MPLX - Back Up Santa's Sleigh With 3 SWANs (Instead Of 3 French Hens)

2023-12-02 07:00:00 ET

Summary

• Consumers are feeling the pressure from inflation and economic growth is slowing.
• In light of these challenges, we give you three picks that can help you grow your income and build long-term wealth.
• These "sleep-well-at-night" - SWAN - stocks offer juicy yields, stellar balance sheets, and strong business models.

This article was coproduced with Leo Nelissen.

Santa is coming!

The problem is that in addition to the general Holiday shopping stress, consumers are feeling the pressure from inflation.

Even worse, economic growth is slowing, making life for many even more difficult ahead of what Andy Williams called “ the most wonderful time of the year .”

Hence, in this article, we decided to give you three sleep-well-at-night (“SWAN”) stocks that have:

• Juicy yields to provide you with income.
• Healthy balance sheets to reduce financial risks in light of elevated rates and economic risks.
• Strong business models and the capability to deliver solid long-term growth. After all, we want a good total return, not just a decent income.

But first, we have to discuss why so many consumers are struggling.

Things have gotten so bad in certain areas that people are cutting back on food purchases, which is something Conagra Brands CEO Sean Connolly noted earlier this year.

Bloomberg just came out with a major report on inflation, stating that grocery prices, up 25% since January 2020, are a significant concern for consumers.

The increase, including staples like ground beef and coffee, is impacting households across the nation, leading to dissatisfaction with the economy.

Looking at the receipt below, we see that food costs have risen across the board.

Furthermore, according to the report, housing costs, the largest monthly expense for most Americans, have soared, making homeownership less attainable.

The rise in mortgage rates and home values, up nearly 42% since 2020, adds to the challenges faced by potential buyers.

According to Redfin (RDFN), it now costs $2,600 per month to service the mortgage on a median house. That’s up from less than $1,600 before the surge in mortgage rates caused affordability to plummet.

Furthermore, electricity bills and car insurance have surged, with a 25% increase since January 2020. Higher borrowing costs, including record-high monthly payments for new cars, contribute to the financial strain on households.

Also, if you have children, inflation is even worse.

Childcare costs have risen 32% since 2019, and healthcare expenses, already high, have increased further. The average employer-sponsored health insurance premium reached almost $24,000 this year, impacting nearly 40% of Americans who have delayed or skipped needed health care!

Want to go on a vacation?

Guess what?

More expensive!

Even small luxuries like travel and dining out have become more expensive, with hotel prices up 15% and restaurant prices up 24% since January 2020. This is especially challenging for consumers already facing higher costs for necessities.

Even worse is that while the pandemic initially allowed for additional savings, it's thinning out.

According to the same report, rising prices have eroded the value of savings, and after adjusting for inflation, the level of bank deposits is lower than in March 2020 for most households.

I have seen estimates that the bottom 80% of consumers are already seeing negative post-pandemic excess savings, which makes this situation so much worse!

Hence, even after a headline inflation decline from more than 8% to roughly 3% this year, the U.S. Census Bureau reports that half of U.S. consumers are very stressed when it comes to inflation.

More than 75% of consumers are at least moderately stressed!

In light of these challenges, we give you picks that can help you grow your income and build long-term wealth.

Also, Santa made sure these plays come with great prices, making the longer-term value proposition even juicier!

MPLX LP ( MPLX ) – An Income & Total Return Star

MPLX LP is a Master Limited Partnership, or MLP, in the energy midstream industry. It issues a K-1 form and comes with a juicy 9.4% yield!

Essentially, MPLX owns the midstream assets of Marathon Petroleum ( MPC ), the nation’s largest refiner.

MPLX operates in two key segments:

1. Logistics and Storage (L&S): This segment focuses on gathering, transporting, storing, and distributing hydrocarbon-based products, with 88% of revenues coming from MPC.
2. Gathering and Processing (G&P): Operations involve natural gas gathering, processing, transportation, and the marketing of NGLs.

Despite a general decline in economic growth, recent third-quarter earnings showed impressive results, with adjusted EBITDA reaching $1.6 billion and distributable cash flow hitting $1.4 billion, both setting new records.

MPLX's active involvement in various projects is noteworthy:

• Successful completion of the Whistler natural gas pipeline expansion in 3Q23.
• Ongoing construction of the Agua Dulce to Corpus Christi pipeline lateral is expected to be completed by 3Q24.
• Participation in the NGL value chain with the expansion of the BANGL pipeline by 1H25.

Furthermore, MPLX's financial strength is evident in its 10% distribution increase for the second consecutive year, reaching an annualized $3.40 per unit, yielding 9.4%.

Let me repeat that again. A stock yielding 9% just raised its payout by 10%!

The distribution, supported by a 1.6x coverage ratio, emphasizes the company's dedication and ability to return capital to investors in an industry where a yield close to 10% has become somewhat rare due to strong capital gains this year.

The strong balance sheet, with a quarter-end cash balance of $960 million and a leverage ratio of 3.4x ((EBITDA)), positions MPLX well for capital optimization and growth initiatives.

Adding to that, the company, which has an investment-grade BBB credit rating, is trading at a blended operating cash flow multiple of 6.9x. The long-term normalized multiple is 8.2x OCF.

