is mplx dividend safe?

So, with MPLX (MPLX 0.14%) currently yielding 9.8%, it begs the question of whether the master limited partnership (MLP) can continue supporting its dividend. Here's a closer look at the energy company's ability to maintain that big-time yield.

Companies need to produce more than enough free cash flow to cover their dividend. That hasn't been a problem for MPLX. The company generated $1.14 billion of distributable cash flow during the first quarter of 2021. That was enough money to cover its payout by 1.56 times. This level marked an improvement from the prior-year period when MPLX produced $1.08 billion of distributable cash flow, covering its payout by 1.44 times.

Another important factor in dividend stability is having a strong balance sheet. Again, MPLX checks this box. Its leverage ratio has also improved over the past year. Consolidated debt-to-adjusted EBITDA stood at 3.9 at the end of the fourth quarter, down from 4.1 during the year-ago period. That's due to earnings growth over the past year and enabled the MLP to maintain an investment-grade balance sheet.

MPLX's combination of excess cash and balance sheet strength gives it a lot of financial flexibility. The MLP has been able to continue investing in its expansion projects while keeping leverage flat. That has allowed it to return additional cash to shareholders through a unit repurchase program. During the first quarter, MPLX returned more than $900 million in cash to investors via the distribution and $155 million in repurchases.

The company expects to generate even more excess cash in the future as it completes its current slate of expansion projects. It has three major pipelines under construction, each of which it expects to finish by year-end. It's on track to produce free cash after funding its capital program and distribution this year.

As those factors indicate, MPLX has the financial means to maintain its payout. However, with a dividend yield near 10%, investors still seem to have concerns about its long-term sustainability.

The biggest factor that appears to be playing a role here is its relationship with refining giant Marathon Petroleum (MPC 0.47%), which owns a majority stake in the company. Large energy companies like Marathon formed MLPs several years ago to grow their infrastructure businesses. However, investors have soured on MLPs in recent years because of lackluster performance. Several energy companies have taken their affiliated MLPs private in response. Meanwhile, those that remain are considering making a similar move. For example, refining giant Phillips 66 (PSX 1.29%) has reportedly explored the possibility of taking its MLP, Phillips 66 Partners (PSXP), private.

Marathon explored its strategic options for MPLX in the past, including completely separating it or buying the rest of the units it didn't own. It ultimately concluded that maintaining the status quo was the best path forward. However, renewed speculation that Marathon might buy out its MLP reemerged late last year.

This uncertain future seems to be weighing on MPLX's unit price, pushing up its yield. If Marathon acquires its MLP, investors will likely receive shares of the refining company in exchange. As a result, they'd see a reduction in their income, given the company's lower dividend yield of 4.3%.

MPLX generates plenty of stable cash flow to support its high-yielding dividend. On top of that, it has a solid balance sheet, giving it plenty of financial flexibility. With its current expansion program wrapping up later this year, the dividend looks to be in great shape.

High-yield blue-chip investing is one of the best ways to retire rich and stay rich in retirement.

The key is to focus on safety and quality first, and prudent valuation and sound risk-management always.

Ycharts

In 2022, high-yield blue-chips are doing magnificently, basically flat while the market is down 14% and tech is down almost 2X that.

But, of course, it's always a market of stocks, not a stock market and energy is the hottest sector on Wall Street, thanks to soaring oil prices and gas prices hitting their highest levels in history (not adjusted for inflation).

Today, I wanted to reiterate my bullish long-term call on MPLX (NYSE:MPLX) a blue-chip quality midstream MLP that's up 17% YTD.

I'm not here to take a victory lap or to tell you that MPLX is set to soar and too cheap to ignore.

FAST Graphs, FactSet Research FAST Graphs, FactSet Research

MPLX has almost quadrupled off the Pandemic lows when it achieved a 61% discount to historical fair value and a safe yield of 25%.

Was that the buying opportunity of a lifetime for high-yield blue-chip investors?

Almost certainly.

But just because MPLX has delivered Buffett-like returns over the last two years, and is on fire during this bear market, doesn't mean it's too late to buy one of the best ultra-high-yield rich retirement dream stocks on Wall Street.

In fact, there are four reasons why MPLX is one of the safest 8.5% yields on Wall Street and a true rich retirement dream stock.

So let's take a look at why you might still want to add MPLX to your diversified and prudently risk-managed portfolio today.

Bottom line upfront.

FAST Graphs, FactSet FAST Graphs, FactSet

MPLX is basically trading near fair value, so that means the easy money has been made.

Now there is absolutely no reason to buy it other than a very safe and steadily growing 8.6% yield and 11.6% long-term return potential.

