By: Dividend Sensei
While I research about 200 dividend growth stocks each year as part of my job, when it comes to my own high-yield income growth retirement portfolio, I invest my capital only in my top ideas. That means the stocks that offer the best combination of:
- Safe dividends that will likely be maintained during a recession
- Fast income growth (supported by stable and growing cash flow and long growth runways)
- Very attractive valuations (on average my positions are 38% undervalued)
Which is why I want to highlight the four reasons that I’ll be spending the next three months building up a 10% stake in Antero Midstream GP Holdings (AMGP). Simply put, this is not just one of my highest conviction buys, but also the fastest growing income stocks in America. One I expect to generate market crushing total returns over the coming decade.
Antero Midstream GP Holdings: Fastest Growing Income Stock In America
Antero Midstream GP is the general partner of Antero Midstream Partners. Essentially AMGP’s only assets are the incentive distribution rights or IDRs of its MLP which exists to support Antero Resources prolific and extremely profitable growth. It’s taxed as a corporation meaning it uses a 1099 instead of a K1 and its distribution is taxed as a qualified dividend. Here’s how it works. Antero Resources is one of America’s fastest growing natural gas producers, exclusively focused on the booming and very low cost Marcellus and Utica shale of Pennsylvania, Ohio, and West Virginia.
During the worst oil crash in over 50 years, Antero managed to become far more efficient including via:
- Cutting the time to drill a well by 59% (since 2014)
- Increasing frack stages per drilling day by 56%
- Increasing lateral length (how far it drills) by 18% (up to 3.5 miles)
- Increasing lateral length per drilling day by 194%
As a result the company has managed to remain one of the most profitable gas producers in the country, and has a current break even price of about $1.3 per thousand cubic feet of gas. For context gas prices are currently about $3.
This high profitability is why Antero Resources plans to grow its gas production by 20% annually through 2020 and then 15% in 2021 and 2022. All while funding its growth almost exclusively through its booming free cash flow and dropping its leverage from 4.0 in 2014 to 1.0 in 2022. To support that surge in gas production Antero Resources founded Antero Midstream Partners to own the midstream infrastructure it needs to execute on its growth plans. These include: gas gathering, compression, processing, and water delivery assets.
As Antero Resources has grown so too has Antero Midstream, whose EBITDA has risen by 82% annually since its 2013 IPO. That cash flow is also rock solid, being 100% under fixed rate, and long-term and volume committed contracts. That is why Antero Midstream has been capable of raising its distribution by 29% annually since its IPO while maintaining an average distribution coverage ratio (distributable cash flow/distribution) of 1.45. For context in the MLP industry a DCR of 1.1 is considered safe and AM management has maintained a long-term goal of a 1.15 coverage ratio (so vastly outperformed its goal). Where does AMGP fit in? Well because it owns AM’s highly lucrative incentive distribution rights, it receives 50% of AM’s fast growing payout (30% growth through 2020 and 20% in 2021 and 2022). This is why AMGP’s distributable cash flow (MLP equivalent of free cash flow and what funds the payout) boomed 293% YOY in the last quarter.
This torrid growth in its cash flow is why AMGP is guiding for 62% annualized distribution growth through 2022. That makes this the fastest growing income stock in America, with a projected 2022 yield on today’s cost of 11.9%. But of course management can offer any kind of guidance it wants. What matters is a realistic ability to execute on it. Fortunately, Antero Midstream has a very good chance of hitting its growth targets.
Superior Business Model Means Low Risk, And Super Fast And Profitable Growth
There are two main reasons why Antero Midstream has a superior business model to most MLPs. The first is that it’s using what’s called a self funding business model. That means that instead of funding some of its growth through the sale of new units (what MLPs call shares) Antero Midstream uses only modest amounts of low cost debt and retains enough cash flow (currently about 30%) to fund its growth efforts. This means that AM and AMGP’s growth potential is not at the mercy of the fickle stock market, which has beaten down MLPs for four years (since the oil crash) and caused many to fall into equity traps that make profitable growth difficult if not impossible.
The second way that Antero Midstream’s business model is superior is it’s 100% focus on only the most profitable organic growth projects. Since 2013 Antero Midstream has invested over $3.1 billion into projects with an average cash yield of 25%, double that of the average MLP’s growth project. Currently Antero Midstream has $2.7 billion in organic growth projects under construction that will be completed by 2022. This, combined with the very stable and commodity insensitive nature of its cash flow, is what allows management to make such bold payout growth projections for the next five years.
These projects have cash yields ranging from 17% to 33%, in line with Antero Midstream’s industry leading past levels. This basically means that Antero’s self funding business model is putting its retained cash flow to work more profitably than almost any MLP in the country. Which is why Antero Midstream Partners (which I also own) and Antero Midstream GP are two of my highest conviction buys. Because both offer some of the best high-yield income growth investing opportunities of the next decade, as well as market crushing return potential.