When incorporating expected operating cash flow and a return to a more favorable valuation, the stock is trading more than 13% below its fair stock price. Adding its yield to this number, the stock has the potential to return 15% per year through 2025.

In other words, the company has a strong business capable of growth, a top-tier balance sheet , a juicy, well-covered yield, and a valuation that paves the road for more upside.

Conagra Brands, Inc. ( CAG ) – Deep Value Consumer Goods

Conagra Brands is a company that is currently struggling as the macroeconomic landscape poses difficulties, with reduced consumer spending and evolving preferences impacting the market.

Conagra acknowledges these challenges but remains a standout player, as it has strong management and a plan to generate accelerating shareholder value.

Despite near-term volume declines caused by poor consumer health, Conagra's financials demonstrate strength.

In the latest quarter, organic net sales dipped slightly, but the company showed positive trends in adjusted gross margin, operating margin, and earnings per share.

Currently, Conagra is implementing a comprehensive action plan, focusing on supply chain improvements, targeted investments, and quality merchandising to protect market share and boost top-line growth.

As part of its turnaround, Conagra is reducing leverage, enhancing the safety of its dividend.

The company's net debt increased slightly from $9.1 billion on May 28 to $9.2 billion on August 27. However, its net leverage ratio declined from 3.63x (EBITDA) to 3.55x during the same period. It has an investment-grade BBB- credit rating and a path to $8.0 billion in net debt in FY26.

Furthermore, with a sub-50% payout ratio and a 5.0% dividend yield, the company offers significant shareholder value. The five-year dividend CAGR is 5.1%.

On July 27, the company hiked the dividend by 6.1%, which, I believe, shows tremendous confidence in its turnaround plans.

Please note that the dividend declines in the chart above are spinoffs. They are NOT dividend cuts.

Trading at a blended P/E ratio of 10.3, Conagra appears undervalued, especially when considering its long-term normalized multiple of 13.5x.

The company's expected EPS recovery (visible in the chart below) in the coming years suggests potential for solid returns.

This paves the way for strong, double-digit annual returns over the next few years.

While elevated rates and inflation could continue to pressure the stock, the long-term value for this 5%-yielder is strong.

Mid-America Apartment Communities, Inc. ( MAA ) – Deep-Value REIT Income

When it comes to anti-cyclical income, safety, and long-term growth, it doesn’t get much better than the real estate investment trust, or REIT, behind the MAA ticker, which is one of the biggest landlords in the U.S., owning more than 100 thousand apartments.

With a strong track record of returns, a well-diversified portfolio, and a healthy balance sheet , MAA exhibits resilience during tough times, as it has never cut its dividend!

Operating in promising markets such as Georgia, Texas, Florida, the Carolinas, and Tennessee, the company benefits from financially secure tenants, maintaining a stellar dividend history, and even weathering the storm of the Great Financial Crisis.

The average rent-to-income ratio for MAA's tenants is an impressive 22%, significantly lower than the U.S. average of 30-35%. This low ratio minimizes occupancy risks, providing stability in rental income.

Currently yielding at 4.6%, the company's dividends are protected by a 68% 2023E core adjusted funds from operations, or FFO, payout ratio.

MAA also has a fortress balance sheet.

Holding an A-/A3 credit rating, the company maintains a net leverage ratio of less than 3.5x, well below the sector average of 4.7x.

With 100% fixed-rate debt, an average weighted interest rate of 3.4%, and a well-balanced maturity schedule, MAA's financial foundation is strong and secure, especially in light of interest rate risks.

Furthermore, thanks to headwinds in the real estate market, MAA presents an attractive valuation.

Currently trading at 14.9x AFFO, or adjusted FFO, which is below the long-term normalized multiple of 18.6x, the stock offers a potential annual return of 19% through 2025, factoring in expected AFFO growth rates of 2% in 2024 and 4% in 2025.

Just like CAG and MPLX, MAA offers a terrific mix of a good yield, safety, potential growth, and a good total return picture.

It’s truly one of my favorite REITs and income growth stocks in the S&P 500.

Takeaway

It’s almost Christmas!

Unfortunately, it’s a challenging period for many, which means we need to put more emphasis on safety and income.

In this article, we gave you 3 SWANs that get you paid, consistently hike their payout, have stellar balance sheets, strong business models, and a good total return picture.

1. MPLX , with a robust 9.4% yield , boasts a strong balance sheet, impressive earnings, and active involvement in strategic projects. A 10% distribution increase underscores its commitment to investors. With a solid business model and attractive valuation, MPLX offers a potential 15% annual return through 2025.
2. Conagra , navigating macroeconomic hurdles, demonstrates strength in financials. With a comprehensive action plan and a focus on reducing leverage, it safeguards dividends. Trading at an undervalued P/E ratio of 10.3 and a 5.0% yield , Conagra presents a compelling opportunity for double-digit annual returns.
3. MAA , a stalwart REIT, sustains dividends with a well-diversified portfolio and an A-/A3 credit rating. Operating in robust markets, it minimizes occupancy risks. With a secure balance sheet and an attractive valuation, MAA, yielding 4.6% , offers a potential annual return of 19% through 2025.

Secure your financial sleigh with these SWANs for a joyful and prosperous holiday season!

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Back Up Santa's Sleigh With 3 SWANs (Instead Of 3 French Hens)