FAST Graphs, FactSet FAST Graphs, FactSet

MPLX at fair value means modest long-term returns, almost all generated from tax-deferred distributions.

But 66% 5-year total return potential is still about 50% more than what analysts expect from the S&P 500.

(Sources: Morningstar, FactSet, Ycharts)

(Source: Portfolio Visualizer Premium) (Source: Portfolio Visualizer Premium)

Despite the worst bear market in industry history, MPLX has actually delivered nearly double-digit returns even with an 80% peak decline.

What inflation-adjusted returns do analysts expect in the future?

(Source: DK Research Terminal, FactSet)

Over the next 30 years, analysts think MPLX could deliver 13X inflation-adjusted returns or about 1.5X that of the S&P 500.

(Source: DK Research Terminal, FactSet)

For anyone comfortable with its risk profile, MPLX represents a potentially reasonable and prudent above-market-average high-yield opportunity.

There are many ways to measure safety and quality and I factor in pretty much all of them.

The Dividend Kings' overall quality scores are based on a 253-point model that includes:

In fact, it includes over 1,000 fundamental metrics including the 12 rating agencies we use to assess fundamental risk.

How do we know that our safety and quality model works well?

During the two worst recessions in 75 years, our safety model 87% of blue-chip dividend cuts, the ultimate baptism by fire for any dividend safety model.

How does MPLX score on our comprehensive safety and quality models?

MPLX Distribution Safety

Long-Term Dependability

Overall Quality

MPLX was founded in 2012 by Marathon Petroleum (MPC), America's largest independent refiner.

(Source: 10-K)

MPLX was originally designed as a traditional MLP.

In 2015 MPLX bought MarkWest, the largest gas gathering and processor in the Marcellus and Utica shale (America's natural gas capitals).

(Source: FactSet Research Terminal)

Today 54% of revenue comes from logistics and storage (the refining transportation assets formerly owned by MPC).

The other 46% is from gas gathering in the Marcellus and Utica.

In November 2017 MPLX completed a mega-deal that bought out the remainder of MPC's refinery transport capacity as well as its IDRs.

In 2018 MPC completed a $23.3 billion acquisition of Andeavor, a rival refining company, becoming the largest independent refiner in the US.

MPLX acquired Andeavor Logistics, gaining the refined product pipeline capacity Andeavor owned.

(Source: 10-K)

This gave MPLX a continent-spanning and diversified asset base with access to the most important shale formations in the country.

MPLX has been building itself into a mini EPD, focusing on natural gas liquids as a key potential export market that could provide significant growth opportunities for decades.

(Source: Earnings presentation)

In the future management is targeting renewable natural gas, hydrogen, and CO2 sequestration as part of its shift to a green energy future.

In the meantime, MPLX is focused on

How does MPLX plan on keeping the 8.6% yield safe?

The difference between FCF and DCF is that FCF is what's left over after running the business and investing in future growth as well as maintenance.

(Source: Earnings presentation)

The balance sheet has also been getting stronger, with debt/adjusted EBITDA of 3.7 compared to 5.0 or less safe according to rating agencies.

Ben Graham recommended using both a quantitative and qualitative approach to analyzing companies, looking at the past, present, and likely future.

And that's why all of my deep articles include a quantitative section, backing up the thesis with math.

(Source: S&P, Moody's)

Rating agencies estimate a 7.5% fundamental risk in buying MPLX today.

(Source: FactSet Research Terminal)

MPLX's strong balance sheet is expected to keep getting stronger, and it could soon get upgraded to BBB+ or even A- within a few years.

(Source: FactSet Research Terminal)

MPLX's debt is shrinking by 3% per year while cash flow grows modestly at the same rate.

(Source: FactSet Research Terminal)

(Source: FactSet Research Terminal)

(Source: FactSet Research Terminal)

Credit default swaps are insurance against bond defaults, and thus represent a real-time bond market estimate of a company's short and medium-term bankruptcy risk.

MPLX CDS indicates steady fundamental risk in recent months, consistent with its BBB credit ratings.

The bond market is basically agreeing with rating agencies and analysts that MPLX's investment thesis remains intact.

GF Score takes five key aspects into consideration. They are:

(Source: Gurufocus Premium)

MPLX's very strong 81/100 GF score confirms its strong fundamentals as well as a reasonable valuation.

(Source: Gurufocus Premium)

MPLX's profitability is historically within the top 20% of its peers.

(Source: Gurufocus Premium)

Profitability in the last year has been in the top 22% of its peers.

MPLX's profitability is relatively stable since its IPO.

