Antero Midstream Partners (NYSE: AM) is one of the fastest growing master limited partnerships (MLPs) around. Last year, the company grew its payout 30%, and it has more than doubled the distribution since coming public in 2014. But it still has plenty of growth left in the tank.
That's evident by Antero Midstream's recent guidance. The MLP reaffirmed its belief that it can grow the payout another 28% to 30% this year, and by that same clip through 2020. Furthermore, the company now believes it can increase its payout another 20% in both 2021 and 2022. That growth rate suggests that investors who buy today aren't locking in a 4.6% yield but one that's on pace to reach an astounding 12.9% by 2022. That fast-growing payout makes Antero Midstream a top dividend growth stock to consider buying for the long haul.
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Drilling down into what's fueling this growth
Driving this forecast is the expectation that the company will invest $2.7 billion in high-return expansion projects over the next five years to support its fast-growing parent Antero Resources (NYSE: AR). It will spend the bulk of this money building pipelines and related facilities to move the rising production from Antero's newly drilled wells to the country's pipeline system. In addition, the company plans to invest about $800 million into a joint venture with fellow MLP MPLX (NYSE: MPLX). That partnership will continue building and operating facilities that help process natural gas by extracting and separating the natural gas liquids (NGLs), which then get shipped out to market centers on NGL pipelines.
Antero Midstream Partners can time these investments to match its parent's production, which should supply it with a steadily growing cash flow stream. Furthermore, it can pay for them with a balance of internally generated cash flow and debt, which insulates it from having to sell additional equity to finance growth. In fact, its growth forecast requires no acquisitions or other outside assistance, which enhances visibility. That's a significant distinction, because organic expansions generate much higher cash flow per investment dollar than acquisitions. In fact, Antero Midstream can build projects at 3 to 6 times EBITDA multiples, while drop-downs and other acquisitions often cost 8 to more than 12 times EBITDA. That means Antero is generating about double the cash flow on its investment dollars, which is why it can grow its distribution at such a high rate.
In addition to the $2.7 billion of expansion capital Antero Midstream expects to spend over the next five years to support its parent, the company has identified more than $1 billion of investment opportunities further downstream. These include regional gathering pipelines as well as long-haul pipelines. If it moves forward with these investments, it could grow at an even faster rate.
Numbers dividend lovers will love
One noteworthy aspect of Antero Midstream's dividend growth forecast is that it expects to achieve that fast-past growth while maintaining top-tier financial metrics. For example, the company covered its payout with cash flow by 1.4 times last year and anticipates coverage to be between 1.25 and 1.35 in 2018. It also expects to maintain at least 1.25 coverage through 2020, and a still-comfortable 1.1-plus coverage ratio in 2022.
Leverage, likewise, should remain conservative, with the company planning to keep it between 2.0 to 2.5 times debt to EBITDA over the long term. That's well below the 4.0 comfort level of most other MLPs. In fact, the company noted that this gives it the ability to flex up to a 3.0 ratio on a short-term basis to complete an accretive transaction, such as sanctioning one of its downstream opportunities.
The fuel for market-crushing returns
Antero Midstream is just starting to hit its stride and is on pace to grow its already attractive 4.6%-yielding payout by an impressive 20%-plus rate for the next five years. That top-tier growth rate will not only supply investors with a growing stream of cash flow but should also significantly increase the company's value in the coming years. That income with upside sets the company up to deliver total returns that should beat the market with ease.
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