MPLX's 9.0% Yield is Set to Rise With a Possible Dividend Hike

MPLX LP (MPLX) is a midstream natural gas pipeline and storage company spun out from Marathon Petroleum that is very profitable and pays out a 9.0% dividend yield. The yield is likely to rise with the next dividend announcement later this month. 

MPLX is also cheap at less than 10x earnings that are expected to rise next year. Moreover, the stock has interesting long and short option income plays.

Why The Dividend Yield Will Likely Rise

Here are the dividend details. MPLX has made 4 payments of 70.5 cents quarterly and is now set to announce the latest quarterly dividend later this month. But MPLX has consistently raised its dividend every year for the past 8 years, according to Seeking Alpha.

Right now the $2.82 annual dividend provides a dividend yield of 9.0% at today's price of $31.31 per share (Oct. 11). If we assume that they raise the dividend by 3.0% to $2.90 the yield will rise to 9.26%. 

That seems highly likely since as a master limited partnership it needs to pay out 90% of its earnings to keep its tax-free status. For example, some analysts now estimate MPLX will make $3.22 per share next year and 90% of that would be $2.90 per share.

But Barchart reports that the average estimate of 5 analysts is $3.35 per share in 2023. That implies that 90% of that higher EPS forecast is $3.01 per share. This implies that the new dividend could rise to 75 cents, which would put MPLX stock on a higher 9.58% dividend yield (i.e., $3.00/$31.31).

Strong Fundamentals

As mentioned, MPLX is one of the few companies that analysts forecast stronger earnings next year. Moreover, MPLX produces strong free cash flow (FCF). For example, last quarter its operating cash flow was $1.487 billion. Since there are 1.012 billion shares outstanding, that works out to $1.47 per share, more than sufficient to cover the quarterly 70.5 cent dividend.

After adjusting for expenses, the company says its Q2 distributable cash flow was lower at $1.237 billion, or $1.22 per share, still well over the 70.5 dividend payment. 

In addition, it is buying back shares and paying down debt. This augurs well for an upcoming dividend hike, when the company reports its earnings on Nov. 1.

Option Income Plays

Investors willing to take on some moderate amount of risk here to earn more income can short out-of-the-money (OTM) covered calls or OTM cash-secured puts. For example, the Barchart option chain below shows that the $40 strike price midpoint premium for the Nov. 18 calls is 38 cents.

That works out to a 1.2% immediate return (i.e., $0.38/$31.31 stock price). Moreover, if the stock rises to $40 by Nov. 18 (after the dividend hike announcement) this will produce a 28% capital gain.

Moreover, the OTM puts for Nov. 18 show that the $29.00 strike price is 77 cents for Nov. 18. That produces an immediate 2.655% return (i.e., $0.77/$29.00). That is an even better return for investors than the covered calls.

However, be careful here, at least with the covered calls. It is highly likely that this option chain will change quite drastically once the new dividend is announced. I suspect that it will be better to wait until Nov. 1 and then see where the $40.00 strike price calls are priced. I suspect the premium will rise as the stock is poised to move higher with a dividend hike. 

Maybe the best way to play this is to short the OTM puts first for 77 cents, and also buy the $40 calls for 38 cents with the proceeds given that the stock could rise, leaving a profit of 39 cents, even if the long calls don't perform. Then after Nov. 1, with the expected higher stock price, short the $40 or higher strike price calls for Nov. 18 to gain more income.

This is based on the very high expectation that the stock will likely rise once the next dividend announcement is made.

• Online Retailers May Not Get a Holiday Boost
• If You’re Looking for Quality, Piper Sandler Likes This Leisure Stock
• Growth Fears Weigh on Stocks
• Markets Today: Stocks Under Pressure From Weak Energy Stocks and Higher Bond Yields