream/MLP Dividend Recap: The Growth Continues

4Q23 Caps Solid Year for Midstream/MLP Buybacks

4Q22 Caps a Strong Year for Midstream/MLP Buybacks

Beyond 2024: Examining Multi-Year Guidance for Midstream

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).

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