Ycharts

MPLX's FCF margins have soared to 46% as it cuts back on growth spending.

(Source: FactSet Research Terminal)

MPLX's profitability is expected to keep improving over time.

This is confirmation of the narrow and stable moat and high quality of this MLP.

Midstream isn't a high-growth industry but a slow-growing utility-like business.

(Source: FAST Graphs, FactSet)

Here's what analysts expect from MPLX over the medium-term.

(Source: FactSet Research Terminal)

Modest negative sales growth is expected but the bottom line is expected to grow at a modest pace.

(Source: FactSet Research Terminal)

Rating agencies consider an 83% DCF payout ratio safe for this industry and MPLX's FCF payout ratio is expected to average 71%.

After distributions, it's expected to retain almost $4 billion in free cash flow over the next five years, enough to pay off 19% of its debt or potentially buy back up to 11% of shares at current valuations.

(Source: FactSet Research Terminal)

Over the next five years, analysts expect $640 million in annual buybacks totaling $3.2 billion, enough to retire almost 10% of units at current valuations.

Ycharts

MPLX began buying back stock after the pandemic crisis had passed and has one of the most aggressive repurchase programs in the industry.

(Source: FactSet Research Terminal)

If MPLX buys back stock as analysts expect, it could reduce the unit count by 44% over the next 30 years.

(Source: FactSet Research Terminal)

How accurate are analysts at forecasting MPLX's growth over time?

FAST Graphs, FactSet

FAST Graphs, FactSet

MPLX has never missed the 2-year growth consensus since its IPO.

Normalizing for margins of error of 5% to the downside and 20% to the upside creates a 3% to 5% CAGR historical margin of error adjusted growth consensus range

FAST Graphs, FactSet

FAST Graphs, FactSet FAST Graphs, FactSet

Over the past 11 years, MPLX has grown between -4% and 11%.

Growth will be slower now that the drop-down era of buying big assets from MPC is over.

(Source: FAST Graphs, FactSet)

During the midstream bear market income investors have consistently paid between 7 and 8X cash flow for MPLX.

I conservatively estimate that MPLX is worth about 7.3X cash flow and today it trades at 7.1X.

Morningstar's DCF model estimates MPLX is worth about 6.5X cash flow, a tad low by historical norms.

Analysts expect it to reach almost 8X cash flow within a year, the upper end of historical fair value, delivering 23% total returns within 12-months.

I don't make recommendations based on 12-month forecasts but based on whether the margin of safety sufficiently compensates you for the risk profile.

For anyone comfortable with the risk profile and K-1 tax form, MPLX is a potentially reasonable buy.

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

How long it takes for a company's investment thesis to break depends on the quality of the company.

These are my personal rule of thumb for when to sell a stock if the investment thesis has broken.

MPLX is highly unlikely to suffer such catastrophic declines in fundamentals.

You can read MPLX's entire 25-page risk section in its 2021 annual report.

(Source: 2021 annual report) (Source: 2021 annual report) (Source: 2021 annual report) (Source: 2021 annual report)

All businesses are complex, including midstream.

In March of 2020, MPC completed a strategic review of MPLX and all its midstream assets.

Marathon Petroleum Corp. Board Concludes Review of Midstream Business

MPC decided to not acquire MPLX because at the time it would have increased its debt/EBITDA and potentially resulted in a loss of its BBB credit rating

If MPC decides to acquire MPLX in the future it would likely be:

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

(Sources: Morningstar, FactSet, Reuters)

MPLX's Long-Term Risk Management Is The 307th Best In The Master List (39th Percentile)

(Source: DK Research Terminal)

MPLX's risk-management consensus is in the bottom 31% of the world's highest quality companies and similar to that of such other blue-chips as

The bottom line is that all companies have risks, and MPLX is average, bordering on above-average at managing theirs.

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

No one can predict what the economy, stock market, interest rates, or energy prices will do.

Fortunately for smart income investors, we don't have to.

Here's what I can tell you about MPLX with 80% confidence.

MPLX's utility-like business model has been battle-tested not just in the worst recession in 75 years, but through two major oil crashes.

Its balance sheet has gotten steadily safer and is potentially on its way to an A-credit rating by 2025.

The 8.5% yield is now protected by not just a self-funding business model but an FCF self-funding business model, the platinum standard of safety in the industry.

With $600 million in post-distribution retained free cash flow this year alone, management has all the firepower it needs not just to execute on its growth projects, but also to buy back stock at 2% per year, one of the most aggressive in the industry.

While the easy money has been made in MPLX already, from its current fairly valued price, it still represents one of the best ultra-yielding blue-chip opportunities in the world.