Markets

This Ultra-High-Yield Stock Is Shifting Gears to Keep Its Dividend Secure

MPLX (NYSE: MPLX) pays an eye-popping dividend that currently yields 11.7%. Usually when a payout gets that high, it's a sign of trouble. However, one thing the MLP made clear on its third-quarter conference call is that it's taking every precaution to ensure that its payout remains on solid ground. That includes shifting its growth strategy so that it doesn't overextend itself, which was one of the key takeaways on that call.

Focusing on the best opportunities

MPLX's CEO Mike Hennigan started the company's third-quarter call by noting that the company generated $1 billion of distributable cash flow during the quarter, which "provided strong distribution coverage of 1.4 times." He also pointed out that MPLX's leverage ratio was four times debt-to-EBITDA, which is a solid level for an MLP. Given those numbers, not only does the payout appear to be on solid ground, but the company also has lots of financial flexibility to continue investing in expansion projects.

A jar of coins with the word dividends written on the front.

Image source: Getty Images.

However, it's still being careful not to overextend itself by trying to do too many things. That's why Hennigan noted that the company "high graded our growth capex [capital expenditures] portfolio" to focus on projects with "the most attractive returns." As a result, MPLX plans to invest only about $2 billion next year, which is $600 million less than it expected to spend, with most of that reduction coming from its more volatile gathering and processing segment.

In making this move, Hennigan stated: "We believe we have selected the highest-return projects available to us which will best position us to deliver long-term value to our unitholders." One noteworthy aspect of those projects is that most are in its logistics and storage segment. Aside from generating higher returns, these projects typically produce more predictable cash flow. That's because most of the projects it's investing in are long-haul pipelines backed by long-term, fee-based contracts with minimum volume commitments. As such, they should enhance the long-term sustainability of MPLX's distribution to investors.

Balancing everything that matters

Later on during the call, CFO Pam Beall shared the company's current thoughts on how it returns cash to investors. She stated that:

So return of capital has been a very big part for midstream companies. And I think it will continue to be a very big part of the thesis. We have been returning $0.01 a quarter of distribution growth this year. We haven't provided a guidance for next year. But we continue to believe that's going to be a very important part of the value proposition for investors going forward. And as Mike highlighted with our focus on high-grading the portfolio, shrinking the amount of capital we're investing in the business, our focus is on generating free cash so that we can fund a greater portion of our investments in the business with cash we generate from operations. And obviously we have to balance that with keeping the appropriate leverage -- maintaining an investment-grade credit profile is of paramount importance to us. So it's really balancing those things, but our focus is going to be on strengthening our financial flexibility. Returning capital to shareholders is an important part of that prospect.

Beall makes two key points. First, she notes that MPLX, like its peers, prides itself on being able to return cash to investors. In MPLX's case, it has grown the amount of money it sends to its investors in each of the last 27 consecutive quarters, with the company currently boosting its payout at a rate of $0.01 per unit each quarter, or by about 6% over the past year. While MPLX hasn't affirmed it would continue increasing its distribution next year, it firmly believes that returning cash to investors is important.

The other point Beall makes is that the company wants to ensure the long-term sustainability of its business by balancing its payout with growth while also maintaining a strong balance sheet. By focusing on its best growth projects in the coming year, the company can do an even better job of maintaining that balance. That should enhance the long-term sustainability of the company's payout.

Lifting the weight

One of the things weighing on MPLX over the past year is whether it would be able to maintain its high-yielding payout even as it continues funding expansion projects. The company addressed those concerns by shifting its investment strategy to focus on its best opportunities, most of which happen to be in its steadier logistics and supply segment. Because of that, the company should have no problem maintaining its high-yield payout and likely will be able to continue increasing it each quarter. That's why it's a top stock for income-seekers to consider buying these days.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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