Better Dividend Stock: MPLX vs. Energy Transfer


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Master limited partnerships (MLPs) can make great income-generating investments. These pass-through entities distribute a meaningful percentage of their cash flows to investors. Because of that, they typically offer higher dividend yields.

Two top MLPs are Energy Transfer (NYSE: ET) and MPLX (NYSE: MPLX). Here’s a look at the better one to buy for income right now (for those comfortable with receiving the Schedule K-1 Federal Tax Form these entities send their investors each year).

The main draw of MLPs is their lucrative income streams. Energy Transfer currently yields nearly 7%, while MPLX is over 8%. Both payouts are on a solid foundation because the companies generate stable cash flow and have strong financial profiles.

Energy Transfer is a giant in the midstream sector. It has a diversified and well-balanced asset mix that primarily generates fee-based cash flows (90% of its earnings) secured by long-term contracts and government-regulated rate structures. While MPLX isn’t quite as large nor as diversified, it has a very similar business model. Most of its assets generate fee-based cash flow backed by government-regulated rate structures and long-term contracts with energy companies like its parent company, refining giant Marathon Petroleum.

The MLPs also have strong financial profiles.

MLP

Distribution Coverage Ratio

Leverage Ratio

Energy Transfer

1.9x

4.0-4.5x

MPLX

1.5X

3.4x

Data source: Energy Transfer and MPLX.

MPLX’s leverage ratio is currently well below the 4.0 times range its stable cash flows can support. That’s allowing the MLP to return more cash to investors. It recently increased its distribution by 12.5% (its third straight year of double-digit distribution growth). In addition, the MLP has been repurchasing some of its units ($76 million in the third quarter and $226 million so far this year).

Energy Transfer has been retaining additional cash to continue strengthening its balance sheet. It’s on track to achieve a leverage ratio in the lower half of its 4.0x-4.5x target range. Because of that, the MLP expects to start prioritizing unit repurchases with its additional excess free cash flow after funding its growing distribution (3% to 5% annual growth target) and capital spending plan.

MPLX currently has several expansion projects underway that it expects will come online through 2026. For example, the company and its partners are building the Blackcomb and Rio Bravo natural gas pipelines. MPLX is also part of a joint venture expanding the BANGL natural gas liquids pipeline. On top of that, the MLP is building a few more natural gas processing plants. These growth projects will supply the MLP with incremental cash flow as they come online over the next couple of years.



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