EQT Midstream Partners LP: This 7.5% Yield Just Keeps on Growing
A High-Yield Stock That Also Offers Dividend Growth
Today’s chart highlights one of my favorite dividend plays in the energy sector, EQT Midstream Partners LP (NYSE:EQM).
For those not in the know, EQT Midstream Partners is a growth-oriented partnership headquartered in Pittsburgh, Pennsylvania. It was created by natural gas production and transportation company EQT Corporation (NYSE:EQT) to own, operate, develop, and acquire midstream assets in the Appalachian Basin.
Those who have been following the markets over the last several years would know that the energy sector is not in the best of shape.
Since oil and gas prices crashed in the summer of 2014, many energy companies have been struggling. Production cuts were often followed by dividend cuts. Some companies even shut down their operation altogether.
Commodity prices have made a comeback in recent months, but they are still far from making a full recovery. And many energy companies are still paying just a fraction of the dividends that they were paying before to shareholders.
And that’s why EQT Midstream Partners stands out. While the partnership operates in the energy sector, it managed to survive the commodity price downturn in much better shape than its peers.
Moreover, even when other companies were slashing their dividends, EQM was still raising its payout to unitholders.
EQT Midstream Partners LP Distribution History
The chart below shows EQM stock’s distribution history for the past five years.
(Source: “Distribution History,” EQT Midstream Partners LP, last accessed May 1, 2018.)
In 2013, EQT Midstream Partners declared and paid total distributions of $1.55 per unit. By 2017, the amount had grown to $3.655 per unit. That’s an increase of 135.8%.
As a matter of fact, the partnership’s ability to raise its payout is actually more impressive than what the above chart suggests. That’s because, since 2013, EQM has increased its cash distribution every single quarter.
Just think about that for a second. When oil and gas prices were down—and companies were laying off workers and cutting their dividends—EQT Midstream Partners still managed to reward unitholders with higher cash distribution every three months.
The latest dividend hike came last week, when the partnership declared a quarterly cash distribution of $1.065 per unit. The amount represented a four-percent increase sequentially and a 20% increase year-over-year. (Source: “EQT Midstream Partners, EQT GP Holdings and Rice Midstream Partners Announce Quarterly Distributions,” EQT Midstream Partners LP, April 26, 2018.)
Trading at $56.88 apiece, EQM stock offers an annual distribution yield of 7.5%.
Earn a Safe and Growing Income Stream from EQM Stock
To be honest, EQT Midstream Partners’ impressive distribution history shouldn’t come as a surprise. You see, even though EQM is considered an energy stock, the partnership does not have any exploration or production activity. Therefore, it doesn’t have to worry too much about commodity prices.
Moreover, the partnership does most of its business through long-term, fixed-fee contracts.
In its natural gas transmission segment, EQT Midstream Partners has a weighted average contract life of 15 years. In its natural gas gathering segment, the weighted average contract life is eight years. (Source: “Investor Relations Presentation,” EQT Midstream Partners LP, last accessed May 1, 2018.)
Last year, EQT Midstream Partners generated approximately 91% of its total revenue from firm reservation fees.
The partnership also boasts a high-quality customer base, with around 85% of its revenue coming from investment-grade counterparts.
With fee-based operations, long-term contracts, and high-quality customers, EQM is right where it needs to be to generate stable cash flows through the commodity cycle.
Of course, as is the case with any high-yield stock, investors may have some concerns about its dividend safety. So let’s take a look at the partnership’s financials.
In 2017, EQT Midstream Partners generated $614.8 million of distributable cash flow while declaring $460.3 million of total cash distributions. That came out to a distribution coverage ratio of 1.34 times, leaving a margin of safety. (Source: “2017 Results Announced for EQT Midstream Partners and EQT GP Holdings,” EQT Midstream Partners LP, February 15, 2018.)
The partnership recently reported financial results for the first quarter of 2018. For the quarter, distributable cash flow came in at $187.2 million. Given its cash distributions of $132.3 million declared during this period, EQM had a very safe distribution coverage ratio of 1.42 times. (Source: “Q1 2018 Results Announced for EQT Midstream Partners and EQT GP Holdings,” EQT Midstream Partners LP, April 26, 2018.)
And the best could be yet to come. Going forward, the partnership is targeting a 15%–20% annual distribution growth rate. For investors looking for a high-yield stock that can also grow its payout, EQM should be near the top of their watchlist.