Got $1,000? Here's How to Turn It Into $97 of Annual Income (With Even More in the Future)

MPLX (MPLX 1.16%) has been an income-producing machine over the years. The energy master limited partnership (MLP) has increased its cash distribution to investors every year since its formation in 2012. The midstream company most recently boosted its payout by almost 10%, pushing its yield up to 9.7%. It could turn a $1,000 investment into $97 of annual income at that rate.

The company’s big-time payout should continue rising in the future. That was one of the key takeaways from the MLP’s third-quarter conference call.

Built for steady income

“Overall, we’re trying to position ourselves as a good investment for people that are interested in the type of cash flows that we’re generating,” stated CEO Michael Hennigan on the third-quarter call. Those cash flows are very stable and steadily rising. The company operates a diversified midstream business that produces fee-based cash flows backed by long-term contracts.

It has produced $3.9 billion in net cash from operating activities through the first nine months of 2023, up from nearly $3.7 billion in the year-ago period. That easily covered its monster distribution to investors, which has totaled $2.4 billion so far this year. The MLP’s post-distribution cash flow allowed it to cover its capital investments of $727 million with $752 million to spare.

That excess free cash allowed MPLX to strengthen its already fortress-like balance sheet. The MLP ended the third quarter with $960 million in cash and a 3.4 leverage ratio, well below its 4.0 target. These factors put its distribution on an extremely firm foundation, making it a very solid investment for those seeking a stable income stream.

Built for steady growth

MPLX’s strong cash flow enables it to reinvest in its business while returning substantial cash to investors via distributions. Those investments grow earnings, giving it more money to distribute to investors. Hennigan pointed out on the call:

We’ve demonstrated in our results we’re going to continue to grow earnings somewhere around that mid-single digit. It will be a little stairsteppy. But if you look at our CAGR (compound annual growth rate) since 2019, it’s been a little north of 6%.

A slide showing MPLX's steady growth over the last few years.

Image source: MPLX.

As that slide shows, the company has steadily increased its cash flow as capital projects come online. While the timing of project completions causes variabilities in the growth rate, it smooths out over the longer term to a mid-single-digit rate.

That should continue in the future. The company is investing about $800 million into growth projects this year. Notable projects include the recently completed expansion of its Whistler pipeline, the associated Agua Dulce Corpus Christi Pipeline lateral that should come online in 2024, its BANGL natural gas liquids (NGL) pipeline expansion that should start up in the first half of 2025, and several new natural gas processing plants. These new projects should grow its cash flow over the next few years as they come online and ramp up volumes.

MPLX also continues to work on securing new investments. Oil and gas volumes are growing in the regions where it operates, which should drive the need for more midstream infrastructure in the future. Meanwhile, the company is working toward securing emerging lower carbon investment opportunities in the hydrogen and carbon dioxide (CO2) sectors. For example, David Heppner, the Senior Vice President of MPLX, noted on the call that the MLP’s parent, refining giant Marathon Petroleum, is involved in two proposed hydrogen hubs that the Department of Energy recently selected for funding. He commented that the MLP’s involvement would specifically be “more around the storage and transportation of hydrogen and CO2 rather than constructing hydrogen production facilities.”

In addition to organic growth, MLPX has the financial flexibility to make acquisitions. On the call, Heppner also discussed what the company looks for in an acquisition. He stated: “We always look into high-quality assets that are aligned with our long-term strategies, and also provide the ability to integrate and capture synergies along our value chains, mainly around crude, nat gas, and NGLs and also finally, of course, is a return on capital, they always have to give us the appropriate, acceptable risk-adjusted return.”

Future growth-related investments will help increase the MLP’s cash flow. That should give it more fuel to boost its distribution.

An ideal passive income producer

MPLX built its business around generating steadily rising cash flow. That gives it lots of money to distribute to investors while investing in expanding its midstream business. Those investments will grow its cash flow, giving it more money to pay distributions. That virtuous cycle makes MPLX an ideal investment for those seeking to turn some idle cash into an attractive and growing income stream.

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.

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