MPLX Is Offering a 7.7% Annual Dividend. But Is the Stock Really a No-Brainer Buy?

Key Points

• MPLX generates lots of stable cash flow.

• The MLP has a strong balance sheet.

• It also has lots of growth coming down the pipeline.

• 10 stocks we like better than MPLX ›

MPLX (NYSE: MPLX) yields more than 7.7%, far above the S&P 500's average of 1.2%. With its large size, the partnership's high payout may seem almost too good to be true.

Let's examine whether MPLX is a top investment opportunity or a potential yield trap.

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Drilling down into MPLX's monster distribution

MPLX is a master limited partnership (MLP) formed by refining giant Marathon Petroleum to own and operate midstream energy infrastructure and logistics assets. The MLP has two focus areas: crude oil and products logistics, and natural gas and natural gas liquids (NGL) services. The company's pipelines, processing plants, storage terminals, and export facilities generate fairly stable earnings, backed by government-regulated rate structures and long-term contracts with high-quality customers, such as Marathon.

The midstream company has generated $2.6 billion in distributable cash flow through the first half of this year, representing a 5% increase from the same period last year. That provided it with enough money to cover its cash distribution payments by 1.5 times. That's a comfortable level for the MLP, which generated over $950 million in excess free cash flow after paying distributions. That performance allowed MPLX to return an additional $200 million to investors by repurchasing some of its units while retaining the remaining funds to invest in its continued expansion.

MPLX further fortifies its lucrative distribution payment with a strong balance sheet. The MLP ended the second quarter with a low 3.1 leverage ratio. That's comfortably below the 4.0 range its stable cash flows can support.

These financial metrics suggest that MPLX's high-yielding distribution isn't a trap. The payout is on a very sustainable foundation with minimal risk of a reduction on the horizon.

More than a fixed income stream

MPLX offers investors more than a bond-like income stream. The MLP is growing its earnings at a healthy mid-single-digit annual rate, which should continue.

The MLP currently has a long list of organic expansion projects under construction:

• Secretariat and Harmon Creek III: MPLX is building two more natural gas processing plants. Secretariat should be in service by the end of 2025, and Harmon Creek III is on track to enter service in the second half of 2026.
• BANGL Pipeline: MPLX is expanding this NGL pipeline, which it expects to finish in the second half of next year.
• Blackcomb, Rio Bravo, and Traverse pipelines: MPLX and its partners are constructing three large-scale gas pipelines. Blackcomb and Rio Bravo are on target for completion in the second half of 2026, while Traverse is set to enter service in 2027.
• Gulf Coast Fractionators: The company is constructing two new NGL fractionators near a Marathon refinery, with one planned to come online in 2028 and the other in 2029. Marathon will purchase the production from these facilities.
• LPG Export Terminal: MPLX is developing an LPG export terminal and related pipeline with Oneok, which is scheduled to enter service in 2028.

Those projects will provide the MLP with growing streams of incremental earnings and cash flow through the end of the decade.

In addition, MPLX is using its financial flexibility to make acquisitions. It agreed to buy Whiptail Midstream, the remaining 55% of the BANGL pipeline, a 5% interest in the Matterhorn Express Pipeline, and Northwind Midstream this year. At nearly $2.4 billion, Northwind is the largest deal. The transaction will immediately boost its earnings and cash flow, while providing additional growth in 2026 from in-process expansion projects. The company has ample financial capacity to continue approving expansion projects and making acquisitions as new opportunities arise.

The MLP's growth catalysts will provide it with plenty of fuel to continue increasing its distribution. MPLX has raised its payout every single year since its formation in 2012. It has delivered robust distribution growth in recent years, with 10.7% compound annual growth since 2021. Distribution growth is likely to moderate in the future to align with the mid-single-digit growth rate of its cash flow.

High-octane total return potential

MPLX offers investors a rock-solid distribution yielding over 7.7%. However, that's not all. It also has a healthy growth profile that extends through the end of the decade, giving it the fuel to continue increasing its distribution. This combination of high income and solid growth positions the MLP to potentially produce high-octane total returns in the coming years. If you're comfortable with the Schedule K-1 federal tax form that the MLP sends its investors each year, MPLX is a no-brainer buy for income and upside potential.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Oneok. The Motley Fool has a disclosure policy.