Image source: TransCanada Corporation.
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The top pipeline stocks have two things in common: Solid dividend coverage ratios and robust growth opportunities. This one-two punch ensures that their payouts will continue flowing and growing over the long-term. While several pipeline stocks fit these criteria,Enterprise Products Partners , TransCanada , Kinder Morgan , Phillips 66 Partners , and MPLX have the best combination of coverage strength and growth potential:
Data source: Company presentations and press releases.
The most reliable pipeline stock
If I could use just one word to describe pipeline and processing MLP Enterprise Products Partners, it would be consistency. After increasing its quarterly distribution in early July, it marked the 48th consecutive quarterly increase and the 57th time Enterprise increased the payout since going public. The company has already promised two more distribution increases in 2016 and will likely have more in the years to come.
Fueling future growth is the $6.5 billion backlog of projects that are currently under construction. These include gas processing plants in the Permian Basin, an oil pipeline in Texas, and a propane facility along the Gulf Coast, which are all backed by long-term fee-based contracts. While this current slate of projects should fuel Enterprise's abilityto grow its payout through 2018, it has the balance sheet strength to build or buy additional assets to keep its payout-boosting streak alive for years to come.
An enormous pipeline of growth projects
While Enterprise tends to focus on mid-sized projects, TransCanada and Kinder Morgan focus on gargantuan needle-moving projects. As such, both companies have an enormous backlog that should drive substantial long-term cash flow growth.
Natural gas pipeline kingpin Kinder Morgan's backlog currently consists of $14.1 billion of projects, including the proposed $5.4 billion expansion of its Trans Mountain pipeline in Canada. Because of this backlog, Kinder Morgan expected to deliver 10% annual dividend growth through 2020 before the oil market downturn changed its plan. However, it had to cut its dividend to fund that growth internally after the market grew concerned about its credit rating. That said, with its credit fears abating,Kinder Morgan's dividend has the potential to rocket higher, especially as it completes its massive pipeline of projects.
Canadian oil pipeline giant TransCanada has an even larger project backlog. It boasts an industry-leading $24 billion of near-term growth projects that it believes will underpin its ability to grow its payout by as much as 10% per year through 2020. Further, it has a total of $45 billion of longer-term projects, including the monster $15.7 Energy East pipeline in Canada. Suffice it to say; TransCanada appears poised to grow its dividend for at least the next decade.
Image source: Kinder Morgan.
These pipeline stocks are getting a big boost from their parents
While mid-sized MLPs MPLX and Phillips 66 Partners both have strong organic growth pipelines, they aren't critical growth drivers for these pipeline stocks. Instead, their growth is driven by drop-down transactions from their parent companies.
In MPLX's case, its parent company, refiner Marathon Petroleum , plans to drop down $12 billion to $15 billion in MLP-type assets over the next few years. These assets include 5,400 miles of pipelines as well as several storage terminals, railcars, and marine assets. In addition to that, Marathon estimates that MPLX can invest between $6 billion and $9 billion in synergistic capital in support of its refineries. These two investment paths are expected to drive double-digit distribution growth over the next few years.
Phillips 66 Partners' parent company, Phillips 66 , is also a refiner that has a boatload of assets to drop down to its MLP. These assets include those it currently operates as well as pipelines, terminals, and processing assets it has under construction. By 2018, Phillips 66 believes it can sell upwards of $10 billion in assets to its MLP, which should fuel robust 30% compound annual distribution growth for investors.
While their strategies are quite different, all five of these pipeline stocks have visible growth opportunities on the horizon. What investors need to decide is if they prefer the consistency of a company like Enterprise Products Partners, the megaproject-driven organic growth of TransCanada or Kinder Morgan, or the drop down fueledgrowth of MLPX or Phillips 66. In any case, all have what it takes to deliver robust returns over the long-term.
The article 5 Top Pipeline Stocks to Buy in 2016 originally appeared on Fool.com.
Matt DiLallo owns shares of Enterprise Products Partners, Kinder Morgan, and Phillips 66 and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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