In contrast to much of the energy sector, this analysis shows a segment that is generating enough cash to cover its distributions, as well as one that has improved year-over-year. In 2018, these companies generated on average about 30% more cash than necessary to cover their distributions. A year later, that excess has risen to 40%. Notably, several of the companies that were on the lower end of last year’s distribution coverage announced distribution cuts — which is exactly the kind of warning signal a low distribution coverage can provide.
The AMZI Index presently yields 8.8% compared to its five-year average of 7.3% and ten-year average of 6.8%. With the bond markets at historic lows and investors desperately seeking yield (as evidenced by the performance of utilities and real estate), MLPs are presently extremely attractive. Their coverage ratios are healthy and getting better, yields are above normal, and the recent sell-off means the sector is on sale.
As the Alerian research note concludes, “Improving distribution coverage should give MLP investors confidence when it comes to the quality of the distributions being paid, even as yields remain elevated.”
Further reading: MLP 2Q19 Distribution Coverage and Payout Ratios Provide Peace of Mind by Bryce Bingham, Energy Research Analyst, Alerian
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