2023-11-07 07:35:00 ET
Summary
- Millions of dollars flow out of the market into investors' pockets every single quarter.
- If your portfolio is not connected to this income pipeline, then you need to start thinking about why.
- A retirement that is marked by abundance and happiness is one that is self-funded.
Co-authored by Treading Softly.
In all my years of working in a professional setting, I've constantly been reminded of the importance of networking. Networking is really just a glorified or fancified term for making friends or playing nice at work and essentially building connections to people who work in other departments or with other skill sets than you. By having a pipeline or network of people that you are connected to, you can often solve problems quickly or find solutions that are outside of your realm. Being stuck within your little silo or your little world can restrict you greatly from finding solutions that are available to others. Likewise, you can enable others to solve problems that they would otherwise not be able to solve because you have access to things that they don't.
When it comes to the market, so many investors like to stay within their little bubble of expertise. They invest in one sector in the market, in one specific area, or they just use a blanket market-wide ETF, hoping that that will provide them with what they need for their retirement. It'd be like only eating carrots your entire life and wondering where all the protein is going to come from.
Instead, I want you to have a retirement that provides you with all the income that you need. For many investors, income investing is the solution. They can hook up their portfolio to the income pipeline that flows from the market. It can provide you with the income you need to enjoy your retirement comfortably.
Today, I want to talk about one of those outstanding companies that is well worth a position in your portfolio.
Let's dive in!
Connect To The Income Pipeline
Antero Midstream Corporation ( AM ), yielding 7%, is an MLP (master limited partnership) focused on natural gas, providing services for parent company Antero Resources Corporation ( AR ). In 2019, AM set out to achieve an ambitious plan: To make the company fully self-funding.
AM was deep in debt, and like many other midstream companies, it was issuing equity and debt in order to fund expansion. While this model works great when equity prices are high and interest rates are low, the train can come off the tracks when equity prices are low and/or the cost of debt is high.
Enterprise Products Partners L.P. ( EPD ) is an example that proved the fully self-funding model could be achieved, and that it could be rewarded by shareholders with strong valuations. AM set out to emulate that model, seeking to fund all capital expenditures and all dividends from cash flow. As a result, AM wouldn't need to issue a single share or borrow a penny to grow operations.
This effort did not come without sacrifice. AM had to significantly slow down its growth plans. It had to reduce its dividend. Its share price fell, at one point down over 90%.
Now, AM's share price is on the climb back up and is near 5-year highs. The reason is that AM's mission is accomplished. AM has generated positive free cash flow ("FCF") after all cap-ex and dividends for five consecutive quarters.
AM is having a great year and has raised guidance multiple times. This quarter, AM bumped up FCF after dividends guidance another $5 million at the midpoint. This is $40 million over the initial guidance. Source .
The big question for investors now is when can we expect the dividend to be raised? AM still has to deal with the sins of the past, and is working on reducing debt. Right now, AM's priority for free cash flow is to reduce debt. Management's stated goal is to bring it down to 3.0x debt/EBITDA. After last quarter, it is down to 3.4x. Note that debt/EBITDA comes down from paying off debt, but also improves when EBITDA rises.
Year to date, AM has reduced debt by $102 million.
We expect them to continue using FCF to pay down debt. Through those efforts and through EBITDA growth, we expect debt/EBITDA to be at 3.0x by the end of 2024. If conditions remain favorable and EBITDA keeps growing, it could occur by Q3.
As anyone who has dug themselves into a debt hole and then got themselves out knows, that the hardest part is the beginning. It looks like you're making very little progress, but with every dollar you pay off, your interest expense decreases and you can pay off more the next payment, which reduces interest expense even more allowing an even larger payment next month. AM is reducing debt at a good pace, and we can expect that pace to accelerate as FCF grows.
So we believe management when they say this (emphasis added):
"Looking ahead to 2024, we expect this Free Cash Flow to continue to increase compared to 2023, resulting in further absolute debt reduction and declining leverage towards our 3.0x target. This positions Antero Midstream to evaluate further return of capital to our shareholders in 2024. "
While we shouldn't count our dividend raises before they happen, we believe there is a very good chance that AM will raise its dividend in Q3 or Q4 of next year. It is certainly on track to achieve that time frame.
Four years ago, AM was a company that was growing faster than was prudent and headed for being buried in debt. Imagine if AM was relying on issuing debt and equity in today's environment. It would be a disaster. The decision to reposition the company and seek a more sustainable long-term strategy came at a great time. Today, investors can look forward to enjoying a company that is sustainable, doesn't need to raise capital, and will reward investors with a growing dividend.
AM will only become lower risk in time as debt declines and FCF grows, which will inevitably lead to an improvement in its credit rating, allowing it to borrow at lower interest rates. Have you ever looked at a dividend aristocrat, and wished you had bought it back when it first started raising its dividend, before it became known as a reliable dividend growth company and traded at a premium valuation? It is hard to predict which companies will be able to raise their dividends for 25 years, but AM has put together a strategy that certainly has the possibility to propel it to dividend aristocrat status.
Conclusion
With AM, you can buy into a company that is now fully paying for all of its expenses without having to issue any debt or a single share. This will enable them, as they continue to reduce their debt, to be able to raise their dividends more and more, as well as continue to grow the company and reward their current shareholders. AM has set up themselves to be able to be a future dividend aristocrat by being able to raise their dividend because they are fully self-funding.
I want you to have a fully self-funded retirement as well. I don't want you to be dependent upon government handouts or the goodwill of others to enjoy a comfortable and enjoyable retirement. Instead, I want you to have the financial security that comes from holding a portfolio of companies like AM that provide you with strong income quarter after quarter, month after month. The Model Portfolio within High Dividend Opportunities has over 90 various picks building 9% or above, enabling members to enjoy strong income every single quarter. I want your retirement to be one marked with abundance and happiness.
That's the beauty of my Income Method. That's the beauty of income investing.
For further details see:
Connect Your Retirement To The Income Pipeline: Antero Midstream