2020 Vision: What’s the Outlook for Midstream/MLP Divid

Summary

Some of the largest US and Canadian midstream companies are guiding to robust annual dividend growth in 2020.
The midstream space can be divided almost equally into three groups – those with solid 2020 guidance, those with no guidance but a trend of growing, and those that have had steady payouts for some time.
Overall, it is encouraging to see many midstream names growing their dividends sequentially, and companies that have cut in the past resume growth.

With many investors using energy infrastructure in income portfolios, the outlook for dividends (or distributions for MLPs) comes up in almost every investor conversation. For quite some time, we have characterized MLP distribution growth as moderating from the old days of 6-8% growth. This cautious tone related to a number of factors, including distribution cuts in recent years, backdoor cuts related to consolidation transactions, the shift to equity self-funding, and the sentiment that the market is not properly rewarding distribution growth. So much focus has been on MLP distributions that C-Corp dividends have been somewhat neglected. To better frame the outlook for dividends across midstream (MLPs and C-Corps), today’s piece analyzes forward guidance for annual dividend growth and recent trends for those names not providing guidance.

Several midstream companies are guiding to solid 2020 dividend growth.
With 4Q19 earnings season just getting under way, only a handful of midstream companies have provided expectations for 2020 dividends, as shown below. Annual dividends correspond with performance during the company’s fiscal year – not when the dividends are paid. For example, 4Q19 dividends refer to the dividends that will be paid in 1Q20 as a result of operational performance in 4Q19 (companies have recently been announcing 4Q19 dividends). We evaluate annual growth using actual distributions for 2018 and 2019 and company guidance for 2020. The midpoint was used when a range was provided, and the minimum was used when a company guided to growth of at least some percentage.

Perhaps unsurprisingly, those names with formal guidance are anticipating significant dividend growth. Out of the nine companies listed in the table, four companies expect to grow their payouts by 10% or more in 2020. All nine companies are guiding to growth of 5% or more. Excluded from the table are two companies that plan to maintain a flat distribution for the year. Equitrans Midstream (ETRN) and EQM Midstream Partners (EQM) expect to maintain their quarterly dividends of $0.45/share and $1.16/unit, respectively, at least through the in-service date of the Mountain Valley Pipeline, which is projected to come online in late 2020. EnLink Midstream (ENLC) announced a 33.7% distribution cut for 4Q19 and expects to maintain its distribution through 2020.

Some of the largest US and Canadian midstream companies are guiding to robust annual dividend growth in 2020. After growing its dividend by 25% in 2019, Kinder Morgan (KMI) is planning another 25% increase in 2020, which would bring its dividend up to $1.25 per share on an annualized basis. The outsized dividend growth marks a recovery from KMI’s 2015 dividend cut. In 1Q19, Plains All American (PAA) announced a 20% distribution increase in conjunction with the conclusion of its deleveraging plan after cutting its distribution twice in the past. PAA is targeting approximately 5% annual distribution growth going forward. Turning to Canada, TC Energy (TRP) has reaffirmed expected dividend growth of 8-10% for each calendar year through 2021 and 5-7% growth thereafter, which is consistent with its historical long-term average. Similarly, at its Investor Conference in December, Enbridge (ENB) guided to 9.8% dividend growth in 2020.

Growing dividends without guidance.
Many midstream companies have not provided guidance for 2020 dividend growth but raised their payout with their latest dividend announcement. For these companies, the table below compares their 4Q19 dividend with 4Q18 to give an indication of growth levels. Notably, the two names with double-digit percentage growth – BP Midstream (BPMP) and Shell Midstream (SHLX) – are MLPs with incentive distribution rights in their structure. Most names achieved more modest year-over-year growth in the mid-to-low single digits. Notably, Crestwood Equity Partners (CEQP) increased its 4Q19 distribution by 4.2% sequentially after keeping its distribution flat at $0.60/unit following a cut in April 2016. Separately, Pembina Pipeline (PPL), which pays monthly, raised its dividend 5% with its declaration in December 2019.

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Many names have held dividends constant for several quarters running.
Finally, there are companies that have not given guidance but have paid the same dividend for more than four quarters. Of course, past performance is not indicative of future results, but the consistency of distributions bears noting, with a handful of companies having paid the same amount for years.

Bottom Line
The midstream space can be divided almost equally into three groups – those with solid 2020 guidance, those with no guidance but a trend of growing, and those that have had steady payouts for some time. Of course, a few names break the mold due to a recent cut (ENLC) or guidance to maintain the dividend (EQM, ETRN). Overall, it is encouraging to see many names growing their dividends sequentially, and companies that have cut in the past resume growth. Additionally, with midstream companies approaching a free cash flow inflection point, particularly in 2021, it’s possible that excess cash flow will drive further dividend growth.

2020 Vision: What’s the Outlook for Midstream/MLP Dividends This Year?

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