Until this week, EnLink Midstream (ENLC +0.00%) offered income-seeking investors a monster yield of more than 19%. However, as is often the case when dividend yields reach well into the double-digit percentages, that payout was too good to last. While the oil and gas industry service provider had solid enough financials to maintain its payout at previous levels, it opted instead to slash it by about 34% and further firm up its financial foundation.
Even with that reduction, EnLink is yielding 12.5% at current share prices. And given that this still-compelling payout is now on an even firmer foundation, EnLink should remain an intriguing option for income-seeking investors.
Image source: Getty Images.
From good to great
Before EnLink reduced its distribution, the master limited partnership was generating enough cash to cover its payout by 1.3 times. Traditionally, that would have been viewed as a comfortable level for a midstream company -- such businesses used to aim for coverage of around 1.2 times. However, due to the energy sector's financial and underperformance issues in recent years, more companies are targeting higher coverage levels so that they can retain more cash to fund growth. That's the case with EnLink, which is now on track to cover its distribution by a much more comfortable 1.95 to 2.05 times.
EnLink also has what would traditionally have been seen as a solid balance sheet for a midstream company. It ended the third quarter with a leverage ratio of 4.2 times debt-to-EBITDA, only slightly above the sub-4.0 target of most midstream companies. However, by reducing its payout, the company will retain more cash to finance capital projects, which will improve its leverage level.
Tapping on the breaks a bit
In addition to reducing the amount of money it distributes to investors, EnLink is cutting its investment spending this year. Management says it currently aims to invest between $275 million and $375 million on growth projects, which at the midpoint would be a 50% decrease from 2018's spending level. On the downside, that reduction will cause its growth rate to moderate. Instead of increasing its cash flow by about 5%, the company only expects roughly 1.5% growth this year.
However, EnLink is on track to generate enough cash to cover its obligations with room to spare. The company forecasts that it will produce from $10 million to $70 million in excess free cash this year, which will give it additional flexibility to pay down debt or potentially repurchase shares. Meanwhile, it looks set to produce even more excess funds in 2021 as its cash flow keeps growing.
Still a big-time yield but now with less risk
EnLink had solid financial metrics before its recent dividend increase. However, given how fiscally conservative the energy sector has gotten, investors for some time had feared it would need to reduce its payout to make its metrics even stronger. That became something of a self-fulfilling prophecy, and the company opted to join its peers in taking things a step further so as to fortify its financial situation.
On the plus side, this places the company's new payout -- which still offers a double-digit yield -- on a much firmer foundation. That should leave it an appealing option for income investors, though its anticipated modest growth rate will likely impact its total returns. That's why it's not as compelling a buy as some other high-yield stocks.
