Investors in master limited partnership care about two things: distributions and distribution growth. Today, we are looking at five MLPs that significantly boosted their distributions for the second quarter, while also considering how sustainable those distributions really are.
Show me the growth!
Let’s take a look at some notable distribution increases from the second quarter, evaluating the growth on both a sequential and annual basis:
| Company | QOQ | YOY |
|---|---|---|
| Targa Resources Partners LP (NYSE:NGLS) | 3% | 11% |
| Western Gas Partners, LP (NYSE:WES) | 4% | 17% |
| Atlas Pipeline Partners, L.P. (NYSE:APL) | 5% | 11% |
| Alliance Resource Partners, L.P. (NASDAQ:ARLP) | 2% | 8.5% |
| Summit Midstream Partners LP (NYSE:SMLP) | 4% | N/A |
Source: Company releases
The most impressive gains posted here come from the traditional midstream MLPs, which isn’t too much of a surprise. These partnerships tend to sport more reliable income streams than MLPs in other energy sub-sectors that might have higher exposure to commodity risk. Alliance Resource Partners is a coal MLP, but it is so well run that it can hang with the big increases of the midstream sector.
A love that lasts
Distribution growth is important, but the ability to maintain impressive growth matters, too. For that, we turn to the distribution coverage ratio. This simple metric shows you whether or not a partnership’s distributable cash flow covers the actual amount of distributions paid out during that period.
| Company | DCF | Paid Distributions | Coverage Ratio |
|---|---|---|---|
| Targa Resources Partners | $79 | $102 | 0.8 |
| Western Gas Partners | $90 | $79 | 1.13 |
| Atlas Pipeline Partners | $58 | $54 | 1.07 |
| Alliance Resource Partners | $117 | $42 | 2.79 |
| Summit Midstream Partners | $28 | $23 | 1.2 |
Source: Company releases
Taking these two charts together, it’s hard to ignore what’s going on at Western Gas Partners, LP (NYSE:WES). Its distribution is up 17% year over year and it easily cleared that payout with the cash it generated this quarter. If this MLP wasn’t on your radar before, it should be now.
Summit Midstream Partners LP (NYSE:SMLP) may very well be on this list next year, sporting a coverage ratio of 1.2 times its payout. It is showing investors that even with the 4% increase from the first quarter’s distribution, it is generating plenty of cash.
Targa Resources Partners LP (NYSE:NGLS) is the only one of our big increasers that doesn’t look great here. It boosted its distribution 11% year over year, but didn’t actually didn’t generate enough distributable cash flow to cover payments this quarter. When this happens, it doesn’t mean the partnership is in trouble, necessarily, but investors should probably investigate to make sure it isn’t the beginning of a long-term trend. In Targa Resources Partners LP (NYSE:NGLS)’s case, management expected to fall short this quarter, while finishing the year above 1.0 times coverage.
Finally, it is clear that Alliance Resource Partners, L.P. (NASDAQ:ARLP), despite being one of those risky coal MLPs, has its business well in hand. You will never see a midstream MLP with a coverage ratio that high; it would simply pay out more cash. It makes sense for a coal MLP, however, to pay out less in the name of stability. Alliance Resource Partners, L.P. (NASDAQ:ARLP) is up 27% this year — unprecedented for coal miners — and you can bet it has a lot to do with its distribution growth and its ability to cover its distributions.
Bottom line
There are more MLP options for investors to consider than ever before, and investors can afford to be extremely picky. Running a few simple calculations can help you pick out strong performers for further research.
The article 5 MLPs Handing out More Cash originally appeared on Fool.com and is written by Aimee Duffy.
Fool contributor Aimee Duffy has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P.
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