Dividend Growth Opportunity in the Energy Sector?
Because of the downturn in oil and gas prices, many energy companies saw huge drops in their share prices. And due to the inverse relationship between stock price and dividend yield, some of these beaten-down energy companies have become the highest-yielding names in today’s stock market.
When there are dozens of companies paying 10% or more, EQT Midstream Partners LP’s (NYSE:EQM) 6.6% dividend yield doesn’t really make it stand out. However, the stock does deserve income investors’ attention for a very simple reason: dividend growth.
Consider this: at the beginning of 2013, EQT Midstream Partners was paying quarterly distributions of $0.35 per unit. Since then, the partnership has raised its payout every quarter. The latest distribution hike came in January 2018, when EQM declared a quarterly cash distribution of $1.025 per unit, representing a five percent increase from the previous payout. So over the last four years, the partnership’s per share quarterly payout has nearly tripled. (Source: “Distribution History,” EQT Midstream Partners LP, last accessed March 5, 2018.)
Just think about that for a second. Many energy stocks were in deep trouble during this period, and dividend cuts were not uncommon. And yet, despite strong commodity price headwinds, EQT Midstream Partners LP managed to consistently increase its cash payments to investors.
These distribution hikes are backed by a rock-solid business. Even though EQM Midstream Partners operates in the energy industry, it has minimal exposure to commodity prices. The partnership was created in 2012 by EQT Corporation (NYSE:EQT) to own, operate, acquire, and develop midstream assets in the Appalachian Basin. Through its gathering and transmission and storage systems, the partnership provides midstream services to EQT Corporation and to third-party customers across 24 counties in Pennsylvania, West Virginia, and Ohio.
The neat thing is, EQT Midstream Partners provides most of its services through contracts with long-term, firm reservation and/or usage fees. In 2017, approximately 91% of the partnership’s total revenue came from firm reservation fees. As of December 31, 2017, EQM’s transmission segment had a weighted average contract life of 15 years, while its gathering segment had a weighted average contract life of eight years. (Source: “Investor Relations Presentation,” EQM Midstream Partners LP, last accessed March 5, 2018.)
With a fee-based business model, the partnership is in a strong position to generate stable cash flows throughout the commodity price cycle.
Indeed, even though oil and gas prices are still far from making a full recovery, EQT Midstream Partners has no problem covering its rising payout. In full year 2017, the partnership generated $614.8 million in distributable cash flow while declaring $460.3 million in total cash distributions. That translated to a distribution coverage ratio of 1.34 times, leaving a sizable margin of safety. (Source: “2017 Results Announced for EQT Midstream Partners and EQT GP Holdings,” EQT Midstream Partners LP, February 15, 2018.)
Ultimately, you can find plenty of higher-yielding stocks in the energy sector. But with consistent quarterly distribution increases from EQT Midstream Partners, investors who purchase EQM stock today will likely collect much higher yield on cost in the years to come.