This High-Yield Stock Just Added More Fuel to Its Dividend Growth Plan
Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B) and its MLP Shell Midstream Partners (NYSE: SHLX) both pay high-yielding dividends. However, as attractive as Shell's 5.8% payout might be, Shell Midstream's distribution is even better. Not only does the MLP offer a higher yield at 7.8%, but it also expects to grow its payout at a faster pace given its target of increasing it at a mid-teen rate this year.
That high-octane growth rate could stretch even further into the future. The midstream company recently added more fuel to its distribution growth engine by securing another needle-moving acquisition from Shell. That makes Shell Midstream Partners an increasingly attractive option for investors seeking both a high yield and high growth.
Details on the latest deal
Shell Midstream recently agreed to acquire additional interests in two pipeline systems from Shell for $800 million. The company will purchase a 25.97% interest in the Explorer Pipeline Company, boosting its stake in that system to 38.59%. The MLP will also buy a 10.125% interest in the Colonial Pipeline Company, which will increase its stake to 16.125%. Those two systems have the capacity to transport about 3 million barrels of refined petroleum products per day from refineries in the Gulf Coast region to market centers along the East Coast and in the Midwest.
The deal does three things for Shell Midstream Partners. First, it provides further diversification by enhancing its onshore presence as well as its exposure to the more stable refined-products market. Second, the deal boosts its stake in two assets that have growing cash flows from contractual rate increases. Third, the transaction will provide the company with incremental income to support the continued growth of its high-yielding dividend.
Keeping the growth engine well fueled
Shell Midstream Partners already had plenty of resources to achieve this year's distribution growth plan. That's because the company completed a $1.22 billion deal with Shell last May that not only provided it with an immediate income boost but also near-term growth. Driving the growth is the expectation that oil volumes on the acquired system will increase from 300,000 barrels per day (BPD) at the time of the deal up to 400,000 BPD by the end of this year as new offshore oil projects come on line. That will provide Shell Midstream with steadily rising income to support continued distribution growth in 2019.
On top of that, the company currently covers its high-yielding distribution with cash flow by a comfortable 1.2 times. That leaves it with plenty of wiggle room to support a higher payout. Meanwhile, with the incremental income from its latest deal, Shell Midstream should have the resources to continue growing its payout at a mid-teens rate for several more quarters.
The company has plenty of flexibility to continue growing. One factor driving that view is the financing it arranged with Shell to pay for its latest deal. Instead of using up the $226 million of cash it had on hand, Shell Midstream paid 25% of the price by issuing more of its units to Shell and funded the other 75% of the cost via a credit facility with its parent. That wasn't the first time Shell provided its MLP with the financing to support its growth plans. Earlier this year, Shell gave Shell Midstream $50 million of support by reducing its management fees so that its MLP had some extra cash to fund growth. Because of that, it still has plenty of financial flexibility to make additional acquisitions from either Shell or third parties.
And the company should continue to benefit from the embedded organic growth of its legacy oil and gas pipeline infrastructure in the Gulf of Mexico. Not only does Shell have new oil projects coming on line in the region, but so do several third-party producers. As that happens, it should drive volume growth on several of the MLP's systems in the area, which will provide some incremental cash flow.
More growth ahead
Shell Midstream continues to work with its parent to make deals that move the needle. Its latest one is a perfect example: It not only provides further support for this year's mid-teens growth rate but also gives it a head start on next year's increase. And Shell's support should enable its MLP to continue growing its distribution at an above-average rate for the next few years. That makes it an option that income-seeking investors won't want to overlook.
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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.